UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarter ended: June 30, 2016

 

OR

 

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

 

For the Transition Period from ___________ to____________

 

Commission File Number: 000-53741

 

DIRECTVIEW HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada   20-5874633
(State or other jurisdiction of incorporation)   (IRS Employer I.D. No.)

 

21218 Saint Andrews Blvd., Suite 323

Boca Raton, Florida

(Address of principal executive offices and zip Code)

 

(561) 750-9777

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [  ] Smaller reporting company [X]

 

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

 

As of August 19, 2016, there were 25,060,698 shares outstanding of the registrant’s common stock.

 

 

 

  
  

 

DIRECTVIEW HOLDINGS, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION    
     
Item 1. Financial Statements   3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   31
     
Item 4. Controls and Procedures   31
     
  PART II – OTHER INFORMATION    
     
Item 1. Legal Proceedings   32
     
Item 1A. Risk Factors   32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   32
     
Item 3. Defaults Upon Senior Securities   33
     
Item 4. Mine Safety Disclosures   33
     
Item 5. Other Information   33
     
Item 6. Exhibits   33
     
Signatures   34

 

OTHER PERTINENT INFORMATION

 

Unless specifically set forth to the contrary, “DirectView,” “we,” “us,” “our” and similar terms refer to DirectView Holdings, Inc., a Nevada corporation, and each of our wholly-owned subsidiaries and majority-owned subsidiary.

 

When used in this report the following terms have the following meanings related to our subsidiaries.

 

  “DirectView Video” refers to DirectView Video Technologies, Inc., our wholly-owned subsidiary and a company organized under the laws of the state of Florida.
     
  “DirectView Security” refers to DirectView Security Systems, Inc. our majority-owned subsidiary (58% owned as of September 30, 2015) and a company organized under the laws of the state of Florida.
     
  “Ralston” refers to Ralston Communication Services, Inc. our wholly-owned subsidiary and a company organized under the laws of the state of Florida.
     
  “Meeting Technologies” refers to Meeting Technologies Inc., our wholly-owned subsidiary and a company organized under the laws of the state of Delaware.

 

 2 
  

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   June 30, 2016   December 31, 2015 
   (UNAUDITED)     
ASSETS          
           
CURRENT ASSETS:          
Cash  $36,388   $330,015 
Accounts Receivable - net   206,688    187,677 
Inventory   17,500    - 
Other Current Assets   49,978    47,489 
           
Total Current Assets   310,554    565,181 
           
PROPERTY AND EQUIPMENT - Net   8,431    15,156 
OTHER ASSETS   38,175    7,582 
           
Total Assets  $357,160   $587,919 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Convertible Promissory Notes, net of debt discounts of $742,667 and $1,283,047  $2,029,567   $1,224,309 
Short Term Advances   146,015    146,015 
Notes Payable   116,792    126,692 
Accounts Payable   224,152    158,658 
Accrued Expenses   2,069,136    2,024,457 
Due to Related Parties   4,226    12,560 
Derivative Liability   4,081,342    3,718,242 
Total Current Liabilities   8,671,230    7,410,933 
           
Total Liabilities   8,671,230    7,410,933 
           
STOCKHOLDERS’ DEFICIT:          
Preferred Stock ($0.0001 Par Value; 5,000,000 Shares Authorized;          
Series A (51 shares designated 51 shares issued and outstanding as of June 30, 2016 and 0 shares issued and outstanding as of December 31, 2015)   -    - 
Common Stock ($0.0001 Par Value; 1,000,000,000 Shares Authorized; 21,315,377 and 13,035,581 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively)    2,132     1,304 
Additional Paid-in Capital    16,976,074     16,224,907 
Accumulated Deficit    (25,321,619)   (23,081,557)
           
Total DirectView Holdings, Inc. Stockholders’ Deficit   (8,343,413)   (6,855,346)
           
Non-Controlling Interest in Subsidiary   29,343    32,332 
           
Total Stockholders’ Deficit   (8,314,070)   (6,823,014)
           
Total Liabilities and Stockholders’ Deficit  $357,160   $587,919 

 

See accompanying notes to unaudited consolidated financial statements.

 

 3 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2016   2015   2016   2015 
                 
NET SALES:                    
Sales of Product  $54,540   $73,735   $216,807   $190,084 
Services   48,284    48,696    64,681    124,861 
Total Net Sales   102,824    122,431    281,488    314,945 
                     
COST OF SALES:                    
Cost of Product   31,631    53,737    112,136    57,202 
Cost of Services   27,147    34,718    62,044    71,212 
Total Cost of Sales   58,778    88,455    174,180    128,414 
                     
GROSS PROFIT (LOSS)   44,046    33,976    107,308    186,531 
                     
OPERATING EXPENSES:                    
Marketing and Public Relations   25,615    104,220    122,209    122,530 
Rent   19,380    18,300    40,560    58,600 
Depreciation   3,363    1,556    6,725    3,112 
Bad Debt Expense   450    -    450    - 
Research and Development   4,600    -    10,154    - 
Compensation and Related Taxes   110,389    144,671    224,590    251,120 
Other Selling, General and Administrative   181,221    204,776    435,359    298,267 
                     
Total Operating Expenses   345,018    473,523    840,047    733,629 
                     
LOSS FROM OPERATIONS   (300,972)   (439,547)   (732,739)   (547,098)
                     
OTHER INCOME (EXPENSES):                    
Loss on conversion of related party loan   -    -    -    (290,000)
Change in Fair Value of Derivative Liabilities    (1,851,221)   (183,374)    (38,396)   361,673 
Initial Derivative Expense   (46,878)   (185,200)   (197,508)   (255,140)
Interest Income   16    -    16    - 
Amortization of Debt Discount   (523,536)   (103,752)   (1,079,285)   (175,200)
Interest Expense   (94,838)   (39,997)   (195,140)   (101,249)
                     
Total Other Income (Expense)    (2,516,457)   (512,323)    (1,510,313)   (459,916)
                     
NET INCOME (LOSS)    (2,817,429)   (951,870)    (2,243,052)   (1,007,014)
                     
Less: Net (Income) Loss Attributable to Non-Controlling Interest   3,572    (2,590)   2,990    (49,936)
                     
Net Income (Loss) Attributable to DirectView Holdings, Inc.  $(2,813,857)  $(954,460)  $(2,240,062)  $(1,056,950)
                     
NET LOSS PER COMMON SHARE: Basic and Diluted  $(0.00)  $(0.00)  $(0.00)  $(0.01)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and Diluted   19,469,255    6,468,706    17,185,956    2,031,716 

 

See accompanying notes to unaudited consolidated financial statements.

