Massive Interactive, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Massive Interactive, Inc.	exhibit_32-1.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Massive Interactive, Inc.	exhibit_31-2.htm
EX-10.5 - FORM OF SECURITY AGREEMENT (MAY 2015) - Massive Interactive, Inc.	exhibit_10-45.htm
EX-10.1 - EXCHANGE AGREEMENT DATED AS OF MAY 28, 2015 BY AND AMONG MASSIVE INTERACTIVE, INC., RON DOWNEY AND DEREK ELLIS - Massive Interactive, Inc.	exhibit_10-41.htm
EX-10.2 - FORM OF MASSIVE INTERACTIVE, INC. NOTE AND WARRANT SUBSCRIPTION AGREEMENT (MAY 2015) - Massive Interactive, Inc.	exhibit_10-42.htm
EX-10.4 - FORM OF MASSIVE INTERACTIVE, INC. WARRANT (MAY 2015) - Massive Interactive, Inc.	exhibit_10-44.htm
EX-10.3 - FORM OF MASSIVE INTERACTIVE, INC. SECURED CONVERTIBLE PROMISSORY NOTE (MAY 2015) - Massive Interactive, Inc.	exhibit_10-43.htm
XML - IDEA: XBRL DOCUMENT - Massive Interactive, Inc.	R9999.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Massive Interactive, Inc.	exhibit_31-1.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Massive Interactive, Inc.	exhibit_32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

o 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 000-53892

MASSIVE INTERACTIVE, INC.

(Exact name of registrant as specified in its charter)


Nevada		20-8295316
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6th Floor, 10 Lower Thames Street London EC3R 6AF, United Kingdom

(Address of principal executive offices) (Zip Code)

Telephone: +442076365585

(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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition 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

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

Number of common shares outstanding at August 13, 2015: 114,986,127

TABLE OF CONTENTS


		PAGE
PART I	FINANCIAL INFORMATION	3

ITEM 1.	Financial statements	3
ITEM 2.	Management’s discussion and analysis of financial condition and results of operations	28
ITEM 3.	Quantitative and qualitative disclosures about market risk	31
ITEM 4.	Controls and procedures	31

PART II	OTHER INFORMATION	33

ITEM 1.	Legal proceedings	33
ITEM 1A.	Risk factors	33
ITEM 2.	Unregistered sales of equity securities and use of proceeds	33
ITEM 3.	Defaults upon senior securities	33
ITEM 4.	Mine safety disclosures	33
ITEM 5.	Other information	33
ITEM 6.	Exhibits	34
SIGNATURES		35

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MASSIVE INTERACTIVE, INC.

CONSOLIDATED INTERIM BALANCE SHEETS

(UNAUDITED)

	At June 30,			At December 31,
	2015			2014
Assets
Current assets:
Cash and cash equivalents	$	292,452		$	204,148
Accounts receivable – trade, net of allowance		1,648,274			2,347,184
Other receivables		28,102			45,117
Prepayments		121,896			126,329
Work in progress		615,946			520,621
Other current assets		227			-
Taxes refundable		741,334			672,641
Total current assets		3,448,231			3,916,040
Property and equipment, net		147,964			194,910
Capitalized software, net		7,332,138			6,849,319
Tradenames, net		331,502			368,886
Customer relationships, net		631,994			711,842
Goodwill		10,245,206			10,908,202
Other assets		35,756			16,067
Total non-current assets		18,724,560			19,049,226

Total assets	$	22,172,791		$	22,965,266

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,137,406		$	794,801
Accrued expenses and other current liabilities		421,826			354,033
Convertible notes payable - related parties		6,398,045			5,651,466
Derivative liability - related parties		594,967			2,570,400
Accrued compensation and related costs		771,927			860,443
Deferred revenue		205,720			199,804
Short-term borrowings		1,000,000			1,083,669
Deferred tax liability		2,664,450			2,664,450
Taxes payable		268,306			435,306
Due to directors		-			146,884
Other current liabilities		20,026			16,486
Total current liabilities		13,482,673			14,777,742
Accrued compensation and other related costs – non-current		55,544			55,246
Other long-term liabilities		26,646			54,720
Total long-term liabilities		82,190			109,966

Total liabilities		13,564,863			14,887,708

Stockholders’ equity:
Common stock		114,996			61,186
Additional paid-in capital		45,750,754			45,423,175
Accumulated deficit		(35,231,009	)		(36,425,545	)
Accumulated other comprehensive loss		(2,026,813	)		(981,258	)
Total stockholders’ equity		8,607,928			8,077,558

Total liabilities and stockholders’ equity	$	22,172,791		$	22,965,266

See notes to consolidated financial statements

MASSIVE INTERACTIVE, INC.

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended June 30,
	2015			2014

Revenues:
Consultancy services	$	38,077		$	106,781
License fee		217,308			240,125
Project services		2,275,474			3,217,507
Support services		34,626			58,406
Other income		-			90,187
Total revenues		2,565,485			3,713,006

Operating expenses:
General and administrative		2,761,033			2,987,779
Depreciation and amortization		490,325			235,769
Total operating expenses		3,251,358			3,223,548

(Loss) income from operations		(685,873	)		489,458

Other income (expense):
Gain on conversion		286			-
Gain on change in fair value of derivative liability		1,838,440			2,019,000
Interest income		397			312
Interest expense		(166,897	)		(110,467	)
Other income, net		1,672,226			1,908,845

Income from operations before income taxes		986,353			2,398,303
Income tax benefit		82,000			237,880

Net income	$	1,068,353		$	2,636,183

Comprehensive income:
Foreign currency translation adjustment		(610,964	)		89,255
Total comprehensive income	$	457,389		$	2,725,438

Net income	$	1,068,353		$	2,636,183
Deemed dividend - amortization of beneficial conversion feature		(324,334	)		(324,334	)
Net income attributable to common stockholders	$	744,019		$	2,311,849

Basic earnings per share:
Net income	$	0.01		$	0.04

Weighted average common shares – Basic		61,176,142			61,176,142


Diluted (loss) income per share:
Net (loss) income	$	(0.00	)	$	0.00

Weighted average common shares – Diluted		234,183,032			71,316,270

See notes to consolidated financial statements

MASSIVE INTERACTIVE, INC.

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

		Six Months Ended June 30,
	2015			2014

Revenues:
Consultancy services	$	137,401		$	278,535
License fee		429,904			642,225
Project services		4,339,307			5,514,851
Support services		65,405			214,686
Other income		351,244			177,145
Total revenues		5,323,261			6,827,442

Operating expenses:
General and administrative		5,330,391			5,418,377
Depreciation and amortization		991,056			393,172
Total operating expenses		6,321,447			5,811,549

(Loss) income from operations		(998,186	)		1,015,893

Other income (expense):
Gain on conversion		756			-
Gain on change in fair value of derivative liability		2,192,250			2,019,000
Interest income		2,780			1,358
Interest expense		(333,496	)		(240,331	)
Other income, net		1,862,290			1,780,027

Income operations before income taxes		864,104			2,795,920
Income tax benefit		330,432			466,570

Net income	$	1,194,536		$	3,262,490

Comprehensive income:
Foreign currency translation adjustment		(1,045,555	)		187,814
Total comprehensive income	$	148,981		$	3,450,304

Net income	$	1,194,536		$	3,262,490
Deemed dividend - amortization of beneficial conversion feature		(648,669	)		(864,892	)
Net income attributable to common stockholders	$	545,867		$	2,397,598

Basic earnings per share:
Net income	$	0.01		$	0.04

Weighted average common shares – Basic		61,176,142			61,176,142

Diluted (loss) income per share:
Net (loss) income	$	(0.01	)	$	0.00

Weighted average common shares – Diluted		214,693,393			77,393,847

See notes to consolidated financial statements

MASSIVE INTERACTIVE, INC.

CONSOLIDATED INTERIM STATEMENTS OF CONVERTIBLE PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Common				Preferred Shares				Additional Paid in Capital		Accumulated Deficit			Foreign Currency Translation Adjustment			Total
	Shares		Amount		Shares		Amount		Additional Paid in Capital		Accumulated Deficit			Foreign Currency Translation Adjustment			Total
Balance at December 31, 2014		61,176,142	$	61,186		55	$	-	$	45,423,175	$	(36,425,545	)	$	(981,258	)	$	8,077,558
Issuance of common stock in connection with stock based compensation		53,809,985		53,810		-		-		-		-			-			53,810
Stock based compensation expense		-		-		-		-		327,579		-			-			327,579
Net income		-		-		-		-		-		1,194,536			(1,045,555	)		148,981
Balance at June 30, 2015		114,986,127	$	114,996		55	$	-	$	45,750,754	$	(35,231,009	)	$	(2,026,813	)	$	8,607,928

See notes to consolidated financial statements

MASSIVE INTERACTIVE, INC.

