The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
JUNE 30, 2019
1. BASIS OF PRESENTATION
The
accompanying unaudited Condensed Consolidated Financial Statements of
CloudCommerce, Inc. (“CloudCommerce,”
“we,” “us,” or the “Company”)
and its wholly-owned
subsidiaries
,
have been
prepared in accordance with
the instructions to interim financial reporting as prescribed by the Securities and Exchange Commission (the “SEC”)
.
The
results for the interim periods are not necessarily indicative of results for the entire year.
These interim financial statements
do not include all disclosures required by generally accepted accounting principles (“GAAP”) and should be read in
conjunction with our consolidated financial statements and footnotes filed with the SEC in the Company's Form 10-K. In the opinion
of management,
the unaudited Condensed Consolidated Financial Statements contained in this
report include all known accruals and adjustments necessary for a fair presentation of the financial position, results of operations,
and cash flows for the periods reported herein. Any such adjustments are of a normal recurring nature
.
There
were various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the Company's condensed consolidated financial position,
results of operations or cash flows.
Going
Concern
The
accompanying
Condensed
Consolidated Financial Statements
have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and
liabilities and commitments in the normal course of business. The accompanying
Condensed
Consolidated Financial Statements do not reflect any adjustments that might result if the Company
is unable to continue as a going concern. The Company does not generate significant revenue, and has negative cash flows
from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The
ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among
other things, an additional cash infusion. Historically, the Company has obtained funds from its shareholders since its inception
through sales of our securities. It is management’s plan to generate additional working capital from increasing sales from
its data sciences, creative, website development and digital advertising service offerings, and then continue to pursue its business
plan and purposes.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
This
summary of significant accounting policies of CloudCommerce is presented to assist in understanding the Company’s Condensed
Consolidated Financial Statements
.
The Condensed
Consolidated Financial Statements
and
notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United States of America and have been consistently applied
in the preparation of the Condensed
Consolidated Financial Statements
.
The
Condensed Consolidated Financial Statements include the Company and its wholly owned subsidiaries, CLWD Operations, Inc., a Delaware
corporation (“CLWD Operations”, formerly Indaba Group, Inc.), Parscale Digital, Inc., a Nevada corporation (“Parscale
Digital”), WebTegrity, Inc., a Nevada corporation (“WebTegrity”), Data Propria, Inc., a Nevada corporation (“Data
Propria”), Parscale Media, LLC, a Texas limited liability company (“Parscale Media”), and Giles Design Bureau,
Inc., a Nevada corporation (“Giles Design Bureau”). All significant inter-company transactions are eliminated in consolidation.
Accounts Receivable
The
Company extends credit to its customers, who are located nationwide. Accounts receivable are customer obligations due under normal
trade terms. The Company performs continuing credit evaluations of its customers’ financial condition. Management reviews
accounts receivable on a regular basis, based on contracted terms and how recently payments have been received to determine if
any such amounts will potentially be uncollected. The Company includes any balances that are determined to be uncollectible in
its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The
balance of the allowance account at
June 30, 2019
and December 31, 2018 are $21,563 and $45,613
respectively.
On
November 30, 2016, CLWD Operations entered into a 12-month agreement wherein amounts due from our customers were pledged to a third
party, in exchange for a borrowing facility in amounts up to a total of $400,000. The agreement was amended on March 23, 2017,
which increased the allowable borrowing amount by $100,000, to a maximum of $500,000. On November 30, 2017, the agreement auto
renewed for another twelve months. The proceeds from the facility are determined
by
the amounts we invoice our customers. We record the amounts due from customers in accounts receivable and the amount due to the
third party as a liability, presented as a “Lines of credit” on the Balance Sheet. During the term of this facility,
the third-party lender has a first priority security interest in CLWD Operations’ assets, and therefore, we will require
such third-party lender’s written consent to obligate CLWD Operations further or pledge our assets against additional borrowing
facilities. Because of this position, it may be difficult for CLWD Operations to secure additional secured borrowing facilities.
The cost of this secured borrowing facility is 0.05% of the daily balance. As of
June
30, 2019
, the balance due from this arrangement was $32,669.
On
October 19, 2017, Parscale Digital entered into a 12-month agreement wherein amounts due from our customers were pledged to a third
party, in exchange for a borrowing facility in amounts up to a total of $500,000. The proceeds from the facility are determined
by the amounts we invoice our customers. The Company evaluated this facility in accordance with ASC 860, classifying it as a secured
borrowing arrangement. We record the amounts due from customers in accounts receivable and the amount due to the third party as
a liability, presented as a “Lines of credit” on the Balance Sheet. During the term of this facility, the third-party
lender has a first priority security interest in the Parscale Digital, and will, therefore, we will require such third-party lender’s
written consent to obligate the Parscale Digital further or pledge our assets against additional borrowing facilities. Because
of this position, it may be difficult for the Company to secure additional secured borrowing facilities. The cost of this secured
borrowing facility is 0.05% of the daily balance. On April 12, 2018, the Company amended the secured borrowing arrangement, which
increased the maximum allowable balance by $250,000, to a total
of $750,000.
As of
June 30, 2019
,
the balance due from this arrangement was
$487,667
.
On
August 2, 2018, Giles Design Bureau, WebTegrity, and Data Propria entered into 12-month agreements wherein amounts due from our
customers were pledged to a third-party, in exchange for borrowing facilities in amounts up to a total of $150,000, $150,000 and
$600,000, respectively. The proceeds from the facility are determined by the amounts we invoice our customers. We evaluated these
facilities in accordance with ASC 860, classifying as secured borrowing arrangements. We record the amounts due from customers
in accounts receivable and the amount due to the third party as a liability, presented as a “Lines of credit” on the
Balance Sheet. During the term of these facilities, the third-party lender has a first priority security interest in the respective
entities, and will, therefore, we will require such third-party lender’s written consent to obligate the entities further
or pledge our assets against additional borrowing facilities. Because of this position, it may be difficult for the entities to
secure additional secured borrowing facilities. The cost of this secured borrowing facilities is 0.056%, 0.056% and 0.049%, respectively,
of the daily balance.
As of
June
30, 2019
, the combined balance
due from these arrangement was $123,320.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining
the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Estimates are primarily used in our revenue recognition, the allowance for doubtful account receivable, fair value assumptions
in accounting for business combinations and analyzing goodwill, intangible assets and long-lived asset impairments and adjustments,
the deferred tax valuation allowance, and the fair value of stock options and warrants.
Cash and Cash Equivalents
The Company
considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of
June
30, 2019
, the Company held cash and cash equivalents in the amount of $87,614, which was held in the operating bank accounts.
Of this amount, none was held in any one account, in amounts exceeding the FDIC insured limit of $250,000.
Property and Equipment
Property
and equipment are stated at cost, and are depreciated or amortized using the straight-line method over the following estimated
useful lives:
Furniture, fixtures & equipment
|
|
7 Years
|
Computer equipment
|
|
5 Years
|
Commerce server
|
|
5 Years
|
Computer software
|
|
3 - 5 Years
|
Leasehold improvements
|
|
Length of the lease
|
Depreciation
expenses were $21,590 and $20,832 for the six months ended June 30, 2019
and 2018
, respectively.
Research and Development
Research
and development costs are expensed as incurred. Total research and development costs were zero for the six months ended June 30,
2019 and 2018.
Advertising
Costs
The Company
expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $4,797 and $30,449 for the
six months ended June 30, 2019
and 2018
, respectively.
Fair value of
financial instruments
The Company’s financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at
cost, which approximates their fair value, due to the relatively short maturity of these instruments. As of June 30, 2019 and December
31, 2018, the Company’s notes payable have stated borrowing rates that are consistent with those currently available to the
Company and, accordingly, the Company believes the carrying value of these debt instruments approximates their fair value.
Fair
value is defined as the price to sell an asset or transfer a liability, between market participants at the measurement date.
Fair
value measurements assume that the asset or liability is (1) exchanged in an orderly manner, (2) the exchange is in the
principal market for that asset or liability, and (3) the market participants are independent, knowledgeable, able and willing
to transact an exchange. Fair value accounting and reporting establishes a framework for measuring fair value by creating a hierarchy
for observable independent market inputs and unobservable market assumptions and expands disclosures about fair value measurements.
Considerable judgment is required to interpret the market data used to develop fair value estimates. As such, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in a current exchange. The use of different market
assumptions and/or estimation methods could have a material effect on the estimated fair value.
As
of
June 30, 2019, and December 31, 2018
, the Company had no assets
or liabilities that are required to be valued on a recurring basis.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the
estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the
long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information
at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future
cash flows based on reasonable and supportable assumptions.
Indefinite Lived Intangibles
and Goodwill Assets
The Company
accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based
on their estimated fair values. Significant estimates in valuing certain intangible assets include, but are not limited to, future
expected cash flows from acquired customer lists, acquired technology, and trade names from a market participant perspective, useful
lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but
which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. The purchase price
is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining
more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The
purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is
recognized as goodwill.
The Company
tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances
indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies,
the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31, 2018 and determined
there was no impairment of indefinite lived intangibles and goodwill.