 

 4 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Six Months Ended June 30, 
   2016   2015 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $(2,243,052)  $(1,007,014)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:          
Depreciation   6,725    3,112 
Common stock issued for compensation and services   -    53,860 
Change in fair value of derivative liabilities   38,396    (361,673)
Loss on conversion of related party loan   -    290,000 
Initial derivative liability expense   197,508    255,140 
Amortization of debt discount   1,079,285    175,200 
Amortization of deferred financing costs   4,188    18,125 
Amortization of original issue discount   50,481    - 
Non cash interest charges   -    17,397 
(Increase) Decrease in:          
Accounts receivable   (19,011)   (113,087)
Other assets   (50,582)   2,355 
Increase (Decrease) in:          
Accounts payable   18,781    36,583 
Accrued expenses   111,733    271,995 
           
Net Cash (Used in) Operating Activities   (805,548)   (358,007)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible notes payable   585,144    499,367 
Payments of convertible notes payable   (54,989)   - 
Payments of notes payable   (9,900)   (50,000)
Proceeds from related parties   -    (26,259)
Payments to related parties   (8,334)   - 
           
Net Cash Provided by Financing Activities   511,921    423,108 
           
Net (Decrease) Increase in Cash   (293,627)   65,101 
           
Cash - Beginning of Period   330,015    13,158 
           
Cash - End of Period  $36,388   $78,259 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
           
Cash paid during the period for:          
Interest  $-   $- 
Income Taxes  $-   $- 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
           
Issuance of common stock in connection with conversion of convertible promissory notes and accrued interest  $324,895   $272,386 
Initial recognition of derivative liability as debt discount  $554,301   $637,305 
Reclassification of derivative liability to additional paid in capital  $427,099   $- 

 

See accompanying notes to unaudited consolidated financial statements.

 

 5 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

DirectView Holdings, Inc., (the “Company”), was incorporated in the State of Delaware on October 2, 2006. On July 6, 2012 the Company changed its domicile from Delaware and incorporated in the State of Nevada.

 

The Company has the following 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 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 23% which is owned by the Company’s CEO who is a majority shareholder of the Parent Company) as of June 30, 2016. In the preparation of 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, 2015 included in our Annual Report on Form 10-K filed with the SEC on April 14, 2016.

 

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, 2016, and the results of operations and cash flows for the six months ending June 30, 2016 have been included. The results of operations for the six months ended June 30, 2016 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 for the six months then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the allowance for doubtful accounts, deferred tax asset valuation allowance, valuation of stock-based compensation, the useful life of property and equipment, valuation of beneficial conversion features on convertible debt and the assumptions used to calculate derivative liabilities.

 

 6 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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, 2016, the Company reflected a non-controlling interest of $29,343 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, 2016 the Company has not reached bank balances exceeding the FDIC insurance limit. The Company was over the insured limit by $58,390 for the year ended December 31, 2015. 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, 2016 and December 31, 2015. 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.

 

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.

 

 7 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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, 2016 and December 31, 2015, management determined that an allowance is necessary which amounted to $38,000 at both dates. During the six months ended June 30, 2016 and the year ended December 31, 2015, the Company recognized $450 and $627 respectively of expenses related to uncollectible accounts receivable.

 

Advertising

 

Advertising is expensed as incurred. Advertising expenses for the six months ended June 30, 2016 and 2015 was $122,209 and $122,530, 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, 2016 and 2015, 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. The Company acquires inventory for specific installation jobs. As a result, the Company generally orders inventory only as needed for installations and there was an insignificant amount of inventory on hand at December 31, 2015. Due to the anticipation of customers needs the Company preordered inventory items and had $17,500 in inventory as of June 30, 2016.

 

Property and Equipment

 

Property and equipment 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.

 

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, 2016 and 2015.

 

 8 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 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 $0 and $53,860 during the six months ended June 30, 2016 and 2015, respectively.

 

Revenue recognition

 

The Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials. The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. When a customer order contains multiple items such as hardware, software, and services which are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting. Delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in the Company’s control. Sales are recorded net of discounts and discounts are determined to be immaterial.

 

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

 

Revenue is recognized upon completion of conferencing services. The Company generally does not charge up-front fees and bills its customers based on usage.

 

 9 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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

 

Revenue from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant obligations remain and collectibility of the related receivable is probable.

 

Cost of sales 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, 2016, three customers accounted for 50% of revenues. The following is a list of percentage of revenue generated by the three customers:

 

Customer 1   10%
Customer 2   11%
Customer 3   29%
Total   50%

 

During the six months ended June 30, 2015, two customers accounted for 53% of revenues. The following is a list of percentage of revenue generated by the two customers:

 

Customer 1   41%
Customer 2   12%
Total   53%

 

As of June 30, 2016, two customers accounted for 44% of total accounts receivable. The following is a list of percentage of accounts receivable owed by the two customers:

 

Customer 1   10%
Customer 2   34%
Total   44%

 

As of December 31, 2015, three customers accounted for 65% of total accounts receivable. The following is a list of percentage of accounts receivable owed by the three customers:

 

Customer 1   14%
Customer 2   16%
Customer 3   35%
Total   65%

 

 10 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 Statement of Financial Account Standards Number 2, 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 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, 2016 the Company had 12,822,431,600 share equivalents issuable pursuant to embedded conversion features. At December 31, 2015 the Company had 1,240,096,048 share equivalents issuable pursuant to embedded conversion features.

 

Recent Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a significant impact on the results of operations, financial condition or cash flow.

 

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, 2016, the Company had an accumulated deficit of approximately $25 million, a stockholders’ deficit of approximately $8 million and a working capital deficiency of $8,360,676. The net cash used in operating activities for the six months ended June 30, 2016 totaled $805,548. 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. 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.

 

 11 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   Estimated life  June 30, 2016   December 31, 2015 
Leasehold Improvements  2 years  $26,901   $26,901 
Less: Accumulated amortization      (18,470)   (11,745)
Furniture and fixtures  3 years   2,771    2,771 
Less: Accumulated depreciation      (2,771)   (2,771)
      $8,431   $15,156 

 

For the six months ended June 30, 2016 and 2015, depreciation and amortization expense amounted to $6,725 and $3,112, respectively.