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2015			2014
Cash flows from operating activities
Net income	$	1,194,536		$	3,262,490
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		991,056			392,983
Bad debt expense reversal		(101,250	)		-
Derivative income		(2,192,250	)		(2,019,000	)
Common stock issued for services		381,389			-
Loss on disposal of properties		-			998
Change in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable		799,206			22,111
Other receivables		17,015			-
Prepayments		4,433			-
Work in progress		(95,325	)		(529,588	)
Taxes refundable		(68,693	)		-
Other current assets		(596	)		43,534
Other assets		(19,689	)		-
Accounts payable		342,605			74,185
Accrued expenses and other current liabilities		67,793			-
Accrued compensation and related costs		(88,516	)		-
Deferred revenue		5,916			103,036
Taxes payable		(167,000	)		-
Other current liabilities		3,540			-
Accrued compensation and other related costs – non-current		298			-
Net cash provided by operating activities		1,074,468			1,350,749

Cash flows from investing activities
Disposals of property and equipment		55,087			-
Capital software expenditures		(1,613,632	)		(914,178	)
Cash received in acquisitions		-			20,203
Purchases of property and equipment		(40,040	)		(54,995	)
Net cash used in investing activities		(1,598,585	)		(948,970	)

Cash flows from financing activities
Proceeds from advances		177,084			-
Proceeds from advances - related parties		715,302			-
Payments to advances - related parties		(16,848	)		(725,388	)
Payments of bank loans		-			(247,286	)
Repayment of hire purchase agreement		(24,534	)		(57,974	)
Net cash provided by (used in) financing activities		851,004			(1,030,648	)

Effect of exchange rates on cash and cash equivalents		(238,583	)		(251,892	)
Net change in cash and cash equivalents		88,304			(880,761	)
Cash and cash equivalents, beginning of year		204,148			1,121,181
Cash and cash equivalents, end of year	$	292,452		$	240,420

Supplemental cash flow information
Cash paid for interest	$	7,811		$	129,788

Supplemental non-cash investing and financing activities
Fair value of convertible note issued for acquisition, net of cash received	$	-		$	12,554,797

See notes to consolidated financial statements

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Description of Business

Massive Interactive, Inc. (the “Company”) is a leading provider of innovative solutions for the management, delivery and streaming of Internet Protocol (IP)-based video and media assets. The Company’s comprehensive software platform enables enterprise customers to acquire, manage and distribute their video assets across just about every device used by consumers including games consoles, smart TV’s, tablets, smart phones, Internet-enabled set top boxes and other Internet linked devices. The Company’s suite of products includes, but is not limited to, MDK, a cross-device software development solution, MUI, a cross devices suite of User Interfaces, MSM, a powerful video management Content Management System (CMS), and MVP, a complete end-to-end managed video platform. The Company offers its solutions over the Internet as a subscription service model using a software-as-a-service (SaaS) or an on-demand model, and by installing software onsite for clients as part of an enterprise licensing model. The Company’s software addresses the unique needs found across different industry verticals, each with the shared aim of offering video to consumers across multiple devices. The verticals the Company addresses are across Telecommunications, Media, Technology, Hospitality, Automotive, Travel, Leisure and Publishing.

In addition to the Company’s software business, it operates design services and technical services businesses. The Company’s services work includes: creative interface design, branding strategies, strategic planning and technical/systems integration services. The Company currently provides its software solutions, professional and creative services internationally through its offices in New York, London, Prague and Sydney.

Organizational History

Xtreme Technologies, Inc. was incorporated in the state of Washington in 2003 with a focus on telecommunications technologies. By early 2006, that business ceased operations and had no assets, becoming a shell company at that time. In December 2006, Xtreme Technologies, Inc. acquired Emerald Energy Partners, LLC for 7,960,000 shares of Common Stock and changed its name to Xtreme Oil & Gas, Inc. Immediately prior to its acquisition of Emerald Energy Partners, LLC, Xtreme Technologies, Inc. effected a 1 for 500 reverse stock split resulting in 185,516 shares outstanding.

The acquisition of Emerald Energy Partners, LLC is treated for accounting purposes as an acquisition of Xtreme Technologies, Inc. by Emerald Energy Partners and a re-capitalization of the limited liability company. With the acquisition of Emerald Energy Partners LLC, Xtreme began to acquire and to develop additional oil and gas properties.

On November 7, 2013, Xtreme sold 55 shares of Series B Redeemable Preferred Stock to Rolling Hill Capital Management LLC (“Rolling Hill”) and 55,000,000 shares of common stock to Southport Lane Equity II, LLC, a wholly owned subsidiary of Southport Lane, LP, in exchange for an aggregate of $5,500,000. Rolling Hill then distributed 40 shares of the preferred stock to its equity holder, Redwood Reinsurance, SPC, Ltd (“Redwood”) and 15 shares of its preferred stock to its equity holder Freestone Insurance Company, f/k/a Dallas National Insurance Company (“Freestone”).

Southport Equity II, LLC used its available cash as capitalized by its parent, Southport Lane, LP, to fund its purchase of the Common Stock. There was no controlling party of the Company prior to this investment by Southport Equity II, LLC.

On November 15, 2013, Xtreme acquired all of the issued and outstanding capital stock of Massive Media Pty Ltd. (“Massive Media”) a proprietary limited company organized under the laws of New South Wales, Australia, from the shareholders of Massive in exchange for $4,167,190 pursuant to a stock purchase agreement dated October 17, 2013. Of the proceeds, approximately $866,000 was to be paid to settle certain debts of Massive Media simultaneously as part of the acquisition; the remaining proceeds of $3.3 million was transferred at settlement for the stock.

On November 25, 2013, Xtreme changed its name to Massive Interactive, Inc.

On May 1, 2014, Massive Interactive, Inc. consummated the purchase of all outstanding shares of Wunderkind Group Pty Ltd. (“Wunderkind”) pursuant to a Stock Purchase Agreement in exchange for a convertible promissory note issued by the Company (the "Wunderkind Note"). The Wunderkind Note, which is for the principal amount of $5.5 million, bears interest at the rate of 0.5% annually. The Wunderkind Note may be called by the holder at any time subsequent to May 1, 2015, unless settled in shares of Common Stock. The Wunderkind Note is convertible into 45% of the total shares of Common Stock issued and outstanding on a fully diluted basis on the date of conversion.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Description of Business - continued

Going Concern

The Company's cash balance at June 30, 2015 is insufficient to pay the Wunderkind Note, should the note be called by the holder and not settled in shares of Common Stock. As such, there is substantial doubt the Company will be able to continue as a going concern without additional sources of funding, which the Company might not be able to obtain. The Company does not have the ability to obtain short term financing on commercially reasonable terms because two of its large stockholders have been judicially declared insolvent and its largest common stockholder, Southport Lane Equity II, LLC, is under common control with the insolvent entities causing lenders to view the Company as a credit risk. Management is considering its options to raise additional funds for the Company including, but not limited to, private and/or public offerings of debt or equity securities and other transactions, but it cannot assure you that its plans will be successful. In view of the foregoing, there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements in this Quarterly Report Form 10-Q do not include any adjustments that might result from the Company’s inability to continue as a going concern.

NOTE 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, the accompanying interim consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated financial position and results of operations and cash flows for the periods presented.

The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2014 should be read in conjunction with these interim consolidated financial statements. Results of operations for interim periods are not necessarily indicative for the results of operations for a full year.

Principles of Consolidation

The interim consolidated financial statements include the financial statements of the Company and its subsidiaries, Massive Media Pty Ltd., Massive Interactive Media Ltd., and Wunderkind Group Pty Ltd. As part of the acquisition of Massive Media Pty Ltd and its controlled entities by the Company, it discontinued all oil and gas operations related to properties owned in Texas and Oklahoma. Financial results related to the oil and gas operations are reported as discontinued operations beginning with the financial results as of December 31, 2013.

Use of Estimates

The preparation of interim consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable allowance, the useful lives of long-lived assets and other intangible assets, and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities as well as reported revenue and expenses during the periods presented.

Cash and Cash Equivalents

Cash and cash equivalents represent cash on hand and deposits held at call with banks. The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Summary of Significant Accounting Policies – continued

Fair Value of Financial Instruments

Pursuant to the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) No. 820, “Disclosures About Fair Value of Financial Instruments”, the Company records its financial assets and liabilities at fair value. ASC No. 820 provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. ASC No. 820 establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the asset/liability’s anticipated life.

Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The carrying values for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities approximate their fair value due to their short maturities.

Accounts Receivable

Receivables from services are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts.

Management periodically reviews receivables for collectability. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Uncollectible receivables are charged off against the allowance account. An allowance for doubtful accounts of $106,256 and $207,506 was recorded as of June 30, 2015 and December 31, 2014, respectively.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable for which the carrying amounts approximate fair value. The Company places their cash and cash equivalents with financial institutions with high-credit ratings and quality.

The Company conducts credit evaluations of customers and generally does not require collateral or other security from customers. The Company establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Company has generally been consistent with management’s expectations and the allowance established for doubtful accounts.

Major Customers

The Company has two significant customers which individually accounted for 35% and 20%, respectively, of the revenues for the three month period ended June 30, 2015. For the three month period ended June 30, 2014, the two largest customers accounted for 14% and 9% of revenues. These customers accounted for approximately 43% and 22% of the accounts receivable balance as of June 30, 2015 and approximately 31% and 24% of the accounts receivable balance as of December 31, 2014, respectively. The Company’s sales to its top five customers accounted for approximately 80% and 48% of revenues during the three month periods ended June 30, 2015 and 2014, respectively.

The Company has two significant customers which individually accounted for 31% and 17%, respectively, of the revenues for the six month period ended June 30, 2015. For the six month period ended June 30, 2014, the two largest customers accounted for 11% and 10% of revenues. These customers accounted for approximately 43% and 22% of the accounts receivable balance as of June 30, 2015 and approximately 31% and 24% of the accounts receivable balance as of December 31, 2014, respectively. The Company’s sales to its top five customers accounted for approximately 75% and 46% of revenues during the six month periods ended June 30, 2015 and 2014, respectively.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Summary of Significant Accounting Policies – continued

Major Suppliers

The Company has two significant vendors which individually accounted for 9% and 7%, respectively, of the purchases for the three month period ended June 30, 2015. For the three month period ended June 30, 2014, the two largest vendors accounted for 6% and 5% of purchases. These vendors accounted for approximately 16% and 10% of the accounts payable balance as of June 30, 2015 and approximately 4% and 2% of the accounts payable balance as of December 31, 2014, respectively. The Company’s purchases from its top five vendors accounted for approximately 29% and 25% of purchases during the three month periods ended June 30, 2015 and 2014, respectively.