Business Combinations
The acquisition
of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair
value, at the acquisition date, of assets received, liabilities incurred or assumed, and equity instruments issued by the Company
in exchange for control of the acquiree. Any costs directly attributable to the business combination are expensed in the period
incurred. The acquiree’s identifiable assets and liabilities are recognized at their fair values at the acquisition date.
Goodwill
arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination
over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized.
Concentrations
of Business and Credit Risk
The Company
operates in a single industry segment. The Company markets its services to companies and individuals in many industries and geographic
locations. The Company’s operations are subject to rapid technological advancement and intense competition. Accounts receivable
represent financial instruments with potential credit risk. The Company typically offers its customers credit terms. The Company
makes periodic evaluations of the credit worthiness of its enterprise
customers
and other than obtaining deposits pursuant to its policies, it generally does not require collateral. In the event of nonpayment,
the Company has the ability to terminate services.
As of June 30, 2019, the Company held cash and cash equivalents in the
amount of $87,614, which was held in the operating bank accounts. Of this amount, none was held in any one account, in amounts
exceeding the FDIC insured limit of $250,000.
Stock-Based Compensation
The Company
addressed the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for
either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments
or that may be settled by the issuance of such equity instruments. The transactions are accounted for using a fair-value-based
method and recognized as expenses in our statement of operations.
Stock-based
compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately
expected to vest. Stock-based compensation expense recognized in the condensed consolidated statement of operations during the
six months ended June 30, 2019, included compensation expense for the stock-based payment awards granted prior to, but not yet
vested, as of June 30, 2019 based on the grant date fair value estimated. Stock-based compensation expense recognized in the condensed
consolidated statement of operations for the six months ended June 30, 2019 is based on awards ultimately expected to vest or has
been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The stock-based compensation expense recognized in the condensed consolidated
statements of operations during the six months ended June 30, 2019 and 2018 were $163,644 and $285,976, respectively.
Basic and Diluted Net Income
(Loss) per Share Calculations
Income (Loss)
per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed
by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings
per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares
were dilutive. The shares for employee options, warrants and convertible notes were used in the calculation of the income per share.
For the six
months ended
June 30, 2019
, the Company has excluded 151,475,799
shares of common stock underlying options, 10,000 Series A Preferred shares convertible into 100,000,000 shares of common stock,
18,025 Series B Preferred shares convertible into 450,625,000 shares of common stock, 14,425 Series C Preferred shares convertible
into 144,250,000 shares of common stock, 90,000 Series D Preferred shares convertible into 225,000,000 shares of common stock,
10,000 Series E Preferred shares convertible into 20,000,000 shares of common stock and 76,353,409 shares of common stock underlying
$657,393 in convertible notes, because their impact on the loss per share is anti-dilutive.
For the six
months ended June 30, 2018, the Company has excluded 154,800,000 shares of common stock underlying options, 10,000 Series A Preferred
shares convertible into 100,000,000 shares of common stock, 18,025 Series B Preferred shares convertible into 450,625,000 shares
of common stock, 14,425 Series C Preferred shares convertible into 144,250,000 shares of common stock, 90,000 Series D Preferred
shares convertible into 225,000,000 shares of common stock, 10,000 Series E Preferred shares convertible into 20,000,000 shares
of common stock and 39,158,500 shares of common stock underlying 277,801 in convertible notes, because their impact on the loss
per share is anti-dilutive.
Dilutive
per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities,
using the treasury stock method if their effect would be dilutive.
Recently Adopted Accounting
Pronouncements
Management
reviewed accounting pronouncements issued during the quarter ended June 30, 2019, and the following pronouncements were adopted
during the period.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASC
842”). Under ASC 842, lessees are recognized as a right-of-use asset and a
lease
liability
for all
leases
, other than those that meet the definition of a short-term
lease
.
For income statement purposes,
leases
are classified as either operating
or finance. Operating
leases
are expensed on a straight-line basis, similar
to current operating
leases
, while finance
leases
result
in a front-loaded pattern, similar to current capital
leases
.
The Company
adopted ASC 842 effective January 1, 2019 and elected certain available transitional practical expedients.
Management
reviewed accounting pronouncements issued during the year ended December 31, 2018, and the following pronouncements were adopted
during the period.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). The core principle
of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects
the consideration to which an entity expects to be entitled for those goods or services. The standard is effective for annual periods
beginning after December 15, 2017, and interim periods therein. The Company follows paragraph 606 of the FASB Accounting Standards
Codification for revenue recognition and ASU 2014-09, adopting the pronouncements on January 1, 2018. The company considers revenue
realized or realizable and earned when services are performed to such a degree that the performed service is delivered or deliverable
to the client, or when a tangible item, such as interior décor or signage, is delivered to the client. Since the Company
was already recognizing revenue in a manner consistent with paragraph 606 of the FASB Accounting Standards Codification, there
was no material impact on prior year results.
ASU
2014-09 supersedes existing guidance on revenue recognition with a five-step model for recognizing and measuring revenue from contracts
with customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts
with customers to improve comparability within industries, across industries, and across capital markets. The underlying principle
is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity
expects to be entitled to in exchange for those goods or services. The guidance also requires a number of disclosures regarding
the nature, amount, timing, and uncertainty of revenue and the related cash flows. The guidance can be applied retrospectively
to each prior reporting period presented (full retrospective method) or retrospectively with a cumulative effect adjustment to
retained earnings for initial application of the guidance at the date of initial adoption (modified retrospective method). The
Company adopted the new standard effective January 1, 2018 using the modified retrospective method applied to those contracts that
were not completed or substantially completed as of January 1, 2018. The timing and measurement of revenue recognition under the
new standard is not materially different than under the old standard. The adoption of the new standard had an immaterial impact
on the Company’s
Condensed
Consolidated Financial Statements
.
Recently Issued Accounting
Pronouncements Not Yet Adopted
In
June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit
losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected
loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting
periods, and interim periods within those years, beginning after December 15, 2019. We are currently in the process of evaluating
the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In January
2017, the FASB issued 2017-04, Intangibles
- Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill
Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative
assessment. Instead, under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the
carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of
goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.
The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
Income Taxes
The
Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is
based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance
based on the amount of tax benefits that, based on available evidence, is not expected to be realized. The six months ended June
30, 2019, we used the federal tax rate of 21% in our determination of the deferred tax assets and liabilities balances.
|
|
For the 6 months ended
|
|
|
June 30, 2019
|
|
|
|
Current tax provision:
|
|
|
|
|
Federal
|
|
|
|
|
Taxable income
|
|
$
|
—
|
|
Total current tax provision
|
|
$
|
—
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
Federal
|
|
|
|
|
Loss carryforwards
|
|
$
|
2,956,834
|
|
Change in valuation allowance
|
|
|
(2,956,834
|
)
|
Total deferred tax provision
|
|
$
|
—
|
|
3. REVENUE RECOGNITION
On January
1, 2018, the Company adopted ASU 2014-09
Revenue from Contracts with Customers
and all subsequent amendments to the ASU
(collectively, “ASC 606”),
using the modified retrospective method applied to those contracts
which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are
presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic
accounting under Topic 605. Revenues are recognized when control of the promised goods or services is transferred to our customers,
in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The core
principles of revenue recognition under ASC 606 includes the following five criteria:
|
1.
|
Identify the contract with the customer
|
Contract with our customers may
be oral, written, or implied. A written and signed contract stating the terms and conditions is the preferred method and is consistent
with most customers. The terms of a written contract may be contained within the body of an email, during which proposals are made
and campaign plans are outlined, or it may be a stand-alone document signed by both parties. Contracts that are oral in nature
are consummated in status and pitch meetings and may be later followed up with an email detailing the terms of the arrangement,
along with a proposal document. No work is commenced without an understanding between the Company and our customers, that a valid
contract exists.
|
2.
|
Identify the performance obligations in the contract
|
Our sales and account management
teams define the scope of services to be offered, to ensure all parties are in agreement and obligations are being delivered to
the customer as promised. The performance obligation may not be fully identified in a mutually signed contract, but may be outlined
in email correspondence, face-to-face meetings, additional proposals or scopes of work, or phone conversations.
|
3.
|
Determine the transaction price
|
Pricing is discussed and identified
by the operations team prior to submitting a proposal to the customer. Based on the obligation presented, third-party service pricing
is established, and time and labor are estimated, to determine the most accurate transaction pricing for our customer. Price is
subject to change upon agreed parties, and could be fixed or variable, milestone focused or time and materials.
|
4.
|
Allocate the transaction price to the performance obligations
in the contract
|
If a contract involves multiple
obligations, the transaction pricing is allocated accordingly, during the performance obligation phase (criteria 2 above).
|
5.
|
Recognize revenue when (or as) we satisfy a performance obligation
|
The Company uses several means
to satisfy the performance obligations:
|
a.
|
Billable Hours
– The Company employs a time tracking
system where employees record their time by project. This method of satisfaction is used for time and material projects, change
orders, website edits, revisions to designs, and any other project that is hours-based. The hours satisfy the performance obligation
as the hours are incurred.
|
|
b.
|
Ad Spend
- To satisfy ad spend, the Company generates analytical
reports monthly or as required to show how the ad dollars were spent and how the targeting resulted in click-throughs. The ad spend
satisfies the performance obligation, regardless of the outcome or effectiveness of the campaign. In addition, the Company utilizes
third party invoices after the ad dollars are spent, in order to satisfy the obligation.
|
|
c.
|
Milestones
– If the contract requires milestones to
be hit, then the Company satisfies the performance obligation when that milestone is completed and presented to the customer for
review. As each phase of a project is complete, we consider it as a performance obligation being satisfied and transferred to the
customer. At this point, the customer is invoiced the amount due based on the transaction pricing for that specific phase and/or
we apply the customer deposit to recognize revenue.
|
|
d.
|
Monthly Retainer
– If the contract is a retainer for
work performed, then the customer is paying the Company for its expertise and accessibility, not for a pre-defines amount of output.