 

In June 2014 the Company negotiated to lease approximately 3,000 square feet of office space in New York City and made leasehold improvements totaling $12,448. In August 2015 the Company made leasehold improvements totaling $14,453. The Company began amortizing the balance on a straight-line basis for the term of 2 years commencing in July 2014 and August 2015. The original monthly rent was $5,000 per month which was increased to $6,460 in November 2015.

 

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 was in default as of December 31, 2015. In February 2016 the Company paid the note holder $19,133, the remaining $9,900 balance of the note and $9,233 in accrued interest. As of June 30, 2016 and December 31, 2015 the balance of this note was $0 and $9,900 respectively.

 

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, 2016 and December 31, 2015 the notes amounted to $116,792 and $116,792 respectively.

 

As of June 30, 2016 and December 31, 2015, notes payable amounted to $116,792 and $126,692, respectively.

 

Accrued interest on the notes payable amounted to approximately $62,500 and $64,200 as of June 30, 2016 and December 31, 2015, respectively and is included in accrued expenses.

 

NOTE 5 – 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, 2016 and December 31, 2015.

 

 12 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 6 – ACCRUED EXPENSES

 

As of June 30, 2016 and December 31, 2015 the Company had accrued expenses of $2,069,136 and $2,024,457 respectively. The following table displays the accrued expenses by category.

 

   June 30, 2016   December 31, 2015 
Operating Expenses  $31,453   $87,410 
Lease Abandonment   164,375    164,375 
Employee Commissions   60,590    60,590 
Interest   321,861    276,791 
Salaries   1,359,977    1,312,594 
Sales Tax Payable   45,086    37,994 
Payroll Liabilities   85,794    84,703 
   $2,069,136   $2,024,457 

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES

 

Convertible promissory notes consisted of the following:  June 30, 2016   December 31, 2015 
Secured convertible promissory notes  $2,772,232   $2,507,356 
           
debt discount liability   (706,413)   (1,221,506)
           
debt discount original issue discount   (36,255)   (57,352)
           
debt discount deferred financing   -    (4,189)
Secured convertible promissory notes– net  $2,295,564   $1,224,309 

 

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 negotiationed 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 8). 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 $.0001 per share. In October 2014 the note holder assigned $20,000 of the note balance to a third party. The balance of the unsecured note payable amounted to $23,246 as of June 30, 2016 and December 31, 2015.

 

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 was amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 8). The balance of the convertible debenture is $10,000 as of June 30, 2016 and December 31, 2015. In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $8,333 (see Note 8).

 

 13 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES (continued)

 

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 was amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 8). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $23,958 (see Note 8). The balance of this convertible debenture is $25,000 as of June 30, 2016 and as of December 31, 2015.

 

On January 16, 2014 the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at 50% of the lowest trading price during the ten trading days prior to the conversion date. The Company recorded a debt discount of $25,000 with the difference of $26,848 recorded as a derivative expense. The debt discount was amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 8). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $51,848 (see Note 8). The balance of this convertible debenture is $25,000 as of June 30, 2016 and as of December 31, 2015.

 

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. In the first quarter of 2016 the Company paid $50,000 in reduction of one of the notes. The balance of these three notes was $100,000 and $150,000 as of June 30, 2016 and as of December 31, 2015, respectively.

 

On October 27, 2014 the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal balance of $21,600 with a one year maturity date. This convertible debenture converts at the lower of $.0025 or 60% of the lowest trading price during the 25 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $311,662 and a debt discount of $18,400 (see Note 8). The Company also recorded OID of $1,600. The OID and debt discount were fully being amortized as of June 30, 2016 and as of December 31, 2015. The balance of this convertible debenture as of June 30, 2016 and as of December 31, 2014 is $21,600.

 

On December 19, 2014 the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal balance of $27,174 with a one year maturity date. This convertible debenture converts at the lower of $.0025 or 60% of the lowest trading price during the 25 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $5,017 and a debt discount of $5,017 (see Note 8). The Company also recorded OID of $2,000. The OID and debt discount were fully amortized as of December 31, 2015. In February 2016 the note holder converted $27,174 of the convertible promissory note payable balance and $2,174 of accrued interest into 559,006 common shares at the contractual rate of $.004 per share. The balance of this convertible debenture as of June 30, 2016 and as of December 31, 2015 is $0 and $27,174, respectively.

 

In October 2014 a note holder assigned $20,000 of principal balance and $4,489 of an accrued interest balance to a third party. In January 2015 the note holder converted $1,000 into 9,524 common shares at the contractual rate of $.105. In March 2015 the note holder converted $1,300 into 37,143 common shares at the contractual rate of $.035. In April and May 2015 the note holder converted $17,200 into 397,143 common shares at the contractual rate ranging from $.028 to $.055 per share. In March 2016 the Company paid the note holder the balance of the unsecured note payable of $4,989. The balance of this unsecured note payable as of June 30, 2016 and as of December 31, 2015 is $0 and $4,989, respectively.

 

On February 11, 2015 the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal balance of $54,348 with a one year maturity date. This convertible debenture converts at the lower of $.0025 or 60% of the lowest trading price during the 25 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $119,940, a debt discount of $50,348 (see Note 8), and derivative expense of $69,940. The Company also recorded OID of $4,000. The OID and debt discount are being amortized over the term of the note. In June 2015 the note holder assigned the balance of the note and accrued interest of $4,348 to a third party totaling a new note balance of $58,696 as of June 30, 2015. In August 2015 the note holder converted $10,000 of principle balance into 207,039 common shares at the contractual rate of $.0483 per share. In September 2015 the note holder converted $24,000 of principle balance into 496,894 common shares at the contractual rate of $.0483 per share. In October 2015 the note holder converted an additional $10,000 of principle balance into 226,757 common shares at the contractual rate of $.0441 per share. In March 2016 the note holder converted the remaining $14,696 of principle balance into 362,733 common shares at the contractual rate of $.0406 per share. The balance of the unsecured note payable amounted to $0 and $14,696 as of June 30, 2016 and as of December 31, 2015, respectively.