The Company has two significant vendors which individually accounted for 8% and 5%, respectively, of the purchases for the six month period ended June 30, 2015. For the six month period ended June 30, 2014, the two largest vendors accounted for 13% and 8% of purchases. These vendors accounted for approximately 16% and 0% of the accounts payable balance as of June 30, 2015 and approximately 10% and 0% of the accounts payable balance as of December 31, 2014, respectively. The Company’s purchases from its top five vendors accounted for approximately 25% and 31% of purchases during the six month periods ended June 30, 2015 and 2014, respectively.

Segment Reporting

FASB ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Group’s chief operating decision maker is the Chief Executive Officer, who reviews consolidated results of operations prepared in accordance with US GAAP when making decisions about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment, namely the software development services.

Income Taxes

The Company recognizes deferred income tax liabilities and assets for the expected future income tax consequences of temporary differences between financial accounting bases and income tax bases of assets and liabilities. Deferred income taxes are measured by applying currently enacted income tax rates. The Company accounts for uncertainty in income taxes for income tax positions taken or expected to be taken in an income tax return. Only income tax positions that meet the more-likely-than-not recognition threshold will be recognized.

This process includes an analysis of whether tax positions the Company takes with regard to a particular item of income or deduction would meet the definition of an uncertain tax position under the standards. Management believes that tax positions taken by the Company with regard to income and deduction do not constitute any uncertain tax positions under the standards.

Goods and Services Tax/Value Added Tax

The Company's Australian operations are subject to the Goods and Services Tax on revenue sales of 10%. The Company's English operations are subject to the Value Added Tax on revenue sales of 20%.

Revenue Recognition

The Company recognizes revenue when it is realized and earned. Specifically, the Company recognizes revenue when services are performed and projects are completed and accepted by the customer. The Company recognizes revenue in accordance with the FASB ASC 985-605 “Software - Revenue Recognition”.

Consultancy Services Revenue

Revenue derived from services primarily includes consulting, implementation, and training. Consultancy revenue is recognized ratably over the term of the service agreement.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Summary of Significant Accounting Policies – continued

License Fees Revenue

License revenue in connection with license agreements for standard proprietary software is recognized upon delivery of the software, provided collection is considered probable and the fee is fixed or determinable.

Project Services Revenue

Revenue derived from services primarily includes consulting, implementation, and training. Fees are primarily billed under time and materials arrangements and are recognized as services are performed.

Support Revenue

Revenue derived from technical support contracts primarily includes telephone consulting and on-site support as well as error reporting and correction services. Maintenance contracts are typically sold for a separate fee with initial contractual period of one year with renewal for additional periods thereafter. Technical support service revenue is recognized ratably over the term of the service agreement.

Deferred Revenue

Deferred revenue represents advance payments or billings for software licenses, services, and maintenance.

Foreign Currency Translation

The functional currency of the Massive Media Pty Ltd. and Wunderkind Group Pty Ltd. is Australian Dollars (“AUD”). The functional currency of Massive Interactive Media Ltd is Great British Pounds ("GBP").

For financial reporting purposes, the financial statements of the Company and its subsidiaries, which are prepared using each entity's functional currency, are translated into the Company’s reporting currency, the United States Dollar (“USD”). Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.

The relationship between the AUD, GBP and the USD, which is our functional currency, is shown below per one USD:

	Three Months Ended		Six Months Ended		Year end
	2015		2015		2014
Period end AUD to USD exchange rate		0.7708		0.7780		0.8207
Period end GBP to USD exchanage rate		1.5752		1.5752		1.5610
Average AUD to USD exchange rate		0.7754		0.7740		0.8983
Average GBP to USD exchange rate		1.5448		1.5270		1.6454

Property and Equipment

Furniture and office equipment, electronic equipment and motor vehicles are recorded at cost less accumulated depreciation. Depreciation is calculated based on estimated useful life of the assets.

	Rate	Method
Motor Vehicles	25%	Diminishing value
Furniture	20%	Straight line
Office equipment	33%	Diminishing value
Telecommunication equipment	20%	Diminishing value
Purchased Software	40%	Straight line
Leasehold improvements	50%	Straight line

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Summary of Significant Accounting Policies – continued

When furniture and office equipment, electronic equipment and motor vehicles are retired or otherwise disposed of, resulting gain or loss is included in net income or loss in the year of disposition for the difference between the net book value and proceeds received thereon. Maintenance and repairs which do not improve or extend the expected useful lives of the assets are charged to expenses as incurred.

Impairment of Long-Lived Assets

In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, “Property, Plant, and Equipment – Overall”, long-lived assets, such as property, plant and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment of long-lived assets was recognized as of June 30, 2015 and 2014, respectively.

Capitalized Computer Software Development Costs

The Company capitalizes software development costs in accordance with the FASB ASC Topic 985-20, “Costs of Software to be Sold, Leased or Marketed”. All software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers.

The Company makes ongoing evaluations of the recoverability of its capitalized software projects by comparing the net amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount by which the unamortized software development costs exceed net realizable value. The Company's capitalized computer software development costs are being amortized ratably based on the projected revenues associated with the related software or on a straight-line basis over five years, whichever method results in a higher level of amortization.

Intangible Assets

The Company amortizes intangible assets on a straight line basis over their estimated useful lives, generally as follows: four to nine years for software, ten to twenty years for customer relationships and trade names, and one to five years for other intangible assets, except goodwill. Goodwill is not amortized, but subject to impairment testing.

Operating Leases

The Company leases office rental spaces in Sydney, Australia and London, England.

Derivative Instruments

The Company’s debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

The identification of, and accounting for, derivative instruments is complex. The Company’s derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For bifurcated conversion options related to the notes issued in 2011 (See Note 13 - Borrowings) that are accounted for as derivative instrument liabilities, the Company determines the fair value of these instruments using binomial option pricing model. That model requires assumptions related to the remaining term of the instrument and risk-free rates of return, the Company’s current Common Stock price and expected dividend yield, and the expected volatility of the Company’s Common Stock price over the life of the option.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Summary of Significant Accounting Policies – continued

For the bifurcated conversion option related to the convertible note issued in 2014 (See Note 13 - Borrowings) in connection with the Wunderkind Acquisition, and the conversion option related to the convertible promissory notes issued in March of 2015, the Company determined the fair value of the instruments using the Monte Carlo Valuation Model, due to the multitude of possible outcomes for the instrument. This model requires assumptions related to the remaining term of the instrument and risk-free rates of return, the Company's current Common Stock price and expected dividend yield, and the expected volatility of the Company's Common Stock price over the life of the option.

Stock-Based Compensation

The Company accounts for its stock-based compensation plans in accordance with FASB ASC Topic 718, “Stock Compensation”. Accordingly, under the fair value recognition provisions of this topic, stock-based compensation for employees and non-employee directors is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period, based on the terms of the awards. The Company’s stock-based compensation expense is reduced for estimated future forfeitures which are revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation expense in the period in which the change in estimate occurs. Fair value is determined by using three different models along with restricted stock and pre-IPO Studies: the Finnerty, Chaffe and Geometric Average Rate Put option pricing models. Compensation expense included in the Company’s consolidated statement of operations includes fair value of the awards at the time of issuance. When common stock was issued, it was valued at the trading price on the date of issuance and is expensed over the vesting period. All stock grants issued in March 2015 vest equally over a four year period, with anniversary dates on March 19 of each year beginning in 2016. All stock grants issued in April 2015 vest equally over a three year period, with anniversary dates on April 29 of each year beginning in 2016. As of June 30, 2015, the Company has granted an aggregate of 58,809,985 shares of restricted common stock.

Deemed dividend

The Company incurs a deemed dividend on Series B Preferred Redeemable Stock. As the conversion rate was less than the deemed fair value of the Common Stock of $0.20, the Series B Preferred Redeemable Stock contains a beneficial conversion feature as described in FASB ASC 470-20, “Debt with Conversion and Other Options”. The difference in the stated conversion price and estimated fair value of the Common Stock is accounted for as a beneficial conversion feature and affects income or loss available to common stockholders for purposes of EPS.

Earnings (Loss) per Share

The Company adopted FASB ASC 260, "Earnings Per Share" ("EPS"), which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income per common share is computed by dividing the net income applicable to common stockholders, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.

The following sets forth the computation of diluted EPS for the three and six months ended June 30, 2015 and 2014:

	Three months ended June 30, 2015								Six months ended June 30, 2015
	Net income (loss) attributable to common stockholders (Numerator)			Shares (Denominator)		Per share amount			Net income (loss) attributable to common stockholders (Numerator)			Shares (Denominator)		Per share amount
Basic EPS	$	744,019			61,176,142	$	0.01		$	545,867			61,176,142	$	0.01
Change in fair value of derivative instruments		(1,796,000	)		-					(2,184,000	)		-
Interest associated with convertible notes		6,856			-					13,637			-
Dilutive shares related to notes and warrants		-			173,006,890					-			153,517,251
Dilutive EPS	$	(1,045,125	)		234,183,032	$	(0.00	)	$	(1,624,496	)		214,693,393	$	(0.01	)

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Summary of Significant Accounting Policies – continued

	Three months ended June 30, 2014							Six months ended June 30, 2014
	Net income (loss) attributable to common stockholders (Numerator)			Shares (Denominator)		Per share amount		Net income (loss) attributable to common stockholders (Numerator)			Shares (Denominator)		Per share amount
Basic EPS	$	2,311,849			61,176,142	$	0.04	$	2,397,598			61,176,142	$	0.04
Change in fair value of derivative instruments		(2,019,000	)		-				(2,019,000	)		-
Dilutive shares related to notes and warrants		292,849			10,140,128				-			16,217,705
Dilutive EPS	$	292,849			71,316,270	$	0.00	$	378,598			77,393,847	$	0.00

Basic earnings (loss) per share is based on the weighted average number of common and common equivalent shares outstanding. Potential common shares includable in the computation of fully diluted per share results are not presented for the six months ended June 30, 2015 and the periods ended June 30, 2014 in the consolidated financial statements as their effect would be anti-dilutive. The total number of shares issuable upon conversion of preferred shares that were not included in dilutive earnings per share for the three and six months ended June 30, 2015 were 31,142,811, respectively.