In this case, the obligation is satisfied at the end of the period, regardless of the amount of work effort required.
|
|
e.
|
Hosting
– Monthly recurring fees for hosting are recognized
on a monthly basis, at a fixed rate. Hosting contracts are typically one-year and reviewed annually for renewal. Prices are subject
to change at management discretion.
|
The Company
generates income from four main revenue streams: data science, creative design, web development, digital marketing, and other.
Each revenue stream is unique, and includes the following features:
Data Science
We
analyze big data (large volume of information) to reveal patterns and trends associated with human behavior and interactions that
can lead to better decisions and strategic business moves. As a result of our data science work, our clients are able to make informed
and valuable decisions to positively impact their bottom lines. We classify revenue as data science that includes
polling,
research, modeling, data fees, consulting and reporting.
Contracts are generated to assure both the
Company and the client are committed to partnership and both agree to the defined terms and conditions and are typically less than
one year. Transaction pricing is usually a lump sum, which is estimated by specific project requirements. The Company recognizes
revenue when performance obligations are met, including, when the data sciences service is performed, polling is conducted, or
support hours are expended. If the data sciences service is a fixed fee retainer, then the obligation is earned at the end of the
period, regardless of how much service is performed.
Creative
Design
We
provide branding and creative design services which set apart our clients from their competitors and establish themselves in their
specific market. We believe in showcasing our client’s brand uniquely and creatively to infuse the public with curiosity
to learn more. We classify revenue as creative design that includes
branding, photography, copyrighting, printing, signs
and interior design.
Contracts are generated to assure both the company and the client are committed
to partnership and both agree to the defined terms and conditions and are typically less than one year. The Company recognizes
revenue when performance obligations are met, usually when creative design services obligations are complete, when the hours are
recorded, designs are presented, website themes are complete, or any other criteria as mutually agreed.
Web
Development
We develop
websites that attract high levels of traffic for our clients. We offer our clients the expertise to manage and protect their website,
and the agility to adjust their online marketing strategy as their business expands.
We classify revenue
as web development that includes
website coding, website patch installs, ongoing development support and fixing inoperable
sites.
Contracts are generated to assure both the company and the client are committed to the partnership
and both agree to the defined terms and conditions. Although most projects are long-term (6-8 months) in scope, we do welcome short-term
projects which are invoiced as the work is completed at a specified hourly rate. In addition, we offer monthly hosting support
packages, which ensures websites are functioning properly. The Company records web development revenue as earned, when the developer
hours are recorded (if T&M arrangements) or when the milestones are achieved (if a milestone arrangement).
Digital
Marketing
We
have a reputation for providing digital marketing services that get results. Whether presenting a vibrant but simple message about
our clients that will enlighten their audience or deploying an influential digital marketing political campaign across one or multiple
social media platforms, our marketing strategist are poised to execute and deliver valuable marketing results to our clients. We
classify revenue as digital marketing that includes
ad spend, SEO management and digital ad support.
Billable
hours and advertising spending are estimated based on client specific needs and subject to change with client concurrence. Revenue
is recognized when ads are run on one of the third-party platforms or when the hours are recorded by the digital marketing specialist,
if the obligation relates to support or services.
Other
We
offer services that do not fit into the other four categories but rely heavily on the “other” services to provide the
entire support package for our clients. Included in this category are
domain name management, account management, web hosting,
client training, and partner commissions. Revenue is recognized for these services as the service is performed (such as account
management or training) or during the month in which the service was provided (such as hosting, partner commissions and domain
name registration).
Included
in creative design and digital marketing revenues are costs that are reimbursed by our clients, including third party services,
such as photographers and stylists, furniture, supplies, and the largest component, digital advertising. We have determined, based
on our review, that the amounts classified as reimbursable costs should be recorded as gross (principal), due to the following
factors:
|
-
|
The Company is the primary obligor in the arrangement;
|
|
-
|
We have latitude in establishing price;
|
|
-
|
We have discretion in supplier selection; and
|
|
-
|
The Company has credit risk
|
During the
six months ended June 30, 2019 and 2018, we included $1,721,404 and 1,813,527, respectively, in revenue, related to reimbursable
costs.
The deferred
revenue and customer deposits as of June 30, 2019 and December 31, 2018 was $1,244,473 and $1,081,570, respectively.
For the
six months ended June 30, 2019 and 2018 (unaudited), revenue was disaggregated into the five categories as follows:
|
|
Six Months Ended June 30, 2019 (unaudited)
|
|
Six Months Ended June 30, 2018 (unaudited)
|
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
Data Sciences
|
|
$
|
451,052
|
|
|
$
|
10,800
|
|
|
$
|
461,852
|
|
|
$
|
226,100
|
|
|
$
|
20,0000
|
|
|
$
|
246,100
|
|
Design
|
|
|
1,018,894
|
|
|
|
594
|
|
|
|
1,019,488
|
|
|
|
948,012
|
|
|
|
154,731
|
|
|
|
1,102,743
|
|
Development
|
|
|
1,177,342
|
|
|
|
21,518
|
|
|
|
1,198,860
|
|
|
|
780,941
|
|
|
|
111,879
|
|
|
|
892,820
|
|
Digital Advertising
|
|
|
1,433,751
|
|
|
|
140,074
|
|
|
|
1,573,825
|
|
|
|
1,013,738
|
|
|
|
1,544,015
|
|
|
|
2,557,753
|
|
Other
|
|
|
526,964
|
|
|
|
26,579
|
|
|
|
553,543
|
|
|
|
477,251
|
|
|
|
197,692
|
|
|
|
674,943
|
|
Total
|
|
$
|
4,608,003
|
|
|
$
|
199,565
|
|
|
$
|
4,807,568
|
|
|
$
|
3,446,042
|
|
|
$
|
2,028,317
|
|
|
$
|
5,474,359
|
|
4. LIQUIDITY
AND OPERATIONS
The
Company had net loss of $1,069,633 for the six months ended
June
30, 2019
, and $1,152,343 the six months ended
June
30, 2018
, and net cash used in operating activities of $820,728 and $300,034, in the same periods,
respectively.
While the
Company expects that its capital needs in the foreseeable future may be met by cash-on-hand and projected positive cash-flow, there
is no assurance that the Company will be able to generate enough positive cash flow or have sufficient capital to finance its growth
and business operations, or that such capital will be available on terms that are favorable to the Company or at all. In the current
financial environment, it could become difficult for the Company to obtain working capital and other business financing.
There is no assurance that the Company would be able to obtain additional working capital through the sale of its securities or
from any other source.
5. BUSINESS ACQUISITIONS
Parscale Creative,
Inc.
On August
1, 2017, the Company completed the acquisition of Parscale Creative, Inc., a Nevada corporation (“Parscale Creative”).
As of that date, the Company’s wholly owned operating subsidiary, Parscale Digital, Inc., a Nevada corporation (“Parscale
Digital”), merged with Parscale Creative, and the name of the combined subsidiary was changed to Parscale Digital. The total
purchase price of $7,945,000, was paid in the form of the issuance of ninety thousand (90,000) shares of the Company's Series D
Convertible Preferred Stock, at a liquidation preference of one hundred dollars ($100) per share, plus dividend payments based
on 5% of adjusted revenue of Parscale Digital. Adjusted revenue is defined as total revenue, minus digital marketing media buys.
Based on the growth of the Parscale Digital, the actual amount of the dividend payments is estimated to be in the range of $850,000
and $1,300,000, over 36 months, if we achieve 0.5% to 3% monthly adjusted revenue growth. The dividend payments are recorded as
a reduction to additional paid in capital. During the six months ended June 30, 2019, we did not pay any dividend related to the
Series D Convertible Preferred stock, and as of June 30, 2019, the accrued balance of the Series D Preferred dividend payable was
$184,435. At the closing, Brad Parscale, the 100% owner of Parscale Creative, was appointed to the Company’s Board of Directors.