 

 14 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES (continued)

 

On May 5, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $115,789 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $147,775, a debt discount of $110,000 (see Note 8), and derivative expense of $37,775. The Company also recorded OID of $5,789 and deferred financing of $10,000. The OID, deferred financing and debt discount are being amortized over the term of the note. In December 2015 the note holder converted $23,000 of principle balance into 408,148 common shares at the contractual rate of $.0564 per share. In January 2016 the note holder converted $65,673 of principle balance into 941,913 common shares at the contractual rate ranging from $.0686 to $.0711 per share. In February the note holder converted the remaining balance of $27,117 of the convertible promissory note and $11,579 of accrued interest into 453,252 common shares at the contractual rate of $.0256 per share. The balance of the convertible promissory note amounted to $0 and $92,789 as of June 30, 2016 and as of December 31, 2015, respectively.

 

On May 15, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount of $50,000 (see Note 8), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of June 30, 2016 and as of December 31, 2015. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of December 31, 2015 amounted to $32,895.

 

On May 27, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount of $50,000 (see Note 8), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of June 30, 2016 and as of December 31, 2015. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of December 31, 2015 amounted to $31,433.

 

On June 5, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount of $50,000 (see Note 8), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of June 30, 2016 and as of December 31, 2015. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of December 31, 2015 amounted to $29,386.

 

On June 15, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,512, a debt discount of $142,500 (see Note 8), and derivative expense of $59,406. The Company also recorded OID of $7,500 and deferred financing of $1,500. The OID, deferred financing and debt discount are being amortized over the term of the note. In June 2016 the note holder converted $5,000 of principle balance into 793,651 common shares at the contractual rate of $.0063 per share. The balance of the convertible promissory note amounted to $152,895 as of June 30, 2016 and $157,895 as of December 31, 2015. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible promissory note net of debt discount, deferred financing and OID as of December 31, 2015 amounted to $113,707.

 

 15 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES (continued)

 

On July 1, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,512, a debt discount of $142,500 (see Note 8), and derivative expense of $59,406. The Company also recorded OID of $7,500. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,895 as of June 30, 2016 and as of December 31, 2015. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of December 31, 2015 amounted to $82,895.

 

On July 15, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,512, a debt discount of $142,500 (see Note 8), and derivative expense of $59,406. The Company also recorded OID of $7,500. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,895 as of June30, 2016 and as of December 31, 2015. The balance of the convertible promissory note net of debt discount and OID as of June30, 2016 amounted to $151,645 and as of December 31, 2015 amounted to $76,645.

 

On July 23, 2015 the Company issued a convertible promissory note with a principal balance of $429,439 with a one year maturity date. This convertible debenture converts at 55% of the two lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $707,603, a debt discount of $429,439 (see Note 8), and derivative expense of $278,164. The debt discount is being amortized over the term of the note. In March 2016 the note holder converted $70,000 of principle balance into 1,454,545 common shares at the contractual rate of $.0482 per share. In April 2016 the note holder converted $15,000 of principle balance into 599,401 common shares at the contractual rate of $.0251 per share. In May 2016 the note holder converted $14,000 of principle balance into 909,091 common shares at the contractual rate of $.0154 per share. The balance of the convertible promissory note amounted to $330,439 and $429,439 as of June 30, 2016 and as of December 31, 2015, respectively. The balance of the convertible promissory note net of debt discount as of June 30, 2016 amounted to $318,849 and as of December 31, 2015 amounted to $278,767.

 

On October 9, 2015 the three convertible promissory notes mentioned above were assigned to a third party note holder with the same terms and balances. In February 2016 the note holder converted $20,000 of the convertible promissory note and $2,000 of accrued interest into 419,048 common shares at the contractual rate of $.0525 per share. In March 2016 the note holder converted $20,000 of the convertible promissory note and $2,000 of accrued interest into 419,048 common shares at the contractual rate of $.0525 per share. In April 2016 the note holder converted an additional $15,000 of the convertible promissory note and $1,500 of accrued interest into 654,762 common shares at the contractual rate of $.0252 per share. In May 2016 the note holder converted $10,895 of the convertible promissory note and $1,089 of accrued interest into 713,346 common shares at the contractual rate of $.0168 per share. The balance of the convertible promissory note amounted to $407,789 and $473,684 as of June 30, 2016 and as of December 31, 2015, respectively. The balance of the convertible promissory note net of debt discount as of June 30, 2016 amounted to $317,456 and as of December 31, 2015 amounted to $159,101.

 

 16 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES (continued)

 

On October 19, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,500 with a one year maturity date. This convertible debenture converts at 55% of the average of the two lowest traded prices in the prior 30 days before conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $259,764, a debt discount of $142,500 (see Note 8), and derivative expense of $117,264. The Company also recorded OID of $7,500. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,500 as of June 30, 2016 and as of December 31, 2015. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $113,750 and as of December 31, 2015 amounted to $38,750.

 

On November 18, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,500 with a one year maturity date. This convertible debenture converts at 55% of the average of the two lowest traded prices in the prior 30 days before conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $259,764, a debt discount of $142,500 (see Note 8), and derivative expense of $117,264. The Company also recorded OID of $7,500. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,500 as of June 30, 2016 and as of December 31, 2015. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $101,250 and as of December 31, 2015 amounted to $26,250.

 

On December 18, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $263,158 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $335,598, a debt discount of $237,500 (see Note 8), and derivative expense of $98,756. The Company also recorded OID of $12,500. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $263,158 as of June 30, 2016 and as of December 31, 2015. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $148,575 and as of December 31, 2015 amounted to $23,575.

 

On January 19, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $111,111 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $141,697, a debt discount of $95,000 (see Note 8), and derivative expense of $52,808. The Company also recorded OID of $5,000. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $111,111 as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $56,944.

 

On February 5, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,359, a debt discount of $142,500 (see Note 8), and derivative expense of $59,254. The Company also recorded OID of $7,500. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,895 as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $70,395.

 

On March 7, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $118,573 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $151,213, a debt discount of $112,940 (see Note 8), and derivative expense of $38,569. The Company also recorded OID of $5,632. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $118,573 as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $34,584.

 

 17 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES (continued)

 

On April 1, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $105,263 with a six month maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $108,185, a debt discount of $95,000 (see Note 8), and derivative expense of $13,448. The Company also recorded OID of $5,000. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $105,263 as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $30,263.

 

On May 23, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632 with a five month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $65,144, a debt discount of $47,500 (see Note 8), and derivative expense of $17,776. The Company also recorded OID of $2,500. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $7,974.