Commitments and Contingencies

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, product and environmental liability, and tax matters. In accordance with FASB ASC 450-20, “Accounting for Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Historically, the Company has not experienced any material service liability claims.

Recent Accounting Pronouncements

The Company has adopted recently issued accounting pronouncements and has determined that they have no material effect on the financial position, results of operations, or cash flow. The Company’s management does not expect any recently issued but not yet adopted accounting pronouncements to have a material effect on the financial position, results of operations or cash flow.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern-Disclosures of Uncertainties about an entity's Ability to Continue as a Going Concern” ("ASU 2014-15"). ASU 2014-15 provides new guidance related to management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact on the Company's disclosures and financial statements.

On January 9, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01, Income Statement – Extraordinary and Unusual Items (“ASU 2015-01”). ASU 2015-01 eliminates the concept of extraordinary items which are defined as items that are both unusual in nature and occurring infrequently. ASU 2015-01 is effective in annual or interim periods beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-01 to have a material impact on the unaudited condensed consolidated financial statements.

On February 18, 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 provides an update affecting reporting entities that are required to evaluate whether they should consolidate certain legal entities. This new guidance applies to all legal entities to re-evaluate 1) whether limited partnerships and similar legal entities are VIE’s or voting interest entities, 2) eliminates the presumption that a general partner should consolidate a limited partnership, 3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and 4) provides a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with rules similar to those for registered money market funds. ASU 2014-08 is effective in annual or interim periods beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-02 to have a material impact on the unaudited condensed consolidated financial statements.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – Summary of Significant Accounting Policies – continued

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 revises previous guidance to require that debt issuance costs be reported in the unaudited condensed consolidated financial statements as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e. an asset) on the unaudited condensed consolidated financial statements. This new guidance is effective for the annual period ending after December 15, 2015, and for annual periods and interim periods thereafter. The amendments must be applied retrospectively. The requirements of ASU 2015-03 are not expected to have a significant impact on the unaudited condensed consolidated financial statements.

On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption of ASU 2014-09 is permitted but not before the original effective date (annual periods beginning after December 15, 2016). When effective, ASU 2014-09 will use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on the consolidated financial statements and have not yet determined the method by which the Company will adopt the standard.

Subsequent Events

Management has evaluated subsequent events up to and including August 14, 2015, which is the date the financial statements were available for issuance, and determined there were no material subsequent events to be disclosed.

NOTE 3 – Acquisitions

The following transaction was accounted for using the acquisition method which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business.

Wunderkind

On May 1, 2014, the Company consummated the purchase of all outstanding shares of Wunderkind pursuant to a Stock Purchase Agreement in exchange for the Wunderkind Note. The principal amount of the Wunderkind Note is $5.5 million and it is convertible into 45% of the total shares of the Company’s Common Stock issued and outstanding on a fully diluted basis on the date of conversion. The Wunderkind Note bears interest at the rate of 0.5% annually.

The Stock Purchase Agreement was entered into in accordance with the terms of a binding letter of intent with the Company’s Chief Executive Officer, Ronald Downey, as disclosed in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on April 1, 2014. Mr. Downey is the majority shareholder of Wunderkind. The Stock Purchase Agreement contains customary representations and warranties and covenants of each party.

Breaches of the representations and warranties will be subject to customary indemnification provisions.

The purchase price is calculated as follows:

Convertible note	$	5,500,000
Fair value of conversion feature		7,075,000
Total estimated purchase price	$	12,575,000

Preliminary purchase price allocation as of the date of acquisition is set forth in the table below and reflects various fair value estimates and analysis. These allocations were determined through established and generally accepted valuation techniques including preliminary work performances by third-party valuation specialists.

Cash and cash equivalents	$	20,203
Trade names and trademarks		360,000
Developed software		2,100,000
Customer relationships		780,000
Goodwill		10,489,202
Property, plant and equipment		2,860
Deferred tax liability		(972,000	)
Net working capital, net of cash		(205,265	)
Total purchase price	$	12,575,000

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – Acquisitions - continued

Unaudited pro forma results of operations data for the three and six months ended June 30, 2014 are shown below as if the Company and the entities described above had been combined on January 1, 2014. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combinations had been in effect on the dates indicated, or which may result in the future.

	Unaudited Pro Forma Results of Operations
	Three Months Ended		Six Months Ended
	June 30, 2014		June 30, 2014

Revenues	$	3,884,665	$	7,057,609
Income (Loss)	$	2,426,291	$	2,836,653
Net income (loss)	$	2,671,317	$	3,303,223

Basic income (loss) per share:	$	0.04	$	(0.05	)
Diluted income (loss) per share:	$	0.04	$	(0.04	)
Pro Forma shares outstanding - Basic		61,176,142		61,176,142
Pro Forma shares outstanding - Diluted		71,316,270		77,393,847

NOTE 4 – Accounts receivable – trade, net of allowance

Accounts receivable consisted of the following at June 30, 2015 and December 31, 2014:

	2015			2014
Trade debtors	$	1,598,606		$	2,512,797
Accrued income		155,924			35,291
Client reimbursements		-			6,602
Allowance for doubtful accounts		(106,256	)		(207,506	)
Accounts receivable – trade, net of allowance	$	1,648,274		$	2,347,184

The Company has not had any write-offs of trade receivables during the years presented.

NOTE 5 – Other receivables

Other receivables consisted of the following at June 30, 2015 and December 31, 2014:

	2015		2014
Employee advance	$	28,102	$	31,691
Other debtors		-		13,426
Other receivables	$	28,102	$	45,117

Other debtors include minor and very short term non trade receivables from staff, suppliers and bank items. The Company has not had any write-off of trade receivables during the years presented and no provision for doubtful accounts was deemed necessary.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – Prepayments

Prepayments consisted of the following at June 30, 2015 and December 31, 2014:

		2015				2014
Prepaid expenses		$	121,896			$	126,329

NOTE 7 – Property and equipment, net

Property and equipment consisted of the following at June 30, 2015 and December 31, 2014:

	2015			2014
Furniture and fixtures	$	34,948		$	47,719
Motor vehicles		672			12,948
Purchased software		72,149			58,680
Office equipment		209,156			225,694
Property and equipment, gross		316,925			345,041
Less: Accumulated depreciation		(168,961	)		(150,131	)
Property and equipment, net	$	147,964		$	194,910

Depreciation expense totaled $33,678 and $48,343 for the three month periods ended June 30, 2015 and 2014, respectively and $82,077 and $58,591 for the six month periods ended June 30, 2015 and 2014, respectively.

NOTE 8 – Other assets

Other assets consisted of the following at June 30, 2015 and December 31, 2014:

	2015		2014
Bonds	$	35,756	$	15,374
Other receivables		-		693
Other assets	$	35,756	$	16,067

Bonds for June 30, 2015 and December 31, 2014 consisted primarily of office rental bonds/holding deposits.

NOTE 9 – Intangible Assets

Intangible assets consisted of the following at June 30, 2015 and December 31, 2014:

	June 30, 2015							December 31, 2014
	Gross		Accumulated					Gross		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount
Capitalized Software Costs	$	9,005,105	$	(1,672,967	)	$	7,332,138	$	7,833,725	$	(984,406	)	$	6,849,319
Tradenames		420,000		(88,498	)		331,502		420,000		(51,114	)		368,886
Customer Relationships		820,000		(188,006	)		631,994		820,000		(108,158	)		711,842
Goodwill		10,245,206		-			10,245,206		10,908,202		-			10,908,202
Total	$	20,490,311	$	(1,949,471	)	$	18,540,840	$	19,981,927	$	(1,143,678	)	$	18,838,249

Amortization expense amounted to $456,647 and $229,675 for the three month periods ended June 30, 2015 and 2014, respectively and $908,979 and $355,518 for the six month periods ended June 30, 2015 and 2014, respectively.

The following represents the Company’s expected amortization expense for the years ending June 30:

2016	$	1,811,510
2017		2,160,929
2018		2,160,929
2019		1,961,247
2020		167,964
Thereafter		33,055
	$	8,295,634

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – Intangible Assets - continued

The following table summarizes the Company’s goodwill as of June 30, 2015 and December 31, 2014:

	Goodwill
December 31, 2014	$	10,908,202

Impairment		-

Foreign exchange movement		(662,996	)
	$	10,245,206

The Wunderkind Group Pty Ltd acquisition was completed in May 2014 and the operations have been integrated into the existing business.