The Company assumed net liabilities of $535,000, related to this acquisition.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $7,945,000, which was the fair value
of Parscale Creative at the time of acquisition. The assets and liabilities of Parscale Creative were recorded at their respective
fair values as of the date of acquisition. The acquisition date estimated fair value of the consideration transferred and purchase
price allocation consisted of the following:
Cash
|
|
$
|
200,000
|
|
Customer deposits and accrued expenses
|
|
|
(535,000
|
)
|
Net tangible liabilities
|
|
$
|
(335,000
|
)
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
280,000
|
|
Brand name
|
|
|
1,930,000
|
|
Customer list
|
|
|
2,090,000
|
|
Goodwill
|
|
|
3,645,000
|
|
Total purchase price
|
|
$
|
7,945,000
|
|
Issuance of series D convertible preferred stock
|
|
$
|
7,610,000
|
|
Net tangible liabilities
|
|
|
335,000
|
|
Total purchase price
|
|
$
|
7,945,000
|
|
|
|
|
|
|
WebTegrity,
LLC
On November
15, 2017, the Company completed the acquisition of WebTegrity. As of that date, the Company’s operating subsidiary, Parscale
Digital, Inc., a Nevada corporation, merged with WebTegrity and the name of the combined subsidiary remained unchanged as Parscale
Digital. On April 16, 2018, we organized WebTegrity as a Nevada corporation, and split WebTegrity from Parscale Digital. The total
purchase price of $900,000, was paid in the form of the issuance of ten thousand (10,000) shares of the Company's Series E Convertible
Preferred Stock, at a liquidation preference of one hundred dollars ($100) per share.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $900,000, which was the fair value of
WebTegrity at the time of acquisition. The assets and liabilities of WebTegrity were recorded at their respective fair values as
of the date of acquisition. The acquisition date estimated fair value of the consideration transferred and purchase price allocation
consisted of the following:
Current assets
|
|
$
|
78,000
|
|
Fixed assets
|
|
|
30,000
|
|
Liabilities
|
|
|
(48,000
|
)
|
Net assets
|
|
|
60,000
|
|
Brand name
|
|
|
130,000
|
|
Customer list
|
|
|
280,000
|
|
Goodwill
|
|
|
430,000
|
|
Total purchase price
|
|
$
|
900,000
|
|
Issuance of Series E Convertible Preferred Stock
|
|
$
|
900,000
|
|
The
above Parscale Creative and WebTegrity acquisitions are based on a preliminary purchase price allocation
,
and include identifiable intangible assets, which were based on their estimated fair values as of the acquisition date. The excess
of purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as
goodwill. The allocation of the purchase price required management to make significant estimates in determining the fair values
of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values
were based on information obtained from management of the acquired companies and historical experience and, with respect to the
long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm.
Parscale Media, LLC
On August
1, 2017, the Company entered into a purchase agreement with Brad Parscale, to purchase Parscale Media, LLC, a website hosting business,
formed under the laws of Texas. Under the terms of the agreement, the Company agreed to pay Mr. Parscale $1,000,000 in cash, upon
closing the transaction, but in no event later than January 1, 2018.
On February
1, 2018, the Company entered into an amended purchase agreement which provided for the issuance of a promissory note to Mr. Parscale
as consideration for the acquisition, under which the Company agreed to pay Mr. Parscale $1,000,000 in twelve equal installments,
and interest of 4% on the promissory note (the “Parscale Media Note”). On November 20, 2018, the Company exchanged
the remaining balance of the Parscale Media Note for an equal amount owed by Mr. Parscale to the Company. As of November 20, 2018,
the balance on the Parscale Media Note was zero.
Current assets
|
|
$
|
—
|
|
Brand name
|
|
|
100,000
|
|
Customer list
|
|
|
400,000
|
|
Goodwill
|
|
|
500,000
|
|
Total purchase price
|
|
$
|
1,000,000
|
|
|
|
|
|
|
During
the year ended December 31, 2018, it was determined that, due to the Company never having paid federal income taxes and having
a large net operating loss (NOL), it is unlikely we will pay federal income taxes in the foreseeable future. This change in estimate
resulted in the Company removing the deferred tax liability from the purchase price of Parscale Media, with a corresponding adjustment
to goodwill. During the year ended December 31, 2018, this change in estimate resulted in a reduction of deferred tax liability
to zero and goodwill to $500,000, or reductions of $125,000 to each.
The
above Parscale Creative, WebTegrity, and Parscale Media acquisitions are based on a preliminary purchase price allocation
,
and include identifiable intangible assets, which were based on their estimated fair values as of the acquisition date. The excess
of purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as
goodwill. The allocation of the purchase price required management to make significant estimates in determining the fair values
of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values
were based on information obtained from management of the acquired companies and historical experience and, with respect to the
long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm.
Pro forma results
The
following tables set forth the unaudited pro forma results of the Company as if the acquisitions of Parscale Creative and WebTegrity
had taken place on the first day of the period presented. These combined results are not necessarily indicative of the results
that may have been achieved had the companies been combined as of the first day of the period presented.
|
|
Six months ended,
June 30, 2019
|
|
Six months ended,
June 30, 2018
|
Total revenues
|
|
$
|
4,807,568
|
|
|
$
|
5,474,359
|
|
Net income (loss)
|
|
|
(1,069,633
|
)
|
|
|
(1,152,343
|
)
|
Basic and diluted net earnings per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Domain Name
On
June 26, 2015, the Company purchased the rights to the domain “CLOUDCOMMERCE.COM”, from a private party at a purchase
price of $20,000, plus transaction costs of $202, which is used as the main landing page for the Company. The total recorded cost
of this domain of $20,202 has been included in other assets on the balance sheet. As of
June 30
,
2015, we determined that this domain has an indefinite useful life, and as such, is not included in depreciation and amortization
expense. The Company will assess this intangible asset annually for impairment, in addition to it being classified with indefinite
useful life.
Trademark
On
September 22, 2015, the Company purchased the trademark rights of “CLOUDCOMMERCE”, from a private party at a purchase
price of $10,000. The total recorded cost of this trademark of $10,000 has been included in other assets on the balance sheet.
The trademark expires in 2020 and may be renewed for an additional 10 years. As of September 30, 2015, we determined that this
intangible asset has a definite useful life of 174 months, and as such, will be included in depreciation and amortization expense.
For the six months ended
June 30, 2019
and 2018, the Company included $345 and $345, respectively,
in depreciation and amortization expense related to this trademark. As of June 30, 2019, the balance on this intangible asset was
$7,415
Non-Compete Agreements
On August
1, 2017, the Company entered into a merger agreement with Brad Parscale, pursuant to which Parscale Creative merged with and into
Parscale Digital. The terms of the merger agreement include a non-compete agreement with Brad Parscale, for a period of three years.
The Company has placed a value on this non-compete agreement at $280,000, amortized over a period of 36 months. For the six months
ended June 30, 2019 and 2018 we have included $46,667 and $46,667 in amortization expense related to this non-compete agreement.
As of June 30, 2019, the balance on this intangible asset was $101,111.
Customer List
On August
1, 2017, the Company acquired Parscale Creative, and have calculated the value of the customer list acquired at $2,090,000, with
a useful life of 3 years. For the six months ended June 30, 2019 and 2018 we included $331,611 and $339,972 in depreciation and
amortization expense related to the customer list, and as of June 30, 2019, the remaining balance of this intangible asset was
$718,492.
On November
15, 2017, the Company acquired WebTegrity, and have calculated the value of the customer list acquired at $280,000, with a useful
life of 3 years. For the six months ended June 30, 2019 and 2018, we included $42,964 and $44,815 in depreciation and amortization
expense related to the customer list, and as of June 30, 2019, the remaining balance of this intangible asset was $114,570.
On February
1, 2018, the Company acquired Parscale Media, and have calculated the value of the customer list acquired at $400,000, with a useful
life of 3 years. For the six months ended June 30, 2019 and 2018, we included $66,667 and $55,556 in depreciation and amortization
expense related to the customer list, and as of June 30, 2019, the remaining balance of this intangible asset was $211,111.
Brand Name
On August
1, 2017, the Company acquired Parscale Creative, and have calculated the value of the brand name at $1,930,000, which is
included
in other assets on the balance sheet. As of
June 30, 2019
, we have determined that this brand
name has an indefinite useful life, and as such, is not included in depreciation and amortization expense. The Company will assess
this intangible asset annually for impairment, in addition to it being classified with an indefinite useful life
.
On November
15, 2017, the Company acquired WebTegrity, and have calculated the value of the brand name at $130,000, which is
included
in other assets on the balance sheet. As of
June 30, 2019
, we have determined that this brand
name has an indefinite useful life, and as such, is not included in depreciation and amortization expense. The Company will assess
this intangible asset annually for impairment, in addition to it being classified with an indefinite useful life
.
On February
1, 2018, the Company acquired Parscale Media, and have calculated the value of the brand name at $100,000, which is
included
in other assets on the balance sheet. As of
June 30, 2019
, we have determined that this brand
name has an indefinite useful life, and as such, is not included in depreciation and amortization expense. The Company will assess
this intangible asset annually for impairment, in addition to it being classified with an indefinite useful life
.
Goodwill
On August 1, 2017, the Company
acquired Parscale Creative, and have calculated the value of the goodwill at $3,645,000, which is
included
in other assets on the balance sheet. The Company will assess this intangible asset for impairment, if an event occurs that may
affect the fair value, or at least annually.
On November 15, 2017, the Company
acquired WebTegrity, and have calculated the value of the goodwill at $430,000, which is
included in
other assets on the balance sheet. The Company will assess this intangible asset for impairment, if an event occurs that may affect
the fair value, or at least annually.