 

On June 24, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $78,947 with a four month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $84,205, a debt discount of $71,250 (see Note 8), and derivative expense of $15,653. The Company also recorded OID of $3,750. The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $78,947 as of June 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of June 30, 2016 amounted to $4,350.

 

During the six months ended June 30, 2016 and the year ended December 31, 2015 amortization of debt discount amounted to $1,079,285 and $919,034, respectively.

 

NOTE 8 – DERIVATIVE LIABILITY

 

The Company enters into financing arrangements that contain embedded derivative features due to down round (“Ratchet”) provisions or conversion formulas that cause derivative treatment. The Company accounts for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. The Company determines the fair value of derivative instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.

 

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.

 

 18 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 8 – DERIVATIVE LIABILITY (continued)

 

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, 2014 to June 30, 2016:

 

   Conversion feature 
   derivative liability 
Balance at December 31, 2014  $1,462,984 
Recognition of initial derivative liability   3,492,594 
Reclass of derivative liability to additional paid in capital due to conversions   (1,196,842)
Change in fair value included in earnings   (40,494)
Balance at December 31, 2015   3,718,242 
Initial fair value of derivative liability recorded as debt discount   554,301 
Initial fair value of derivative liability charged to other expense   197,508 
Reclass of derivative liability to additional paid in capital due to conversions   

(427,099

)
Change in fair value included in earnings   38,390 
Balance at June 30, 2016  $4,081,342 

 

Total derivative liability at June 30, 2016 and December 31, 2015 amounted to $4,081,342 and $3,718,242, respectively. The change in fair value included in earnings as income of $38,390 is due in part to the quoted market price of the Company’s common stock decreasing from $.126 at December 31, 2015 to $.0175 at June 30, 2016 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, 2016
     
Expected volatility   192% - 304%
Expected term   3 – 12 months
Risk-free interest rate   0.02% - 0.09%
Expected dividend yield   0%

 

NOTE 9 - STOCKHOLDERS’ DEFICIT

 

In March 2015 the Company approved a 1-30 Reverse Stock Split and on August 2, 2016 the Company approved a 1-35 Reverse Stock split (see Note 15). The financial statements have been retroactively restated to reflect the August 2, 2016 Reverse Split.

 

In January 2015 the Company made four issuances of common shares related to the same convertible note payable. The Company issued 17,143; 18,095; 18,095 and 19,048 shares of common stock at the contractual rate of $.378 for the reduction of $6,480; at the contractual rate of $.378 for the reduction of 6,840; at $.378 for the reduction of $6,840 and at $.315 for an additional reduction of $6,000 in principal of notes payable.

 

In January 2015 the Company issued 9,523 shares of common stock at the contractual rate of $.1050 for the reduction of $1,000 in principal of convertible notes payable.

 

In January 2015 the Company issued 19,133 shares of common stock at the contractual rate of $.378 for the reduction of $7,556 in principal of convertible notes payable.

 

 19 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 9 - STOCKHOLDERS’ DEFICIT (continued)

 

In February 2015 the Company issued 20,000; 21,905 and 23,810 shares of common stock at the contractual rate of $.315 for the reduction of $6,300; at the contractual rate of $.315 for the reduction of $6,900; and at the contractual rate of $.252 for the reduction of $6,000 in principal of convertible notes payable.

 

In February 2015 the Company made four issuances of common shares at contractual rates related to the same convertible note payable. The Company issued 21,178; 27,051; 29,524 and 31,365 shares of common stock at $.315 for the reduction of $6,671; at $.315 for the reduction of $8,521; at $.252 for the reduction of $7,440 and at $.189 for an additional reduction of $5,928 in principal of notes payable.

 

In February 2015 the Company issued 3,333 shares of common stock at fair market value of $.63 for $2,100 of services rendered.

 

In March 2015 the Company made two issuances of common shares at contractual rates related to the same convertible note payable. The Company issued 119 and 1,238 shares of common stock at $.945 for the reduction of $1,121 and at $.945 for the reduction of $1,170 in principal of notes payable.

 

In March 2015 the Company made issuances of common shares at contractual rates related to the same convertible note payable. The Company issued 138,418 shares of common stock at $.252 for the reduction of $8,720 of principal, interest and associated fees.

 

In March 2015 the Company made two issuances of common shares at contractual rates related to the same convertible note payable. The Company issued 1,310 and 1,565 shares of common stock at $.945 for the reduction of $1,238 and at $.945 for the reduction of $1,479 in principal of notes payable.

 

In March 2015 the Company issued 37,143 shares of common stock at the contractual rate of $.035 for the reduction of $1,300 in principal of convertible notes payable.

 

In the period of April 1, 2015 through June 30, 2015 the Company issued 4,977,930 shares of common stock at contractual rates ranging from $.0336 to $2.625 for the reduction of $265,281 in principal convertible notes payable, $8,540 in fees and $959 in the reduction of accrued interest (See Note 7).

 

In May 2015 the Company issued 85,714 shares of common stock at fair market value of $.49 per share, based on quoted traded prices, for compensation totaling $42,000.

 

In the period of July 1, 2015 through September 30, 2015 the Company issued 2,036,594 shares of common stock at contractual rates ranging from $.0483 to $.1050 for the reduction of $114,289 in principal of convertible notes payable, $156 in fees and $44,181 in the reduction of accrued interest (See Note 7).

 

In the period of October 1, 2015 through December 31, 2015 the Company issued 1,971,517 shares of common stock at contractual rates ranging from $.0460 to $.0805 for the reduction of $85,500 in principal of convertible notes payable and $5,250 in the reduction of accrued interest (See Note 7).

 

On January 6, 2016, the Company filed an amendment to its articles of incorporation (the “Amendment”) with the Secretary of State of the State of Nevada, which, among other things, established the designation, powers, rights, privileges, preferences and restrictions of the Series A Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”).

 

Among other provisions, each one (1) share of the Series A Preferred Stock shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) – (0.019607 x 5,000,000) = 102,036).

 

 20 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 9 - STOCKHOLDERS’ DEFICIT (continued)

 

Fifty-one (51) shares of Series A Preferred Stock were authorized and fifty-one (51) shares of Series A Preferred Stock were issued to Roger Ralston, the Company’s Chief Executive Officer and a director of the Company (CEO). The Series A Preferred Stock was issued to the CEO and is Series A Super Voting Preferred Stock. The Super Voting was created primarily to be able to obtain a quorum and conduct business at shareholder meetings.