NOTE 10 – Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. The Company evaluates the fair value of certain assets and liabilities using the following fair value hierarchy which ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value:

	•	Level 1 — quoted prices in active markets for identical assets and liabilities

	•	Level 2 — inputs other than Level 1 quoted prices that are directly or indirectly observable

	•	Level 3 — unobservable inputs that are not corroborated by market data

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and nonrecurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by the Company. The following table sets forth the Company’s assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, by level within the fair value hierarchy:

	Amounts at		Fair Value Measurement Using
	Fair Value		Level 1		Level 2		Level 3
As of June 30, 2015
Liabilities
March 2015 Note conversion feature	$	216,817	$	-	$	-	$	216,817
Orbach warrant liability		8,140		-		-		8,140
Wunderkind conversion feature		250,000		-		-		250,000
9/12 Warrant liability		63,747		-		-		63,747
9/12 Note liability		56,263		-		-		56,263

As of December 31, 2014
Liabilities
Orbach warrant liability	$	16,390	$	-	$	-	$	16,390
Wunderkind conversion feature		2,434,000		-		-		2,434,000
9/12 Warrant liability		63,747		-		-		63,747
9/12 Note liability		56,263		-		-		56,263

The carrying amounts of the Company’s long-term liabilities approximate their fair value because the interest rate is reflective of rates that the Company could currently obtain on debt with similar terms and conditions. See Note 13 - Borrowings for additional information about the changes in the fair value for the items above.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – Fair Value Measurements - continued

In connection with the issuance of certain convertible notes and warrants prior to December 31, 2012, the related conversion features were accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date, due to anti-dilution reset features. The fair value was estimated on the date of grant using a binomial option-pricing model using the following weighted-average assumptions: expected dividend yield of 0%; expected volatility of 290%; risk-free interest rate of 0.05% and an expected holding period of 24 months for the Notes and 60 months for the Warrants. The resulting values, at the date of issuance, were allocated to the proceeds received and applied as a discount to the face value of the Notes and Warrants. The Company recorded a derivative expense on the Notes of $649,212 at inception and a further derivative expense on the Warrants of $2,431,437 at inception based on the guidance in ASC 815-10 and ASC 815-40-15 due to a reset feature on the exercise price.

NOTE 11 – Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following at June 30, 2015 and December 31, 2014:

	2015		2014
Credit cards	$	109,226	$	22,277
Accrued expenses		312,600		331,756
Accrued expenses and other current liabilities	$	421,826	$	354,033

Accrued expenses constitute trade creditor balances where invoices have not yet been received.

NOTE 12 – Accrued compensation and related costs

Accrued compensation and related costs consisted of the following at June 30, 2015 and December 31, 2014:

	2015		2014
Payable to staff	$	504	$	1,263
Long service leave provision		169,319		157,585
Annual leave provision		255,254		263,098
Employee pension plan		123,839		160,449
Federal payroll tax		209,714		261,843
State payroll tax		13,297		16,205
Accrued compensation and related costs	$	771,927	$	860,443

NOTE 13 – Borrowings

Convertible Notes Payable

On September 12, 2011, Xtreme raised $2,360,000 in convertible notes (the “9/12 Notes”). The 9/12 Notes bear an interest rate of 12% per annum and matured on September 12, 2013. Under the convertible note agreements, the lender has the right to convert all or any part of the outstanding and unpaid principal and interest into shares of the Company’s Common Stock; provided however, that in no event shall the lender be entitled to convert any portion of the 9/12 Notes that would result in the beneficial ownership by it and its affiliates to be more than 9.99% of the outstanding shares of the Company’s Common Stock. The 9/12 Notes are convertible at a fixed conversion price of $0.28 per share. In addition, Xtreme issued warrants (the “Warrants”) to acquire 6,810,269 shares of the Company’s Common Stock at a strike price of $0.28 per share. The Warrants expire on September 12, 2016. The conversion price of the 9/12 Notes and Warrants will be reduced in the event the Company issues or sells any shares of Common Stock less than the conversion price.

Xtreme delayed scheduled payments on the 9/12 Notes for the seven months ending December 31, 2012. As a result the remaining 9/12 Notes totaling $151,466 as of June 30, 2015 remain in default.

The conversion features of the 9/12 Notes and Warrants are accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date, due to anti-dilution reset features. The fair value was estimated on the date of grant using a binomial option-pricing model that incorporated the following weighted-average assumptions: expected dividend yield of 0%; expected volatility of 290%; risk-free interest rate of 0.05% and an expected holding period of 24 months for the 9/12 Notes and 60 months for the Warrants. The resulting values, at the date of issuance, were allocated to the proceeds received and applied as a discount to the face value of the 9/12 Notes and Warrants. Xtreme recorded a derivative expense on the 9/12 Notes of $649,212 at inception and a further derivative expense on the Warrants of $2,431,437 at inception based on the guidance in ASC 815-10 and ASC 815-40-15 due to a reset feature on the exercise price.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – Borrowings - continued

On December 31, 2014, Massive recognized a derivative liability for the 9/12 Notes and Warrants of $56,263, $0 in redemptions and no change in fair value for the three and six month periods ended June 30, 2015 resulting in a derivative liability of $56,263 at June 30, 2015.

On December 31, 2013, Massive recognized a derivative liability for the 9/12 Notes and Warrants of $63,747 at December 31, 2014, $0 in redemptions and no change in fair value for the three and six month periods ended June 30, 2015, resulting in a derivative liability of $63,747 at June 30, 2015.

As of June 30, 2015 and December 31, 2014, the balance of the 9/12 Notes is $151,466.

On May 1, 2014, in connection with the acquisition of Wunderkind (See Note 3 - Acquisitions), the Company issued the Wunderkind Note in the amount of $5,500,000, plus interest of 0.5% compounded annually. All outstanding and unpaid principal, together with any then unpaid and accrued interest and other amounts payable thereunder are due and payable at the option of the holder, subsequent to May 1, 2015, unless this Wunderkind Note is previously converted. Pursuant to section 2.1 of the Wunderkind Note, Wunderkind will have the right to convert all or part of the outstanding principal on the note into a number of shares of the Company Common Stock equal to 45% of the total shares of Company common stock issued and outstanding on a fully diluted basis (or the appropriate pro rata amount, in case of conversion of part of the outstanding principal) on the date of conversion.

The conversion features of the Wunderkind Note are accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings at each reporting date, due to anti-dilution reset features as well as the feature that provides for conversion into a variable number of shares equal to 45% of the total amount of outstanding shares, on a diluted basis. The fair value was estimated on the date of grant using a Monte Carlo valuation model that has been updated to incorporate the following weighted-average assumptions as of June 30, 2015: expected volatility of 70%; risk-free interest rate of 0.28%, an expected life of the option to convert in years of 1.0 and an expected expiration date of June 30, 2016. The resulting values were allocated to the dilutive and non-dilutive conversion features. The resulting values were allocated to the dilutive and non-dilutive conversion features. The Company recorded a gain on change in fair value on the Wunderkind Note of $388,000 and $1,796,000 for the three and six month period ended June 30, 2015, respectively, due to a change in fair value of the convertible features. As of June 30, 2014 the fair value was estimated using a Monte Carlo valuation model that has been updated to incorporate the following weighted-average assumptions: expected volatility of 70%; risk-free interest rate of 0.11%, an expected life of the option to convert in years of 0.8 and an expected expiration date of May 1, 2015. The Company recorded a gain on change in fair value on the Wunderkind Note of $2,019,000 for the three and six month period ended June 30, 2014.

On April 24, 2015, the Company entered into a First Amendment to Convertible Promissory Note (the “Amendment”), which amends the Wunderkind Note. The Amendment provides that until the Wunderkind Note is paid in full, the note holder will have the right to convert all or part of the outstanding principal of the note into a number of shares of the Company’s common stock equal to 45% of the total shares of common stock issued and outstanding on a fully-diluted basis on the date of conversion. Additionally, the Amendment provides that the note holders may convert the accrued interest under the note into common stock at the same ratio as the principal bears to the 45% at the same time as the conversion of principal.

As of June 30, 2015 and December 31, 2014, the balance of the Wunderkind Note is $5.5M and $5.5M.

On March 23, 2015, the Company closed on private offerings of secured convertible promissory notes (each a “March 2015 Note” and collectively, the “March 2015 Notes”) in the aggregate amount of $636,310 to multiple investors including the Company’s Chairman of the Board of Directors and Chief Executive Officer (Ron Downey) and Chief Creative Officer (Derek Ellis). The offerings, made pursuant to note subscription agreements, represent initial closings in the Company’s private placement of up to $2,000,000 (the “Original Private Placement”).

On May 28, 2015, the Company revised the terms of the Original Private Placement. While the Original Private Placement is still for an aggregate of up to $2,000,000, it includes sales of both revised secured convertible promissory notes (each a “Revised Note” and collectively, the “Revised Notes”) and warrants for that number of shares of Company common stock (the “May 2015 Warrant Shares”) equal to five times the amount of the Revised Notes (each a “May 2015 Warrant” and collectively, the “May 2015 Warrants”) pursuant to note and warrant subscription agreements (the “Note and Warrant Subscription Agreements”). The Note and Warrant Subscription Agreements contain certain customary representations and warranties.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – Borrowings – continued

On May 28, 2015, each of the investors in the Original Private Placement, entered into an Exchange Agreement whereby all outstanding principal and accrued but unpaid interest under their March 2015 Notes were exchanged and converted into the Revised Notes and corresponding May 2015 Warrants (Revised Note for an equivalent of $526,085 and May 2015 Warrant for 2,630,425 shares of Company common stock for Mr. Downey, and a Revised Note for an equivalent of $77,939 and May 2015 Warrant for 389,693 shares of Company common stock for Mr. Ellis). In addition, on May 28, 2015, the Company closed on the equivalent of a total of $371,505 in Revised Notes and 1,857,523 May 2015 Warrants to other investors including, among others, the Company's Chief Financial Officer (Antaine Furlong) and Senior Vice President, People, Culture and Operations (Monique Ellis).

The Revised Notes are secured by a first priority lien on all the Company’s assets pursuant to a security agreement among the Company and the Revised note holders. The Revised Notes bear interest at an annual rate of 12% and mature on the first to occur of (the “Maturity Date”) (i) certain change in control transactions (each a “Deemed Liquidation Event”), (ii) the closing of the next issuance and sale of capital stock of the Company resulting in gross proceeds to the Company of at least $2,000,000 (a “Qualified Financing”), and (iii) the date that is 60 days after the Revised Note holder gives written notice to the Company demanding payment in full.