On February 1, 2018, the Company
acquired Parscale Media, and have calculated the value of the goodwill at $500,000, which is
included
in other assets on the balance sheet. The Company will assess this intangible asset for impairment, if an event occurs that may
affect the fair value, or at least annually.
The
Company’s intangible assets consist of the following:
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Customer list
|
|
|
2,770,000
|
|
|
|
(1,725,827
|
)
|
|
|
1,044,173
|
|
|
|
2,770,000
|
|
|
|
(1,284,587
|
)
|
|
|
1,485,413
|
|
Non-compete agreement
|
|
|
280,000
|
|
|
|
(178,889
|
)
|
|
|
101,111
|
|
|
|
280,000
|
|
|
|
(132,222
|
)
|
|
|
147,778
|
|
Domain name and trademark
|
|
|
30,201
|
|
|
|
(2,586
|
)
|
|
|
27,615
|
|
|
|
30,201
|
|
|
|
(2,241
|
)
|
|
|
27,960
|
|
Brand name
|
|
|
2,160,000
|
|
|
|
—
|
|
|
|
2,160,000
|
|
|
|
2,160,000
|
|
|
|
—
|
|
|
|
2,160,000
|
|
Goodwill
|
|
|
4,575,000
|
|
|
|
—
|
|
|
|
4,575,000
|
|
|
|
4,575,000
|
|
|
|
—
|
|
|
|
4,575,000
|
|
Total
|
|
|
9,815,201
|
|
|
|
(1,907,302
|
)
|
|
|
7,907,899
|
|
|
|
9,815,201
|
|
|
|
(1,419,050
|
)
|
|
|
8,396,151
|
|
Total
amortization expense charged to operations for the six months ended June 30, 2019, and 2018 were
$488,252 and $487,354, respectively.
The following table of remaining amortization of finite life intangible assets, for the years
ended December 31, includes the intangible assets acquired, in addition to the CloudCommerce trademark:
|
2019 (excluding six months ended June 30, 2019)
|
|
|
$
|
488,253
|
|
|
2020
|
|
|
|
646,953
|
|
|
2021
|
|
|
|
11,801
|
|
|
2022
|
|
|
|
690
|
|
|
2023
|
|
|
|
690
|
|
|
Thereafter
|
|
|
|
4,310
|
|
|
Total
|
|
|
$
|
1,152,697
|
|
7. CREDIT FACILITIES
Lines of Credit
The
Company has assumed an outstanding liability related to a bank line of credit agreement from the acquisition of Indaba. As of December
31, 2017, the balance was zero.
On
November 30, 2016, CLWD Operations entered into a 12-month agreement wherein amounts due from our customers were pledged to a third
party, in exchange for a borrowing facility in amounts up to a total of $400,000. The agreement was amended on March 23, 2017,
which increased the allowable borrowing amount by $100,000, to a maximum of $500,000. On November 30, 2017, the agreement auto
renewed for another twelve months. The proceeds from the facility are determined by the amounts we invoice our customers. We record
the amounts due from customers in accounts receivable and the amount due to the third party as a liability, presented as a “Lines
of credit” on the Balance Sheet. During the term of this facility, the third-party lender has a first priority security interest
in CLWD Operations, and therefore, we will require such third-party lender’s written consent to obligate CLWD Operations
further or pledge our assets against additional borrowing facilities. Because of this position, it may be difficult for CLWD Operations
to secure additional secured borrowing facilities. The cost of this secured borrowing facility is 0.05% of the daily balance. During
the six months ended
June 30, 2019
and 2018, the Company included $1,406 and $15,079, respectively, in interest
expense, related to this secured borrowing facility, and as of
June
30, 2019
and December 31, 2018, the outstanding balances were $36,699
and zero, respectively.
On
October 19, 2017, Parscale Digital entered into a 12 month agreement with a third party to sell the rights to amounts due from
our customers, in exchange for a borrowing facility in amounts up to a total of $500,000. The agreement was amended on April 12,
2018, which increased the allowable borrowing amount by $250,000, to a maximum of $750,000. The proceeds from the facility are
determined by the amounts we invoice our customers. We evaluated this facility in accordance with ASC 860, classifying it as a
secured borrowing arrangement. As such, we record the amounts due from customers in accounts receivable and the amount due to the
third party as a liability, presented as a “line of credit” on the Balance Sheet. During the term of this facility,
the third party lender has a first priority security interest in Parscale Digital, and will, therefore, we will require such third
party lender’s written consent to obligate it further or pledge our assets against additional borrowing facilities. Because
of this position, it may be difficult for Parscale Digital to secure additional secured borrowing facilities. The cost of this
secured borrowing facility is 0.05% of the daily balance. During the six months ended
June
30, 2019
and 2018, the Company included $30,823 and $16,712, respectively,
in interest expense, related to this secured borrowing facility, and as of
June
30, 2019
and December 31, 2018, the outstanding balances were $487,667
and $102,988, respectively.
On
August 2, 2018, Giles Design Bureau, WebTegrity, and Data Propria entered into a 12 month agreements with a third party to sell
the rights to amounts due from our customers, in exchange for borrowing facilities in amounts up to a total of $150,000, $150,000
and $600,000, respectively. The proceeds from the facility are determined by the amounts we invoice our customers. We evaluated
these facilities in accordance with ASC 860, classifying as secured borrowing arrangements. As such, we record the amounts due
from customers in accounts receivable and the amount due to the third party as a liability, presented as a “line of credit”
on the Balance Sheet. During the term of these facilities, the third party lender has a first priority security interest in the
respective entities, and will, therefore, we will require such third party lender’s written consent to obligate the entities
further or pledge our assets against additional borrowing facilities. Because of this position, it may be difficult for the entities
to secure additional secured borrowing facilities. The cost of this secured borrowing facilities is
0.056%,
0.056% and 0.049%, respectively, of the daily balance. During the six months ended
June
30, 2019
and 2018, the Company included $73,023 and zero, respectively, in interest expense, related to these secured borrowing
facilities, and as of
June 30, 2019
and December 31, 2018, the
combined outstanding balances were $123,320 and $321,106, respectively.
8. CONVERTIBLE
NOTES PAYABLE
During the
quarter ended December 31, 2015, the Company signed an addendum to each of its outstanding convertible notes, fixing the conversion
price at $0.004. Before the addenda, the conversion price for each of the notes was tied to the trading price of the Company’s
common stock. Because of that fluctuation, the Company was required to report derivative gains and losses each quarter, which was
included in earnings, and an overall derivative liability balance on the balance sheet. Since the addenda, the Company has eliminated
the derivative liability balance on the balance sheet and discontinued the gain/loss reporting on the income statement.
On
March 25, 2013, the Company issued a convertible promissory note (the “March 2013 Note”) in the amount of up to $100,000,
at which time an initial advance of $50,000 was received to cover operational expenses. The lender, a related party, advanced an
additional $20,000 on April 16, 2013, $15,000 on May 1, 2013 and $15,000 on May 16, 2013, for a total draw of $100,000. The terms
of the March 2013 Note, as amended, allow the lender to convert all or part of the outstanding balance plus accrued interest, at
any time after the effective date, at a conversion price of $0.004 per share. The March 2013 Note bears interest at a rate of 10%
per year and matured on March 25, 2018. The Company is working with the lender to extend the maturity date, and remove the March
2013 Note from default status. On May 23, 2014, the lender converted $17,000 of the outstanding balance and accrued interest of
$1,975 into 4,743,699 shares of common stock. On October 14, 2014, the lender converted $17,000 of the outstanding balance and
accrued interest of $2,645 into 4,911,370 shares of common stock. On April 17, 2018, the lender converted $16,000 of the outstanding
balance and accrued interest of $8,106 into 6,026,301 shares of common stock. The balance of the March 2013 Note, as of
June
30, 2019
was $80,857, which includes $30,857 of accrued interest.
On
April 20, 2018, the Company issued a convertible promissory note (the “April 2018 Note”) in the amount of up to $200,000,
at which time an initial advance of $200,000 was received to cover operational expenses. The terms of the April 2018 Note, as amended,
allow the lender, a related party, to convert all or part of the outstanding balance plus accrued interest, at any time after the
effective date, at a conversion price of $0.01 per share. The April 2018 Note bears interest at a rate of 5% per year and matures
on April 20, 2021. The balance of the April 2018 Note, as of
June
30, 2019
was $211,945, which includes $11,945 of accrued interest.
On
January 16, 2019 the Company issued a promissory note (the “January 16, 2019 Note”) in the amount of $103,000 at which
time the company received of $100,000, the remaining $3,000 was retained by the lender to cover legal and administrative cost.
The proceeds were used to cover operational expenses. The January 16, 2019 Note bears interest at a rate of 10% per year, is payable
on January 16, 2020, and is convertible into common stock after 180 days. The conversion price is calculated as a 39% discount
off of the average of the two lowest trading prices during the 20 trading days prior to conversion. The balance of the January
16, 2019 Note, as of
June 30, 2019
is $107,656, which includes $4,656 of accrued interest.