 

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

 

In the period of January 1, 2016 through March 31, 2016 the Company issued 4,609,850 shares of common stock at contractual rates ranging from $.0483 to $.0711 for the reduction of $244,660 in principal of convertible notes payable and $17,753 in the reduction of accrued interest (See Note 7).

 

In the period of April 1, 2016 through June 30, 2016 the Company issued 3,670,250 shares of common stock at contractual rates ranging from $.0063 to $.0252 for the reduction of $59,895 in principal of convertible notes payable and $2,589 in the reduction of accrued interest (See Note 7).

 

NOTE 10 - RELATED PARTY TRANSACTIONS

 

Due to Related Parties

 

The following related party transactions have been presented on the balance sheet in due to related parties. During the six months ended June 30, 2016, the Company paid $18,915 in accrued interest to the Chief Executive Officer. Additionally, as of June 30, 2016 and as of December 31, 2015 $0 and $48,478 of accrued interest due to related parties has been included in accrued expenses.

 

The Company repaid $10,907 to the Chief Executive Officer and borrowed $2,484 in the second quarter of 2015. The Company repaid $140,330 to the Chief Executive Officer and borrowed $3,412 in the third quarter of 2015. In October 2015 the Company repaid $2,584 to the Chief Executive Officer. As of June 30, 2016 and December 31, 2015 the Company had a payable to the Chief Executive Officer of the Company amounting to $2,160 and $12,560, respectively. These advances are short-term in nature and non-interest bearing.

 

NOTE 11 – 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, 2016 and the year ended December 31, 2015 totaled $20,543 and $18,047, respectively.

 

NOTE 12 - ACCRUED PAYROLL TAXES

 

As of June 30, 2016 and December 31, 2015 the Company recorded a liability related to unpaid payroll taxes which includes interest and penalties of approximately $86,000 and $84,000, 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 and in September 2015, the Company paid $28,281 toward the outstanding payroll tax liabilities. Such amount also includes current payroll tax liabilities and has been included in accrued expenses in the accompanying consolidated financial statements. In period of January 2011 through June 2016 the Company has filed and paid its payroll liabilities timely.

 

 21 
  

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

NOTE 13 - SEGMENT REPORTING

 

Although the Company has a number of operating divisions, separate segment data has not been presented as they meet the criteria for aggregation as permitted by ASC Topic 280, “Segment Reporting” (formerly Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures About Segments of an Enterprise and Related Information”).

 

Our chief operating decision-maker is considered to be our Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the CEO is identical to the information presented in the accompanying consolidated statements of operations. Therefore, the Company has determined that it operates in a single operating segment, specifically, security systems and related services. For the six months ended June 30, 2016 and the year ended December 31, 2015 all material assets and revenues of the Company were in the United States.

 

NOTE 15 – SUBSEQUENT EVENTS

 

Subsequent to June 30, 2016 the Company issued 3,758,658 shares of common stock in satisfaction of $18,450 of convertible promissory notes and $500 of accrued interest. These notes were converted at contractual rates ranging from $.0039 to $.0063.

 

On July 20, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632 with a six month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company will account for this conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $62,142, a debt discount of $47,500, and derivative expense of $14,774. The Company also will record OID of $2,500. The OID and debt discount are being amortized over the term of the note.

 

On July 29, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632 with a six month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company will account for this conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $62,142, a debt discount of $47,500, and derivative expense of $14,774. The Company also will record OID of $2,500. The OID and debt discount will be amortized over the term of the note.

 

On August 2, 2016 the Company approved a 1-35 Reverse Stock split (see Note 9).

 

 22 
  

 

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

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “management believes” and similar language. Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this annual report are forward-looking statements that involve risks and uncertainties. The factors listed in the section captioned “Risk Factors,” as well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this quarterly report.

 

Overview

 

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

 

Our operations are conducted within two divisions:

 

  The vast majority of our business is derived from our security division which provides surveillance systems, digital video recording and services to businesses, organizations and law enforcement, and
     
  Our video conferencing division 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 transportation, hotel and hospitality, education, cannabis, food services, and real estate industries.

 

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

 

 23 
  

 

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 (Airport, Heliport, and Bus Terminal)
     
  Hospitality (Hotel, Golf Course, Food Service and Bars/Restaurant)
     
  Industrial (Warehousing and Storage, Cannabis Grow House and Dispensary, and Manufacturing)
     
  Educational (Daycare, Private School, Learning Center/Religious Organization)
     
  Residential (Condo/Co-op, Property Management Company, and Private Home)

 

Beginning in 2014, we focused a significant amount of our business development and marketing efforts towards the legalized cannabis industry. We see this market as a strong growth area for the Company due to our belief that the political landscape will continue to move towards the legalization of marijuana for medical and recreational use across the country. By the middle of 2013, 18 states and the District of Columbia have already allowed the production and use of marijuana for medical purposes. Two states, Colorado and Washington, also have approved cannabis for recreational use. Additionally, many large security service providers have publicly avoided servicing businesses engaged in the sale or growing of marijuana which we believe lowers the competitive landscape.

 

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

 

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

 

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

 

 24 
  

 

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

 

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

 

Our Outlook

 

Our net sales are currently not sufficient to fund our operating expenses. We have relied upon funds from the issuance of notes, the sale of common stock and advances from our executive officers to provide working capital to our company. These funds, however, are not sufficient to pay all of our expenses nor to provide the additional capital we believe is necessary to permit us to properly market our company in an effort to increase our sales. We are always looking for opportunities with new dealers to expand our IP based surveillance products offerings and plan to evaluate the market for our products throughout 2016 to determine whether we should hire additional employees in our sales force. We seek to leverage our current customer base which includes major international hotel chains, well known real estate development companies, and respected educational facilities, to build our reputation as a trusted security provider and generate customer referrals. Beginning in 2014 we also began targeting our marketing efforts toward the cannabis industry. We see the specific security needs of this industry, representing a significant opportunity for sales growth. Each state has specific requirements for security which includes extensive video surveillance and perimeter security. Additionally, some larger security companies have been hesitant to enter this market up to this point, we believe this will help reduce competitive pressures. While we believe our strategy for growth will result in an increase in demand for our products and service and generate revenues, no assurance can be provided that we will successfully implement our strategy. We are subject to significant business risks and may need to raise additional capital in order to realize and effectuate the above strategy.