In the event of a Deemed Liquidation Event, the Company will pay each Revised Note holder an additional purchase premium equal to 100% of the principal amount of such holder’s Revised Note. In the event any of the Revised Notes remain outstanding and unpaid after the Maturity Date, the Company will pay the Revised Note holder monthly liquidated damages payments equal to 1% of the original principal amount of the Revised Note for each month that such Revised Note remains unsatisfied, up to a cap of 12%. If not sooner repaid, as of the close of business on the day immediately preceding the closing of a Qualified Financing, each Revised Note holder will have the option to convert the principal and accrued but unpaid interest on their Revised Note into shares of the securities sold in the Qualified Financing at a 20% discount to the lowest price paid by any investor in the Qualified Financing.

The 2015 Warrants are exercisable for $0.08 per Warrant Share. Each May 2015 Warrant vests 50% on November 28, 2015 and 50% on May 28, 2016 if on each such date the May 2015 Warrant holder has not made demand for payment on the holder’s Revised Note. Each May 2015 Warrant fully vests upon a sale of the Company and if demand is made on the Revised Note, the unvested portion of each May 2015 Warrant immediately terminates. The fair value of the May 2015 Warrants was estimated at May 28, 2015 using a Black-Scholes option pricing model that incorporated the following weighted-average assumptions: expected volatility of 70%; risk-free interest rate of 1.51%, and an expected term of 5 years. The resulting value was allocated to the May 2015 Warrants in the amount of $189,000.

The conversion feature of the Revised Notes are accounted for as a derivative liability at fair value on the date of issuance and accreted into the convertible note at each reporting date, due to the feature that provides for conversion into a variable number of shares upon the occurrence of a Qualified Financing. The fair value was estimated at May 28, 2015 using a Monte Carlo valuation model that incorporated the following weighted-average assumptions: expected volatility of 70%; risk-free interest rate of 0.26%, an expected life to convert in years of 1.0 and the likelihood of a Qualified Offering of 60%. The resulting value, was allocated to the conversion feature on the date the note was revised in the amount of $233,000. The conversion feature was then reduced through accretion into the convertible note through quarter end, resulting in a June 30, 2015 derivative liability balance of $216,817.

As of June 30, 2015 the balance of the Revised Notes is $986,119.

The following tables illustrate the fair value adjustments that were recorded related to the derivative financial instruments associated with the convertible debenture financings:

	June 30, 2015
Derivative liability	December 31, 2014		New Borrowings		Fair Value Adjustments			Adjustments		Total
March 2015 note conversion feature	$	-	$	144,000	$	-		$	72,817	$	216,817
Orbach warrant liability		16,390		-		(8,250	)		-		8,140
Wunderkind conversion feature		2,434,000		-		(2,184,000	)		-		250,000
9/12 Warrant liability		63,747		-		-			-		63,747
9/12 Note liability		56,263		-		-			-		56,263
	$	2,570,400	$	144,000	$	(2,192,250	)	$	72,817	$	594,967

The derivative income of $2,192,250, included within the Consolidated Income Statement, is the net result of $0 in redemptions and warrant expense, and fair value adjustments of $2,192,250.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 – Borrowings – continued

Short-term borrowings

On October 24, 2014, the Company entered into a Note and Warrant Purchase Agreement with Gil Orbach (the “Investor”) to issue a $1,000,000 in principal amount promissory note and warrants to purchase an aggregate of 100,000 shares of common stock, $0.001 par value per share of the Company (the “Common Stock”). The note bears interest at a rate of 10.0% per annum and will mature on October 24, 2015. The note holds first precedence with regard to any other creditors, instruments, or contractual obligations of the Company, and cannot be subordinated without the written approval of the Investor. In the event that a party other than Investor or his affiliate (which specifically includes any entity controlled by Zachary Venegas or Scott Ogur) acquires 20% or more of the equity or assets of the Company (a “Change in Control”), the Investor may demand that the principal and interest for one year shall become immediately due and payable. The warrants expire three years after their initial issuance date and may be exercised for a purchase price equal to $0.25 per share of Common Stock, subject to customary antidilution adjustments. In the event of a Change in Control, the exercise price of the warrant shall reset to $0.05 per share and the number of shares of Common Stock underlying the warrant shall increase to 550,000.

As of June 30, 2015 and December 31, 2014, the balance of the Orbach Note is $1M and $1M, respectively.

NOTE 14 – Borrowings – Related Party

As described in Note 13 - Borrowings, on May 28, 2015, each of the investors in the Original Private Placement entered into an Exchange Agreement whereby all outstanding principal and accrued but unpaid interest under their March 2015 Notes from the Original Private Placement were exchanged and converted into Revised Notes and corresponding May 2015 Warrants (Revised Note for an equivalent of $526,085 and May 2015 Warrant for 2,630,425 shares of Company common stock for Mr. Downey, and a Revised Note for an equivalent of $77,939 and May 2015 Warrant for 389,693 shares of Company common stock for Mr. Ellis). In addition, on May 28, 2015, the Company closed on the equivalent of a total of $371,505 in Revised Notes and 1,857,523 May 2015 Warrants to other investors including, among others, the Company's Chief Financial Officer (Antaine Furlong) and Senior Vice President, People, Culture and Operations (Monique Ellis).

NOTE 15 – Taxes refundable (payable)

Taxes refundable were as follows at June 30, 2015 and December 31, 2014:

		2015			2014
Goods and services taxes receivable (payable)	Australia	$	566		$	(2,658	)
Fringe benefit tax payable	Australia		(3,885	)		(624	)
Value added tax payable	United Kingdom		(33,892	)		(104,794	)
Income tax refundable	Australia		778,545			780,717
Taxes refundable		$	741,334		$	672,641

NOTE 16 – Income Taxes

The Company has historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss for the reporting period. For the six month period ended June 30, 2015, the Company has utilized the discrete effective tax rate method under ASC 740-270-30-18, Income Taxes—Interim Reporting to calculate its interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. The Company believes that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as the annual effective tax rate method is not reliable due to the high degree of uncertainty in estimating annual pretax earnings. In addition, deferred tax assets related to domestic operations are fully offset by a valuation allowance.

NOTE 17 – Employee Defined Contribution Plan

Employees of the Company participate in government mandated defined contribution plan, pursuant to which certain pension benefits are provided to employees. The government mandate requires certain percentages of the employees’ salaries be paid into Trust accounts for the benefit of the employees. The Group has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were $57,332 and $3,040 for the three month periods ended June 30, 2015 and 2014, respectively. The total amounts for such employee benefits, which were expensed as incurred, were $122,842 and $133,909 for six month periods ended June 30, 2015 and 2014, respectively.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 – Commitments and Contingencies

Litigation

From time to time, the Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Leases

Total rent expense incurred by the Company was $73,911 and $98,636 for the three month periods ended June 30, 2015 and 2014, respectively. Total rent expense incurred by the Company was $172,766 and $205,647 for the six month periods ended June 30, 2015 and 2014, respectively.

Leases where substantially all the rewards and risks of ownership of assets remain with the lesser are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods. The Company leases office spaces in Australia and in the UK under a lease agreement. The term expiry for the Australian office was May 31, 2015, the space is now leased on a month to month basis. The term expiry for the UK office is December 31, 2016. Future minimum rental payments under these operating leases are as follows:

2015	$	129,275
2016		258,551
2017		-
2018		-
2019		-
Thereafter		-
	$	387,826

The Company has entered into commercial leases for company motor vehicles with a term expiring in September 16, 2016. Future minimum rental payments under this operating lease are as follows:

2015	$	12,365
2016		16,486
2017		34,074
2018		-
2019		-
Thereafter		-
	$	62,925

The non-current portion of future payments on the commercial leases for company motor vehicles are recorded as Other Long-Term Liabilities on the Balance Sheet.

NOTE 19 – Stockholders’ Equity

Capital Structure

The Company is authorized to issue up to 150,000,000 shares of Common Stock, $0.001 par value per share. The holders of the Common Stock do not have any preemptive right to subscribe for, or purchase, any shares of any class of stock.

The Company is authorized to issue up to 50,000,000 shares of Preferred Stock, $0.001 par value per share of which 55 were issued and outstanding as of June 30, 2015.

The Company has redeemed and canceled its one class of Non-transferable Preferred Stock. The Non-transferable Preferred Stock, consisting of 1,000 shares, was returned to the Company by Mr. McAndrew upon his resignation as the Company’s Chief Executive Officer on September 6, 2013.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 – Stockholders’ Equity – continued

Common Stock

On March 19, 2015, the Company issued an aggregate of 17,613,630 unregistered shares of its common stock as retention bonuses to several members of management including, but not limited to, the Chairman of the Company’s Board of Directors and Chief Executive Officer, Mr. Downey (2,963,769 shares), the Company’s Chief Financial Officer, Antaine Furlong (1,570,800 shares), and additional named executive officers of the Company for the year ended December 31, 2013, Derek Ellis and Max Ramsay (1,529,308 shares and 1,437,338 shares, respectively).

Reverse Split

On August 17, 2013 Xtreme received approval to complete a 1 for 100 reverse split of all outstanding shares of Xtreme's Common Stock by filing a Certificate of Amendment with the Nevada Secretary of State. Each issued and outstanding share of Common Stock would automatically be changed into a fraction of a share of Common Stock in accordance with the ratio of 1 for 100. The par value of the Common Stock would remain unchanged at $0.001 per share, and the number of authorized shares of Common Stock would remain unchanged as well. Any fractional shares resulting from the Reverse Split have been rounded up to the nearest whole number. The reverse split became effective after filing a Certificate of Amendment with the Nevada Secretary of State and upon the completion of the review and comment process with FINRA on August 17, 2013. The Company has retroactively reflected the reverse split in the accompanying financial statements.