On
January 31, 2019 the Company issued a promissory note (the “January 31, 2019 Note”) in the amount of $53,500 at which
time the company received of $50,000, the remaining $3,500 was retained by the lender to cover legal and administrative cost. The
proceeds were used to cover operational expenses. The January 31, 2019 Note bears interest at a rate of 10% per year, is payable
on January 31, 2020, and is convertible into common stock after 180 days. The conversion price is calculated as a 39% discount
off of the lowest trading prices during the 15 trading days prior to conversion. The balance of the January 31, 2019 Note, as of
June 30, 2019
is $55,699, which includes $2,199 of accrued interest.
On
February 21, 2019 the Company issued a promissory note (the “February 21, 2019 Note”) in the amount of $53,000 at which
time the company received of $50,000, the remaining $3,000 was retained by the lender to cover legal and administrative cost. The
proceeds were used to cover operational expenses. The February 21, 2019 Note bears interest at a rate of 10% per year, is payable
on February 21, 2020, and is convertible into common stock after 180 days. The conversion price is calculated as a 39% discount
off of the average of the two lowest trading prices during the 20 trading days prior to conversion. The balance of the February
21, 2019 Note, as of
June 30, 2019
is $54,873, which includes $1,873 of accrued interest.
On
April 24, 2019 the Company issued a promissory note (the “April 24, 2019 Note”) in the amount of $43,000 at which time
the company received of $43,000, the remaining $3,000 was retained by the lender to cover legal and administrative cost. The proceeds
were used to cover operational expenses. The April 24, 2019 Note bears interest at a rate of 10% per year, is payable on April
24, 2020, and is convertible into common stock after 180 days. The conversion price is calculated as a 39% discount off of the
average of the two lowest trading prices during the 20 trading days prior to conversion. The balance of the April 24, 2019 Note,
as of
June 30, 2019
is $43,789, which includes $789 of accrued interest.
On May 02,
2019 the Company issued a promissory note (the “May 02, 2019 Note”) in the amount of $48,500 at which
time the company received of $45,000,
the remaining $3,500 was retained by the lender to cover legal and administrative cost. The proceeds were used to cover operational
expenses. The May 02, 2019 Note bears interest at a rate of 10% per year, is payable on May 02, 2020, and is convertible into common
stock after 180 days. The conversion price is calculated as a 39% discount off of the average of the two lowest trading prices
during the 20 trading days prior to conversion. The balance of the May 02, 2019 Note, as of June 30, 2019 is $49,284, which includes
$784 of accrued interest.
On
June 10, 2019 the Company issued a promissory note (the “June 10, 2019 Note”) in the amount of $53,000 at which time
the company received of $50,000, the remaining $3,000 was retained by the lender to cover legal and administrative cost. The proceeds
were used to cover operational expenses. The June 10, 2019 Note bears interest at a rate of 10% per year, is payable on June 10,
2020, and is convertible into common stock after 180 days. The conversion price is calculated as a 39% discount off of the average
of the two lowest trading prices during the 20 trading days prior to conversion. The balance of the June 10, 2019 Note, as of
June
30, 2019
is $53,290, which includes $290 of accrued interest.
9. NOTES PAYABLE
Related Party
Notes Payable
On
August 3, 2017, the Company issued a promissory note (the “August 3, 2017 Note”) in the amount of $25,000, at which
time the entire balance of $25,000 was received to cover operational expenses. The August 3, 2017 Note bears interest at a rate
of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the August
3, 2017 Note, as of
June 30, 2019
is
$27,582, which includes $2,582 of accrued interest.
On
August 15, 2017, the Company issued a promissory note (the “August 15, 2017 Note”) in the amount of $34,000, at which
time the entire balance of $34,000 was received to cover operational expenses. The August 15, 2017 Note bears interest at a rate
of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the August
15, 2017 Note, as of
June 30, 2019
is
$37,395, which includes $3,395 of accrued interest.
On
August 28, 2017, the Company issued a promissory note (the “August 28, 2017 Note”) in the amount of $92,000, at which
time the entire balance of $92,000 was received to cover operational expenses. The August 28, 2017 Note bears interest at a rate
of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the August
28, 2017 Note, as of
June 30, 2019
is
$100,872 which includes $8,872 of accrued interest.
On
September 28, 2017, the Company issued a promissory note (the “September 28, 2017 Note”) in the amount of $63,600,
at which time the entire balance of $63,600 was received to cover operational expenses. The September 28, 2017 Note bears interest
at a rate of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance
of the September 28, 2017 Note, as of
June 30, 2019
is
$69,193, which includes $5,593 of accrued interest.
On
October 11, 2017, the Company issued a promissory note (the “October 11, 2017 Note”) in the amount of $103,500, at
which time the entire balance of $103,500 was received to cover operational expenses. The October 11, 2017 Note bears interest
at a rate of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance
of the October 11, 2017 Note, as of
June 30, 2019
is
$112,389, which includes $8,889 of accrued interest.
On
October 27, 2017, the Company issued a promissory note (the “October 27, 2017 Note”) in the amount of $106,000, at
which time the entire balance of $106,000 was received to cover operational expenses. The October 27, 2017 Note bears interest
at a rate of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance
of the October 27, 2017 Note, as of
June 30, 2019
is
$114,872, which includes $8,872 of accrued interest.
On
November 15, 2017, the Company issued a promissory note (the “November 15, 2017 Note”) in the amount of $62,000, at
which time the entire balance of $62,000 was received to cover operational expenses. The November 15, 2017 Note bears interest
at a rate of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance
of the November 15, 2017 Note, as of
June 30, 2019
is
$67,028, which includes $5,028 of accrued interest.
On
November 27, 2017, the Company issued a promissory note (the “November 27, 2017 Note”) in the amount of $106,000, at
which time the entire balance of $106,000 was received to cover operational expenses. The November 27, 2017 Note bears interest
at a rate of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance
of the November 27, 2017 Note, as of
June 30, 2019
is
$114,422, which includes $8,422 of accrued interest.
On
November 30, 2017, the Company issued a promissory note (the “November 30, 2017 Note”) in the amount of $30,000, at
which time the entire balance of $30,000 was received to cover operational expenses. The November 30, 2017 Note bears interest
at a rate of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance
of the November 30, 2017 Note, as of
June 30, 2019
is
$32,371, which includes $2,371 of accrued
interest.
On December
19, 2017, the Company issued a promissory note (the “December 19, 2017 Note”) in the amount of $42,000, at which time
the entire balance of $42,000 was received to cover operational expenses. The December 19, 2017 Note bears
interest at a rate of 5% per year
and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the December 19, 2017
Note, as of June 30, 2019 is $45,211, which includes $3,211 of accrued interest.
On
January 3, 2018, the Company issued a promissory note (the “January 3, 2018 Note”) in the amount of $49,000, at which
time the entire balance of $49,000 was received to cover operational expenses. The January 3, 2018 Note bears interest at a rate
of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the January
3, 2018 Note, as of
June 30, 2019
is $52,645, which includes $3,645 of accrued interest.
On
January 30, 2018, the Company issued a promissory note (the “January 30, 2018 Note”) in the amount of $72,000, at which
time the entire balance of $72,000 was received to cover operational expenses. The January 30, 2018 Note bears interest at a rate
of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the January
30, 2018 Note, as of
June 30, 2019
is $77,090, which includes $5,090 of accrued interest.
On February
1, 2018, the Company entered into an amended purchase agreement and promissory note with Mr. Parscale, which facilitated the closing
of the Parscale Media transaction and established a revised payment arrangement, under which the Company agreed to pay Mr. Parscale
$1,000,000 in twelve equal installments, which includes 4% interest. On November 20, 2018, the Company exchanged the remaining
balance of the Parscale Media Note for an equal amount owed by Mr. Parscale to the Company. As of November 20, 2018, the balance
on the Parscale Media Note was zero.
On
February 2, 2018, the Company issued a promissory note (the “February 2, 2018 Note”) in the amount of $85,000, at which
time the entire balance of $85,000 was received to cover operational expenses. The February 2, 2018 Note bears interest at a rate
of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the February
2, 2018 Note, as of
June 30, 2019
is $90,974, which includes $5,974 of accrued interest.
As
of
June 30, 2019
, and December 31, 2018, the notes payable due to related parties totaled $942,042
and $920,470, respectively.
Third Party
Notes Payable
On
June 29, 2018, the Company issued a promissory note (the “June 2018 Note”), in the amount of $750,000, at which time
the Company received $735,000. The remaining $15,000 was retained by the lender as an origination fee. On February 28, 2019 refinanced
this promissory note and increased the balance to $1,000,000 (the “February 28, 2019 Note”). As of the date of closing
the lender withheld $25,443 from the $375,000 balance increase as an origination fee, netting $349,557 to the Company, and on April
3, 2019 the Company received the remaining $250,000. The February 28, 2019 Note bears interest at a rate of 18% per year and is
amortized over 12 months. During the six months ended June 30, 2019, the Company made payments totaling $374,347, and included
$66,457 in interest expense related to this note. As of
June 30, 2019
, the outstanding balance
on the February 28, 2019 Note was $666,667.
The company is not in default on this note.