 

Results of Operations

 

Three and Six Months Ended June 30, 2016 Compared to the Three and Six Months Ended June 30, 2015

 

Net Sales

 

Overall, our net sales for the three and six months ended June 30, 2016 decreased approximately 16% and 11% from the comparable periods in 2015. The following table provides comparative data regarding the source of our net sales in each of these periods and the change from 2016 to 2015:

 

   Three Months Ended June 30, 2016   Three Months Ended June 30, 2015      
   $   % of Total   $   % of Total   Variance 
Sale of product   54,540    53%   73,735    60%   -26%
Service   48,284    47%   48,696    40%   -1%
Total   102,824    100%   122,431    100%   -16%

 

 25 
  

 

   Six Months Ended June 30, 2016    Six Months Ended June 30, 2015     
   $   % of Total   $   % of Total   Variance 
Sale of product   216,807    77%   190,084    60%   14%
Service   64,681    23%   124,861    40%   -48%
Total   281,488    100%   314,945    100%   -11%

 

Sales of product for the three months ended June 30, 2016 decreased approximately 26% as compared to the three months ended June 30, 2015. The decrease is attributed to a lower sales force in the three months ended June 30, 2016. Sales of product for the six months ended June 30, 2016 increased approximately 14% as compared to the six months ended June 30, 2015 due to more sales efforts in the three months ended March 31, 2016. Service revenue decreased by approximately 1% and 48% due to customers decreasing their service needs in 2016 compared to 2015.

 

Net sales slightly decreased due to lower customers’ service needs. In an effort to continue to increase our sales in future periods, we believe we need to hire additional sales staff to initiate a telemarketing campaign and to obtain leads from various lead sources such as lead generating telemarketing lists, email marketing campaigns and other sources. However, given our lack of working capital, we cannot assure that we will ever be able to successfully implement our current business strategy or increase our revenues in future periods.

 

Cost of Sales

 

Cost of product includes product and delivery costs relating to the sale of product revenue. Cost of services includes labor and installation for service revenue. Overall, cost of sales decreased approximately 34% for the three months ended June 30, 2016 compared to June 30, 2015. Cost of sales increased approximately 36% for the six months ended June 30, 2016 compared to June 30, 2015. The following table provides comparative data regarding the breakdown of the cost of sales in each of these periods and the change from 2016 to 2015:

 

   Three Months Ended June 30, 2016    Three Months Ended June 30, 2015      
   $   % of Total   $   % of Total   Variance 
Cost of product   31,631    54%   53,737    61%   -41%
Cost of service   27,147    46%   34,718    39%   -22%
Total   58,778    100%   88,455    100%   -34%

 

   Six Months Ended June 30, 2016    Six Months Ended June 30, 2015      
   $   % of Total   $   % of Total   Variance 
Cost of product   112,136    64%   57,202    45%   96%
Cost of service   62,044    36%   71,212    55%   -13%
Total   174,180    100%   128,414    100%   36%

 

 26 
  

 

During the three months ended June 30, 2016, our cost of product decreased approximately 41% as compared to the three months ended June 30, 2015 which is directly related to the decrease in product sales for the same period. During the six months ended June 30, 2016, our cost of product increased approximately 96% as compared to the six months ended June 30, 2015 which is directly related to the increase in product sales for the same period. Our cost of services for 2016 decreased 22% and 13% as compared to the three and six months ended June 30, 2015 due to less installation fees for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015.

 

Total operating expenses for the three months ended June 30, 2016 were $345,018, a decrease of $128,505, or approximately 27%, from total operating expenses for the comparable three months ended June 30, 2015 of $473,523. This decrease is primarily attributable to compensation and related taxes and less marketing efforts.

 

Total operating expenses for the six months ended June 30, 2016 were $840,047, an increase of $106,418, or approximately 15%, from total operating expenses for the comparable six months ended June 30, 2015 of $733,629.

 

This increase is primarily attributable to an increase in public company expenses, legal and accounting expenses, research and development and slightly offset by a decrease in rent expense.

 

Loss from Operations

 

We reported a loss from operations of $300,972 and $732,739 for the three and six months ended June 30, 2016, as compared to a loss from operations of $439,547 and $547,098 for the three and six months ended June 30, 2015. A decrease of $138,575 and an increase of $185,641or (32%) and 34% respectively, for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015.

 

Other Expense

 

Total other expense was $2,516,221 for the three months ended June 30, 2016 as compared to total other expense of $512,323 for the three months ended June 30, 2015. The increase in other expense was primarily attributable to the change in fair value of derivative liabilities and an increase in amortization of debt discount. Total other expense was $1,510,313 for the six months ended June 30, 2016 as compared to total other expense of $459,916 for the six months ended June 30, 2015. The increase in other expense was primarily attributable to an increase in amortization of debt discount offset by a decrease in loss on conversion of related party loans.

 

Net loss

 

We reported a net loss of $2,817,429 and $2,243,052 for the three and six months ended June 30, 2016 as compared to a net loss of $951,870 and $1,007,014 for the three and six months ended June 30, 2015. Net loss from non-controlling interest for the three and six months ended June 30, 2016 was $3,572 and $2,990 respectively compared to net income of 2,590 and $49,936 for the three and six months ended June 30, 2015.

 

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, 2016, we had a cash balance of $36,388. Our working capital deficit is $8,360,676 at June 30, 2016.

 

We reported a net decrease in cash for the six months ended June 30, 2016 of $293,627. While we currently have no material commitments for capital expenditures, at June 30, 2016 we owed approximately $116,792 under various notes payable. During the period ended June 30, 2016, we have raised $805,258 of net proceeds from convertible notes payable.

 

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Accrued liabilities were $2,069,136 as of June 30, 2016 and consist of the following:

 

  Accrued salaries for certain employees amounting to $1,359,977
     
  Accrued commissions for certain employees amounting to $60,590
     
  Sales tax payable of $45,086
     
  Lease abandonment charges of $164,375
     
  Accrued interest of $321,861
     
  Accrued payroll liabilities and taxes of $85,794
     
  Other accrued expenses of $31,453

 

On April 1, 2016, the Company entered into a Securities Purchase Agreement (the “SPA”) to issue and sell a 5% Original Issue Discount Convertible Promissory Note (the “Note” and together with the SPA, the “Transaction Documents”) to an institutional investor (the “Investor”), in the principal amount of $105,263 (the “Principal Amount”). Pursuant to the Transaction Documents, on or about April 1, 2016, the Company received $100,000 (before expenses and fees) in funding from the Investor. The Company’s issuance of the securities to the Investor pursuant to the SPA are exempt from registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.