Preferred Stock

The shares of Preferred Stock, other than the Nontransferable Preferred Stock, could be issued from time to time by the Company’s Board of Directors in its sole discretion without further approval or authorization by the stockholders, in one or more series, each of which series could have any particular distinctive designations as well as relative rights and preferences as determined by the Board of Directors. The relative rights and preferences that may be determined by the Board of Directors in it discretion from time to time include but are not limited to the following:

•

the rate of dividend and whether the dividends are to be cumulative and the priority, if any, of dividend payments relative to other series in the class;

•

whether the shares of any such series may be redeemed, and if so, the redemption price and the terms and conditions of redemption;

•

the amount payable with respect to such series in the event of voluntary or involuntary liquidation and the priority, if any, of each series relative to other series in the class with respect to amounts payable upon liquidation and sinking fund

provision, if any, for the redemption or purchase of the shares of that series; and

•

the terms and conditions, if any, on which the shares of a series may be converted into or exchanged for shares of any class, whether common or preferred, or into shares of any series of the same class, and if provision is made for conversion or exchange, the times, prices, rates, adjustments and other terms.

On May 7, 2013, the Company issued a total of 3,694,000 shares of Preferred Stock to the then current CFO, CEO, COO, Corporate Secretary, and three unrelated third parties, in exchange for full mutual releases and extinguishment of $3,568,461 in liabilities owed to these individuals. The amount of shares issued to the CEO, COO, CFO, and Corporate Secretary were 1,250,000; 1,500,000; 400,000; and 84,000 shares, respectively, valued at $1,649,340. On August 17, 2013, the shares of Preferred Stock were converted into 3,694,000 shares of Common Stock.

On November 7, 2013, Massive Interactive, Inc. sold 55 Series B Redeemable Preferred Stock to Rolling Hill Capital Management LLC and 55,000,000 shares of common stock to Southport Lane Equity II, LLC, a wholly owned subsidiary of Southport Lane, LP, in exchange for an aggregate of $5,500,000. The Preferred Stock accrues an annual dividend of $6,750 per share. The Preferred Stock is redeemable by the Company at any time prior to November 16, 2016. Southport Lane Equity II, LLC may convert the Preferred Stock following the third anniversary of the date of issuance. The Preferred Stock is convertible at $0.144, 120% of the closing bid price of the Company’s Common Stock on November 1, 2013. The conversion price changes for certain diluting issuances in accordance with the agreement.

Warrants

On June 1, 2015, the Company issued 176,768 of warrants to lawyers in exchange for services provided (the “6/1 Warrants”). The 6/1 Warrants are exercisable for $0.08 per warrant share. Each 6/1 Warrant is fully vested and exercisable from time to time or at any time during the ten year period commencing on June 1, 2015. The fair value of the 6/1 Warrants was estimated at June 1, 2015 using a Black-Scholes option pricing model that incorporated the following weighted-average assumptions: expected volatility of 70%; risk-free interest rate of 1.55%, stock price of $0.07, and an expected term of 5 years. The resulting value was allocated to the 6/1 Warrants in the amount of $6,900.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 – Stockholders’ Equity – continued

On June 26, 2015, the Company issued 2,000,000 of warrants to non-employees in exchange for services provided (the “6/26 Warrants”). The 6/26 Warrants are exercisable for $0.07 per warrant share. This right to purchase Common Stock is exercisable for a period ending upon the five year period commencing on June 26, 2015. The fair value of the 6/26 Warrants was estimated at June 26, 2015 using a Black-Scholes option pricing model that incorporated the following weighted-average assumptions: expected volatility of 70%; risk-free interest rate of 1.55%, stock price of $0.07, and an expected term of 2.5 years. The resulting value was allocated to the 6/26 Warrants in the amount of $59,700.

NOTE 20 - Stock Based Compensation

The fair values of the restricted stock granted during the quarter ended March 31, 2015 was estimated on the date of grant using three different pricing models: Finnerty, Chaffe, and Geometric Average Rate Put. As the stock vests over four years, each year was valued separately by reviewing the discount studies, including restricted stock studies and pre-IPO studies, and assigning a separate risk-free rate for each year. The resulting valuation incorporated the following assumptions: share price at the date of grant, expected dividend yield of 0%; expected volatility of 70%; and a risk-free interest rate of 0.26%, 0.63%, 0.99%, and 1.24% for years one through four, respectively.

The following table summarizes the Company’s restricted stock activity and related information for the six month periods ended June 30, 2015:

	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2015		-	$	-
Granted		53,809,985		0.13
Forfeited and expired		-		-
Outstanding at June 30, 2015		53,809,985	$	0.13

For the three and six months ended June 30, 2014, the Company incurred $0 in stock compensation expense from the issuance of common stock to employees and consultants. For the three and six months ended June 30, 2015, the Company incurred $347,778 and $381,389 in stock compensation expense from the issuance of common stock to employees.

Omnibus Stock Incentive Plan

On April 19, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan (the “2015 Plan”). The 2015 Plan provides for the grant of restricted stock, stock options, stock appreciation rights, and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company and any subsidiary. The 2015 Plan will continue in effect for 10 years unless sooner terminated. Pursuant to the 2015 Plan, on April 29, 2015, the Company issued an aggregate of 31,770,010 restricted shares of its common stock to the following members of management: the Chief Financial Officer, Antaine Furlong (12,219,235 shares), the Chief Technical Officer, Max Ramsay (5,295,002), the President, North America, Alex Drosin (4,887,694), SVP People & Operations, Monique Ellis (4,887,694), and the Managing Director EMEA, Kieran Bresnan (4,480,386). Subject to adjustment upon certain corporate transactions or events, up to 40,730,782 shares of our common stock may be issued under the 2015 Plan.

MASSIVE INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 – Business and Geographic Segment Information

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Group’s chief operating decision maker is the Chief Executive Officer, who reviews consolidated results of operations prepared in accordance with GAAP when making decisions about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment, namely the software development services.

The Company’s revenues were generated in the following geographic regions for the three and six month periods ended June 30:

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
United Kingdom		$	2,040,772		$	2,082,694		$	3,927,881		$	3,228,802
Australia			524,713			1,630,312			1,395,380			3,598,640
		$	2,565,485		$	3,713,006		$	5,323,261		$	6,827,442

Long-lived assets by geographic area consist of property and equipment and are as follows at June 30, 2015 and December 31, 2014:

	2015		2014
United Kingdom	$	58,124	$	102,264
Australia		89,840		92,646
	$	147,964	$	194,910

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our accompanying consolidated financial statements and related notes.

In addition to historical information, this Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may appear throughout this Quarterly Report, including without limitation, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. We use words such as “believe,” “intend,” “expect,” “anticipate,” “plan,” “may,” “will,” “should,” “estimate,” “potential,” “project” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and ability to continue as a going concern, and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements. Such risks and uncertainties include, but are not limited to the risks identified in our Annual Report on the Form 10-K for the year ended December 31, 2014.

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this Quarterly Report. Other than as required under the securities laws, we do not assume a duty to update forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

Overview

Massive Interactive, Inc. (the “Company” or “Massive”) is a provider of innovative solutions for the management, delivery and streaming of Internet Protocol (“IP”)-based video and media assets. Our comprehensive software platform enables enterprise customers to acquire, manage and distribute their video assets across various devices used by consumers, including games consoles, smart TV’s, tablets, smart phones, Internet-enabled set top boxes and other devices. Our suite of products includes, but is not limited to, MDK, a cross-device software development solution, MUI, a cross-devices suite of user interfaces, MSM, a powerful video content management and merchandising system (“CMS”), and MVP, a complete end-to-end video management platform. We offer our solutions over the Internet as a subscription service model using a software-as-a-service (“SaaS”) or as an on-demand model, and by installing our software onsite for clients as part of an enterprise licensing model. Our software addresses the unique needs found across different industry verticals, each with the shared aim of offering video to consumers across multiple devices. The verticals we address include telecommunications, media, technology, hospitality, automotive, travel and leisure and publishing. In addition to our software business, we operate design services and technical services businesses. Our services work includes: creative interface design, branding strategies, strategic planning and technical/systems integration services. We currently provide our software solutions, professional and creative services internationally through our offices in London, Prague and Sydney.

On March 23, 2015, we closed on private offerings of secured convertible promissory notes (each a “March 2015 Note” and collectively, the “March 2015 Notes”) in the aggregate amount of $636,310 to multiple investors including the Company’s Chairman of the Board of Directors and Chief Executive Officer (Ron Downey) and Chief Creative Officer (Derek Ellis). The offerings, made pursuant to note subscription agreements, represent initial closings in the Company’s private placement of up to $2,000,000 (the “Original Private Placement”).

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- continued

The Revised Notes are secured by a first priority lien on all the Company’s assets pursuant to a security agreement among the Company and the Revised Note holders. The Revised Notes bear interest at an annual rate of 12% and mature on the first to occur of (the “Maturity Date”) (i) certain change in control transactions (each a “Deemed Liquidation Event”), (ii) the closing of the next issuance and sale of capital stock of the Company resulting in gross proceeds to the Company of at least $2,000,000 (a “Qualified Financing”), and (iii) the date that is 60 days after the Revised Note holder gives written notice to the Company demanding payment in full.

For the Three Months Ended June 30, 2015 compared to the Three Months Ended June 30, 2014

Revenues

Revenues for the three months ended June 30, 2015 and 2014 were $2,565,485 and $3,713,006, respectively, representing a decrease of $1,147,521 or 31% over the prior period. This decrease is primarily attributable to timing of two project start dates and commercial negotiations with a large film and television distribution company which will roll out the Company’s Video Platform and build applications across the US, Europe, and the Asia Pacific, which took two months longer than planned, a decrease in perpetual license agreements, and offset by an increase in annual license agreements over a three-year period consistent with the Company’s license strategy.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2015 and 2014 were $2,761,033 and $2,987,779, respectively, representing a decrease of $226,746 or 8% over the prior period. This decrease is primarily attributable to an increase in the capitalization of costs related to salaries and contractors for Massive Media, approximately $375,000 in stock based compensation expense, a $101,250 reversal of the Company’s bad debt reserve, and a reduction in expenses incurred by Wunderkind.