10. CAPITAL STOCK
At June 30,
2019 and December 31, 2018, the Company’s authorized stock consists of 2,000,000,000 shares of common stock, par value $0.001
per share. The Company is also authorized to issue 5,000,000 shares of preferred stock, par value of $0.001 per share. The
rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to
issuance of such shares. The conversion of certain outstanding preferred stock could have a significant impact on our common stockholders.
Series A Preferred
The
Company has designated 10,000 shares of its preferred stock as Series A Preferred Stock. Each share of Series A Preferred Stock
is convertible into 10,000 shares of the Company’s common stock. The holders of outstanding shares of Series A Preferred
Stock shall be entitled to receive dividends, payable quarterly, out of any assets of the Corporation legally available therefor,
at the rate of $8 per share per annum, payable in preference and priority to any payment of any dividend on the common stock. As
of June 30, 2019, the Company has 10,000 shares of Series A Preferred Stock outstanding.
During the six months ended June
30, 2019 and 2018, we paid dividends of $20,000 and $40,000, respectively, to the holders of Series A Preferred stock. As of June
30, 2019, the balance owed on the Series A Preferred stock dividend was $40,000.
Series B Preferred
The Company
has designated 25,000 shares of its preferred stock as Series B Preferred Stock. Each share of Series B Preferred Stock shall have
a stated value of $100. The Series B Preferred Stock is convertible into shares of fully paid and non-assessable shares of the
Company's common stock by dividing the stated value by a conversion price of $0.004 per share. Series B Preferred Stock shall not
be entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action
or consideration at any meeting of stockholders of the Company. As of June 30, 2019, the Company has 18,025 shares of Series B
Preferred Stock outstanding.
Series C Preferred
The Company
has designated 25,000 shares of its preferred stock as Series C Preferred Stock. Each share of Series C Preferred Stock shall have
a stated value of $100. The Series C Preferred Stock is convertible into shares of fully paid and non-assessable shares of the
Company's common stock by dividing the stated value by a conversion price of $0.01 per share. Series C Preferred Stock shall not
be entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action
or consideration at any meeting of stockholders of the Company. As of June 30, 2019, the Company has 14,425 shares of Series C
Preferred Stock outstanding.
Series D Preferred
The
Company has designated 90,000 shares of its preferred stock as Series D Preferred Stock. Each share of Series D Preferred Stock
shall have a stated value of $100. The Series D Preferred Stock
is convertible into common stock at a ratio of 2,500 shares
of common stock per share of preferred stock, and pays a quarterly dividend, calculated as (1/90,000) x (5% of the Adjusted Gross
Revenue) of the Company’s subsidiary Parscale Digital.
Adjusted Gross Revenue shall mean the top
line gross revenue of Parscale Digital, as calculated under GAAP (generally accepted accounting principles) less any reselling
revenue attributed to third party advertising products or service, such as, but not limited to, search engine keyword campaign
fees, social media campaign fees, radio or television advertising fees, and the like. Series D Preferred Stock shall not be entitled
to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration
at any meeting of stockholders of the Company. As of June 30, 2019, the Company has 90,000 shares of Series D Preferred Stock outstanding.
During the six months ended
June 30, 2019
, and 2018, we paid dividends of zero, and $53,132
respectively, to the holders of Series D Preferred stock. As of June 30, 2019, the balance owed on the Series D Preferred stock
dividend was $183,435.
Series E Preferred
The Company
has designated 10,000 shares of its preferred stock as Series E Preferred Stock. Each share of Series E Preferred Stock shall have
a stated value of $100. The Series E Preferred Stock is convertible into shares of fully paid and non-assessable shares of the
Company's common stock by dividing the stated value by a conversion price of $0.05 per share. Series E Preferred Stock shall not
be entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action
or consideration at any meeting of stockholders of the Company. As of June 30, 2019, the Company has 10,000 shares of Series E
Preferred Stock outstanding.
11. STOCK OPTIONS AND WARRANTS
Stock Options
On
July 10, 2003, the Company adopted the Warp 9, Inc. Stock Option Plan for directors, executive officers, and employees of and key
consultants to the Company. Pursuant to the now terminated plan, the Company could issue 5,000,000 shares of common stock. The
plan was administered by the Company’s Board of Directors, and options granted under the plan could be either incentive options
or nonqualified options. Each option was exercisable in full or in installment and at such time as designated by the Board. Notwithstanding
any other provision of the plan or of any option agreement, each option expired on the date specified in the option agreement,
which date was to be no later than the tenth anniversary of the date on which the option was granted (fifth anniversary in the
case of an incentive option granted to a greater-than-10% stockholder). The purchase price per share of the common stock under
each incentive option was to be no less than the fair market value of the common stock on the date the option was granted (110%
of the fair market value in the case of a greater-than-10% stockholder). The purchase price per share of the common stock under
each nonqualified option was to be specified by the Board at the time the option is granted, and could be less than, equal to or
greater than the fair market value of the shares of common stock on the date such nonqualified option was granted, but was to be
no less than the par value of shares of common stock. The plan provided specific language as to the termination of options granted
thereunder.
The
following options were issued outside of the Warp 9, Inc. Stock Option Plan:
On
August 1, 2017, we granted non-qualified stock options to purchase up to 10,000,000 shares of our common stock to a key employee,
at a price of $0.01 per share. The stock options vest equally over a period of 36 months and expire August 1, 2022. These options
allow the optionee to exercise on a cashless basis, resulting in no cash payment to the company upon exercise. If the optionee
exercises on a cashless basis, then the above water value (difference between the option price and the fair market price at the
time of exercise) is used to purchase shares of common stock. Under this method, the number of shares of common stock issued will
be less than the number of options used to obtain those shares of common stock. On September 30, 2018, the employee exercised,
on a cashless basis, 3,324,201 options, resulting in 1,233,509 shares of common stock.
On
September 18, 2017, we granted non-qualified stock options to purchase up to 1,800,000 shares of our common stock to three key
employees, at a price of $0.05 per share.
The stock options vest equally over a period of 36 months and expire
September 18, 2022
.
These options allow the optionee to exercise on a cashless basis, resulting in no cash payment to the company upon exercise.
On
January 3, 2018, we granted non-qualified stock options to purchase up to 20,000,000 shares of our common stock to three key employees,
at a price of $0.04 per share.
The stock options vest equally over a period of 36 months and expire January 3, 2023
.
These options allow the optionee to exercise on a cashless basis, resulting in no cash payment to the company upon exercise.
The Company
used the historical industry index to calculate volatility, since the Company’s stock history did not represent the expected
future volatility of the Company’s common stock. The fair value of options granted during the six months ending June 30,
2019 and 2018, were determined using the Black Scholes method with the following assumptions:
|
|
Six Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
Risk free interest rate
|
|
|
—
|
|
|
|
5.00
|
%
|
Stock volatility factor
|
|
|
—
|
|
|
|
397
|
%
|
Weighted average expected option life
|
|
|
—
|
|
|
|
5 years
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
none
|
|
A summary of the Company’s
stock option activity and related information follows:
|
|
Six Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2018
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
|
exercise
|
|
|
|
exercise
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
Outstanding -beginning of period
|
|
|
151,475,799
|
|
|
$
|
0.017
|
|
|
|
134,800,000
|
|
|
$
|
0.013
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
20,000,000
|
|
|
$
|
0.040
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding - end of period
|
|
|
151,475,799
|
|
|
$
|
0.017
|
|
|
|
154,800,000
|
|
|
$
|
0.017
|
|
Exercisable at the end of period
|
|
|
137,036,530
|
|
|
$
|
0.015
|
|
|
|
125,738,995
|
|
|
$
|
0.013
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted during the period
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
800,000
|
|
As of June
30, 2019, and December 31, 2018, the intrinsic value of the stock options was approximately $126,150 and $212,950, respectively.
Stock option expense for the six months ended June 30, 2019
, and 2018
were $163,644 and $285,976,
respectively.
The Black
Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair
value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The weighted average remaining
contractual life of options outstanding, as of June 30, 2019 was as follows:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
remaining
|
Exercise
|
|
options
|
|
contractual
|
prices
|
|
outstanding
|
|
life (years)
|
$0.050
$0.040
$0.015
|
|
1,800,000
20,000,000
35,000,000
|
|
3.22
3.52
3.16
|
$0.013
|
|
60,000,000
|
|
2.60
|
$0.013
$0.010
|
|
15,000,000
6,675,799
|
|
2.72
3.09
|
$0.005
|
|
12,500,000
|
|
0.12
|
$0.004
|
|
500,000
|
|
2.29
|
|
|
151,475,799
|
|
|
Warrants
During the six months ended June
30, 2019 and 2018, the Company issued no warrants for services.
12.