 

The Note shall mature on March 31, 2017 (the “Maturity Date”) and shall accrue interest at an annual rate equal to 10%. The Principal Amount shall be paid on the Maturity Date (or sooner as provided in the Note) in cash. The interest shall be paid on the Maturity Date (or sooner as provided in the Note) in cash or in shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). In accordance with the terms of the Note, the Investor shall be entitled to convert a portion or all of the Principal Amount and interest due and outstanding under the Note into shares of Common Stock equal to 70% of the lowest traded price in the prior thirty (30) trading days.

 

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 $2,243,052 during the six months ended June 30, 2016.  At June 30, 2016 we had a working capital deficit of $8,360,676. We do not anticipate we will be profitable in 2016.  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.  Other than those disclosed above, we do not presently have any firm commitments for any additional capital and our financial condition as well as the uncertainty in the capital markets may make our ability to secure this capital difficult. There are no assurances that we will be able to continue our business, and we may be forced to cease operations in which event investors could lose their entire investment in our company. Included in our Notes to the financial statements for the year ended December 31, 2015 is a discussion regarding Going Concern.

 

Operating activities

 

Net cash flows used in operating activities for the six months ended June 30, 2016 amounted to $805,548 and was primarily attributable to our net loss of $2,243,052, off set by change in fair value of derivative liabilities of $38,396, depreciation of $6,725, derivative liability expenses of $197,508, amortization of debt discount of $1,079,285, amortization of deferred financing of $4,188, amortization of original issue discount of $50,481 and other assets and liabilities of $60,921. Net cash flows used in operating activities for the six months ended June 30, 2015 amounted to $358,007 and was primarily attributed to our net loss of $1,007,014 change in fair value of derivative liabilities of $361,673, off set by depreciation of $3,112, derivative liability expenses of $255,140, amortization of debt discount of $175,200, amortization of deferred financing of $18,125,common stock issued for compensation and services of $53,860, loss on conversion of related party loan of $290,000, non cash interest charges of $17,397 and other assets and liabilities of $197,846.

 

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Financing activities

 

Net cash flows provided by financing activities was $511,921 for the six months ended June 30, 2016. We received proceeds from notes payable of $585,144 offset by payments on convertible notes payable of $54,989 and payments on notes payable of $9,900 and payments to related parties of $8,334. Net cash flows provided by financing activities was $423,108 for the six months ended June 30, 2015. We received proceeds from notes payable of $499,367. We made payments of $50,000 related to notes payable and $26,259 to related parties.

 

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 table summarizes our contractual obligations as of June 30, 2016, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

   Payments Due by Period 
   Total    Less than 1
year
   1-3 Years   4-5 Years   5 Years + 
Contractual Obligations:                         
Short term loans- unrelated party  $146,015    146,015             
Operating Leases  $164,375    164,375             
Purchase Obligations  $                 
Total Contractual Obligations:  $310,390    310,390             

 

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, use of estimates, accounts receivable, property and equipment and income taxes.

 

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 collectability 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 collectability of the related receivable is probable.

 

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

 

Property and Equipment

 

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

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”). 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.

 

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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.

 

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, 2016.

 

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, 2016.

 

 31 
  

 

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, 2015, 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 14, 2016.

 

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

 

On April 1, 2016 the Company issued a 5% original issue discount convertible promissory note with a principal balance of $105,263 with a six month maturity date to an institutional investor. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion.

 

On May 23, 2016 the Company issued a 5% original issue discount convertible promissory note with a principal balance of $52,632 with a five month maturity date to an institutional investor. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On June 24, 2016 the Company issued a 5% original issue discount convertible promissory note with a principal balance of $78,947 with a four month maturity date to an institutional investor. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

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

 

 32 
  

 

Other than as disclosed above, there were no unregistered sales of the Company’s equity securities during the quarter ended June 30, 2016 that were not previously disclosed in a current report on Form 8-K, or quarterly report on Form 10-Q.

 

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.

 

Not Applicable.

 

Item 6. Exhibits.

 

Exhibit

Number

  Description
     
31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
31.2   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
     
101.INS   XBRL Instance Document*
     
101.SCH   XBRL Taxonomy Extension Schema Document*
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

*Filed herein

 

 33 
  

 

SIGNATURES

 

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

 

  DIRECTVIEW HOLDINGS, INC.
     
Date: August 19, 2016 By: /s/ Roger Ralston
    Roger Ralston
    Chief Executive Officer
    Principal Executive Officer
     
Date: August 19, 2016 By: /s/ Michele Ralston
    Michele Ralston
    Chief Financial Officer
    Principal Financial Officer

 

 34 
  

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

 

I, Roger Ralston, certify that:

 

1. I have reviewed this Form 10-Q of DirectView Holdings, Inc.;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 19, 2016 By: /s/ Roger Ralston
    Roger Ralston
   

Principal Executive Officer

DirectView Holdings, Inc.

 

   
   

 

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

 

I, Michele Ralston, certify that:

 

1. I have reviewed this Form 10-Q of DirectView Holdings, Inc.;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 19, 2016 By: /s/ Michele Ralston
    Michele Ralston
   

Principal Financial Officer

DirectView Holdings, Inc.

 

   
   

 

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

 

In connection with this Quarterly Report of DirectView Holdings, Inc. (the “Company”), on Form 10-Q for the period ended June 30, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Roger Ralston, Principal Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) Such Quarterly Report on Form 10-Q for the period ended June 30, 2016, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2) The information contained in such Quarterly Report on Form 10-Q for the period ended June 30, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 19, 2016 By: /s/ Roger Ralston
    Roger Ralston
   

Principal Executive Officer

DirectView Holdings, Inc.

 

   
   

 

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

 

In connection with this Quarterly Report of DirectView Holdings, Inc. (the “Company”), on Form 10-Q for the period ended June 30, 2016, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Michele Ralston, Principal Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) Such Quarterly Report on Form 10-Q for the period ended June 30, 2016, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2) The information contained in such Quarterly Report on Form 10-Q for the period ended June 30, 2016, fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: August 19, 2016 By: /s/ Michele Ralston
    Michele Ralston
   

Principal Financial Officer

DirectView Holdings, Inc.