Depreciation and Amortization Expenses

Depreciation and amortization expenses for the three months ended June 30, 2015 and 2014 were $490,325 and $235,769, respectively, representing an increase of $254,556 or 108% over the prior period. This increase in depreciation and amortization is the result of approximately $197,000 in additional software amortization expense for Massive Media completed projects in 2015 and an additional $54,000 of amortization expense related to the intangible assets held by Wunderkind due to three months of activity in 2015 instead of two months of activity in 2014.

Other Income (Expense)

Other income (expense) for the three months ended June 30, 2015 and 2014 was $1,672,226 and $1,908,845, respectively, representing a decrease of $236,619 or 12% over the prior period. This decrease is due to a reduced gain on the fair value of the derivative liability from that of the prior period of $180,560 combined with $56,430 in additional interest expense, incurred on the outstanding Orbach Note Payable and the Revised Notes.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- continued

Income Tax Benefit

Income tax benefit for the three months ended June 30, 2015 and 2014 was $82,000 and $237,880, respectively, representing a decrease of $155,880 or 66% over the prior period. The income tax benefit for Q2 of 2015 is the result of a $319,000 reduction in the tax liability, offset by a $237,000 decrease in deferred tax assets. The income tax benefit from 2014 relates to the operations of Massive Media and represents a Research and Development (R&D) tax incentive, which provides a tax offset for eligible R&D activities and its targeted toward R&D that benefits Australia. The incentive, being a refundable tax offset, is available for those entities engaging in eligible activities whose aggregated turnover is less than $20 million.

Net Income

Net income for the three months ended June 31, 2015 and 2014 was $1,068,353 and $2,636,183, respectively, representing a decrease of $1,567,830 or 59% over the prior period. This decrease in net income from 2014 is primarily due to both a decrease in revenues due to timing of project start dates and an increase in operating expenses for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.

For the Six Months Ended June 30, 2015 compared to the Six Months Ended June 30, 2014

Revenues

For the six month period ended June 30, 2015, revenues were $5,323,261 compared to revenues of $6,827,442 for the six month period ended June 30, 2014, respectively, representing a decrease of $1,504,181 or 22% over the prior period. This decrease is primarily attributable to timing of two project start dates and commercial negotiations with a large film and television distribution company which will roll out the Company’s Video Platform and build applications across the US, Europe, and the Asia Pacific, which took two months longer than planned, and a decrease in perpetual license agreements, and offset by an increase in annual license agreements over a three-year period consistent with the Company’s license strategy.

General and Administrative Expenses

For the six month period ended June 30, 2015, general and administrative expenses were $5,330,391 compared to $5,418,377 for the six month ended June 30, 2014, respectively, representing a decrease of $87,986 or 2% over the prior period. This decrease is primarily attributable to an increase in the capitalization of costs related to salaries and contractors for Massive Media, $408,000 in stock based compensation expense, a $101,250 reversal of the Company’s bad debt reserve, and a reduction in expenses incurred by Wunderkind.

Depreciation and Amortization Expenses

Depreciation and amortization expense during the six months ended June 30, 2015 and 2014 was approximately $991,056 and $393,172, respectively, representing an increase of $597,884 or 152% over the prior period. This increase in depreciation and amortization is the result of an increase of approximately $382,000 in additional software amortization expense for Massive Media completed projects in 2015 and an additional $216,000 of amortization expense related to the intangible assets held by Wunderkind due to six months of activity in 2015 instead of two months of activity in 2014.

Other Income (expense)

Other income increased from $1,780,027 of income in 2014 to $1,862,290 in 2015, representing an increase of $82,263 or 5% over the prior period. This increase is due to a larger gain on the fair value of the derivative liability from that of the prior period of $173,250 offset by $93,165 in additional interest expense, primarily due to the outstanding Orbach Note Payable and Revised Notes.

Income Tax Benefit

The income tax benefit decreased from $466,570 in 2014 to $330,432 for the six months ended June 30, 2015, respectively, representing a decrease of $136,138 or 29% over the prior period. The income tax benefit relates to the operations of Massive Media and represents a Research and Development (R&D) tax incentive, which provides a tax offset for eligible R&D activities and is targeted toward R&D that benefits Australia. The incentive, being a refundable tax offset, is available for those entities engaging in eligible activities whose aggregated turnover is less than $20 million. See Note 15 - Taxes Refundable (Payable) in our financial statements included in this Quarterly Report. In 2014, this credit amounted to $466,570 and is offset by a decrease in tax liability as of June 30, 2015 of $137,000.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Net Loss

For the six month period ended June 30, 2015, we had net income of $1,194,536 compared with net income of $3,262,490 for the six months ended June 30, 2014, respectively, representing a decrease of $2,067,954 or 63% over the prior period. This decrease in net income from 2014 is primarily due to both a decrease in revenues due to timing of project start dates and an increase in operating expenses for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.

Liquidity and Capital Resources:

As of June 30, 2015, our continuing operations had cash of $292,452 and a working capital balance of ($376,980). As of December 31, 2014, continuing operations had cash of $204,148 and a working capital balance of $24,614. Working capital is defined as current assets minus current liabilities, excluding convertible notes payable, derivative liability and deferred taxes.

If the Wunderkind Note is not settled in shares of our Common Stock, there is substantial doubt we will be able to continue as a going concern without additional sources of funding, which we might not be able to obtain. We do not have the ability to obtain short term financing on commercially reasonable terms because two of our large stockholders have been judicially declared insolvent and our largest common stockholder, Southport Lane Equity II, LLC, is under common control with the insolvent entities causing lenders to view our Company as a credit risk. Management's plan concerning these matters is described in Note 1, Going Concern, in our financial statements in this Quarterly Report, however, management cannot assure you that its plan will be successful. In view of the foregoing, there is substantial doubt about our ability to continue as a going concern.

Cash Flows from Continuing Operations

Operating activities

Cash provided by operating activities during the six months ended June 30, 2015 was $1,074,468 as compared to $1,350,749 for the six months ended June 30, 2014. The cash flows from operations in 2015 related to net income of $1,194,536, and depreciation, amortization and non-cash expenses of $1,372,445, offset by a gain on change in fair value of derivative liability and a decrease in bad debt expense reversal of $2,293,500 and changes in operating assets and liabilities provided cash of $800,987. For 2014, cash flows from operations related to net income of $3,262,490, depreciation and amortization of $392,983 and changes in operating assets and liabilities of $286,722.

Investing Activities

Cash used in investing activities during the six months ended June 30, 2015 was $1,598,585 as compared to $948,970 for the six months ended June 30, 2014. Cash used in investing activities for the six months ended June 30, 2015 consisted primarily of capital software and property and equipment expenditures offset by disposals of property and equipment. For the six months ended June 30, 2014, cash used in investing activities related to capital software and property and equipment expenditures offset by cash received in conjunction with the Wunderkind acquisition.

Financing Activities

Cash provided by (used in) financing activities of continuing operations for the six months ended June 30, 2015 was $851,004 as compared to ($1,030,648) for the six months ended June 30, 2015. This increase is primarily due to $972,674 in payments made to advances and bank loans during the six months ended June 30, 2014 as compared to $16,848 of payments made to advances, offset by $892,386 in proceeds from advances during the six months ended June 30, 2015.

Disclosure About Off-Balance Sheet Arrangements

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATTIVE DISCLOSURES ABOUT MARKET RISK.

Smaller reporting companies such as the Company are not required to provide the information required by this item.

ITEM 4.

CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files and submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. As of March 31, 2015, our Chief Executive Officer and Chief Financial Officer reviewed our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon their evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective at the reasonable assurance level to ensure that information required to be included in this report is (i) accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

ITEM 4.

CONTROLS AND PROCEDURES- continued

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

Changes in Internal Control over Financial Reporting

There have not been any significant changes in our internal control over financial reporting during the quarter ended June 30, 2015, 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

On June 23, 2015, Southport Lane Equity II, LLC filed a complaint in the US District Court for the District of Nevada naming the Company as a nominal defendant only in a shareholder derivative action. The complaint alleges claims against various individual officers and directors of the Company contesting various business judgments made by the Board of Directors. The complaint seeks various declaratory judgments and other ancillary remedies. The complaint has not been served. If served, the individuals intend to contest the challenges made to their business judgments. The Company believes the claims are without merit, that the plaintiff has pled false facts in bad faith and that the plaintiff is seeking to use the courts for an improper purpose. The Company further believes the claims are related to the winding down of the plaintiff’s parent, the placement into receivership of the parent’s insurance company subsidiaries and ongoing investigations relating thereto.

ITEM 1A. RISK FACTORS

Smaller reporting companies such as the Company are not required to provide the information required by this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

10.41	Exchange Agreement dated as of May 28, 2015 by and among Massive Interactive, Inc., Ron Downey and Derek Ellis

10.42	Form of Massive Interactive, Inc. Note and Warrant Subscription Agreement (May 2015)

10.43	Form of Massive Interactive, Inc. Secured Convertible Promissory Note (May 2015)

10.44	Form of Massive Interactive, Inc. Warrant (May 2015)

10.45	Form of Security Agreement (May 2015)

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Massive Interactive Inc.

August 14, 2015	By:	/s/ Ron Downey
		Ron Downey, Chief Executive Officer
		(Principal Executive Officer)

August 14, 2015	By:	/s/ Antaine Furlong
		Antaine Furlong, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

Massive Interactive, Inc. - FORM 10-Q - August 14, 2015

Attached files

Massive Interactive, Inc. Reports