RELATED
PARTIES
Bountiful
Capital, LLC, loaned the Company $100,000 on January 12, 2016, $500,000 through multiple fundings on the April 2016 Note, $500,000
through multiple fundings on the October 2016 Note, $38,000 on May 16, 2017, $46,000 on May 30, 2017, $26,000 on June 14, 2017,
$23,500 on June 29, 2017, $105,000 on July 10, 2017, $50,500 on July 14, 2017, $53,500 on July 30, 2017, $25,000 on August 3, 2017,
$34,000 on August 16, 2017, $92,000 on August 28, 2017, $63,600 on September 28, 2017, $103,500 on October 11, 2017, $106,000 on
October 27, 2017, $62,000 on November 15, 2017, $106,000 on November 27, 2017, $30,000 on November 30, 2017, $42,000 on December
19, 2017, $49,000 on January 3, 2018, $72,000 on January 30, 2018 and $85,000 on February 2, 2018, as unsecured promissory notes
(the “Bountiful Notes”). The terms of the Bountiful Notes include interest of 5% and are due and payable upon demand,
but in no case later than 36 months after the effective date. On July 31, 2017, notes payable amounting to $1,442,500 and accrued
interest of $43,414 were converted into 14,425 shares of Series C preferred stock. At
June
30, 2019 and December 31, 2018
, principal on the Bountiful Notes and accrued interest totaled $
942,042
and $920,470
. The Company’s chief financial officer, Greg Boden, also serves as the president of Bountiful Capital,
LLC.
Brad
Parscale has served on the board of directors of the Company since the acquisition of Parscale Creative on August 1, 2017. Mr.
Parscale is also the owner of Parscale Strategy, LLC (“Parscale Strategy”), the largest customer of Parscale Digital.
During the six months ended
June 30, 2019
and 2018, the Company
earned $128,164 and $2,205,423, respectively, in revenue from providing services to Parscale Strategy, and as of
June 30,
2019
and December 31, 2018, Parscale Strategy had an outstanding accounts receivable of $17,947 and
$78,753, respectively.
On
August 1, 2017, Parscale Digital signed a lease with Giles-Parscale, Inc., a related party, to provide a workplace for the employees
of Parscale Digital. Giles-Parscale, Inc., is wholly owned by Jill Giles, an employee of the Company. Details on this lease are
included in Note 14.
On
August 1, 2017, Parscale Digital signed a lease with Parscale Strategy for computer equipment and office furniture. Parscale Strategy
is wholly owned by Brad Parscale, who serves on the CloudCommerce board of directors. Details of this lease are included in Note
14.
On
April 28, 2018, Data Propria entered into an agreement to lease approximately 2,073 square feet of office space located at 311
Sixth Street, San Antonio, TX 78215, for a period of twelve months, commencing May 1, 2018, at a cost of $4,000 per month, plus
a pro rata share of building maintenance expenses. This lease was signed with a related party, Jill Giles, an employee of the Company.
Upon expiration the company did not renew this lease.
As
of June 30, 2019, we had convertible notes in the amount of $292,802 with a relative of a shareholder that owns in excess of 5%.
We believe that the terms of those convertible notes are consistent with arm’s length transactions.
13. CONCENTRATIONS
For the six
months ended June 30, 2019 and 2018, the Company had one and one major customers who represented approximately 12% and 37% of total
revenue, respectively. At June 30, 2019 and December 31, 2018, accounts receivable from two and two customers, represented approximately
45% and 19% of total accounts receivable, respectively. The customers comprising the concentrations within the accounts receivable
are not the same customers that comprise the concentrations with the revenues discussed above.
14. COMMITMENTS AND CONTINGENCIES
Leases
In February 2016, the FASB
issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840,
Leases
.
The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use
(“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under the standard,
disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty
of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income statement, over the expected term on a straight-line basis.
Operating leases are recognized on the balance sheet as right-of-use assets, current operating lease liabilities and non-current
operating lease liabilities. We determine if an arrangement is a lease at inception. Operating leases are included in operating
lease right-of-use (“ROU”) assets and operating lease liabilities on our condensed consolidated balance sheets. Finance
leases are included in property and equipment, current liabilities, and long-term liabilities on our condensed consolidated balance
sheets.
The
Company adopted the new lease guidance effective January 1, 2019 using the modified retrospective transition approach, applying
the new standard to all of its leases existing at the date of initial application which is the effective date of adoption. Consequently,
financial information will not be updated and the disclosures required under the new standard will not be provided for dates and
periods before January 1, 2019. The Company has elected the practical expedient to combine lease and non-lease components
as a single component. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining
the lease term and assessing impairment. The adoption of the lease standard did not change our previously reported condensed consolidated
statements of operations and did not result in a cumulative catch-up adjustment to opening equity. As of June 30, 2019, the
company recognized ROU assets of $336,227 and lease liabilities of $338,127.
The
interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental
borrowing rate of 10%, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the
lease payments in a similar economic environment. In calculating the present value of the lease payments, the Company elected to
utilize its incremental borrowing rate based on the remaining lease terms as of the January 1, 2019 adoption date.
Operating
lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments
over the lease term at the commencement date. The operating lease ROU asset also includes any lease payments made and excludes
lease incentives and initial direct costs incurred, if any. Our lease terms may include options to extend or terminate the lease
when it is reasonably certain that we will exercise that option. Our leases have remaining lease terms of 1 years to 3 years, some
of which include options to extend the lease term for up to an undetermined number of years.
Operating Leases
As a result
of the WebTegrity acquisition, we assumed a lease for office space used by the WebTegrity employees, at 14603 Huebner Road, Suite
3402, San Antonio, TX 78230. The lease was executed on March 20, 2017 for a period of 36 months, commencing March 20, 2017, at
a rate of $2,750 per month from April 1, 2017 through March 31, 2018, $2,950 per month from April 1, 2018 through March 31, 2019,
and $3,150 per month from April 1, 2019 through March 31, 2020. As of June 30, 2019, it has been determined that the Company will
not attempt to extend this lease past the March 31, 2020 expiration date. This lease does not include a residual value guarantee,
nor do we expect any material exit costs. As of January 1, 2019, we determined that this lease meets the criterion to be classified
as a ROU Asset and is included on the balance sheet as Right-Of-Use Assets. As of June 30, 2019, the ROU asset and liability balances
of this lease were $25,304 and $27,204, respectively.
On August
1, 2017, Parscale Digital signed a lease agreement with Giles-Parscale, Inc., a related party, which commenced on August 1, 2017,
for approximately 8,290 square feet, at 321 Sixth Street, San Antonio, TX 78215, for $9,800 per month, plus a pro rata share of
the common building expenses. The lease expires on July 31, 2022. As of June 30, 2019, it is unclear whether we will attempt to
extend this lease beyond the July 31, 2022 expiration date. However, because the lease expiration is greater than twelve months,
the lease liability is included on the Balance Sheet as Right-of-use lease. This lease does not include a residual value guarantee,
nor do we expect any material exit costs. As of January 1, 2019, we determined that this lease meets the criterion to be classified
as a ROU Asset and is included on the balance sheet as Right-Of-Use Assets. As of June 30, 2019, the ROU asset and liability balances
of this lease were $310,923 and $310,923, respectively.
On October
24, 2017, we executed a lease agreement for office space located at 1933 Cliff Drive, Santa Barbara, CA, commencing March 1, 2018
for a period of 36 months, at a rate of $2,795 per month, plus a pro rata share of the common area maintenance. As of September
31, 2018, the Company vacated this office space and the landlord relieved the Company of any further liability by leasing the space
to another party. As of September 30, 2018, the Company moved its headquarters to 321 Sixth Street in San Antonio, Texas.
On February
12, 2018, we executed a lease agreement for office space at 1415 Park Avenue West, Denver, CO 80205, expiring August 14, 2018,
at a cost of $800 per month. This lease was cancelled on June 30, 2018, at no cost to the Company.
On
April 28, 2018, Data Propria entered into an agreement to lease approximately 2,073 square feet of office space located at 311
Sixth Street, San Antonio, TX 78215, for a period of twelve months, commencing May 1, 2018, at a cost of $4,000 per month, plus
a pro rata share of building maintenance expenses. This lease was signed with a related party, Jill Giles, an employee of the Company.
The Company did not extend this lease upon expiration on April 30, 2019.
Total
operating lease expense for the six months ended June 30, 2019 and 2018 was $87,433 and $118,957, respectively. The Company is
also required to pay its pro rata share of taxes, building maintenance costs, and insurance in according to the lease agreement.
On May 21,
2014, the Company entered into a settlement agreement with the landlord of our previous location at 6500 Hollister Ave., Goleta,
CA, to make monthly payments on past due rent totaling $227,052. Under the terms of the agreement, the Company will make monthly
payments of $350 on a reduced balance of $40,250. Upon payment of $40,250, the Company will record a gain on extinguishment of
debt of $186,802. As of June 30, 2019, the Company recorded the outstanding balance under this settlement agreement as a long-term
accrued expense, with the current portion of the debt recorded in accrued expenses. As of June 30, 2019, and December 31, 2018,
the Company owed $18,900 and $21,000 on the outstanding reduced payment terms, respectively.
The
Company is required to pay its pro rata share of taxes, building maintenance costs, and insurance in accordance with the operating
lease agreements of Parscale Digital, WebTegrity, and Data Propria.
Finance Leases
On August
1, 2017, Parscale Digital signed a lease agreement with Parscale Strategy, a related party, for the use of office equipment and
furniture. The lease provides for a term of thirty-six (36) months, at a monthly payment of $3,000, and an option to
purchase
all items at the end of the lease for one dollar. It is certain that the Company will exercise this purchase option. We have evaluated
this lease in accordance with ASC 840-30 and determined that it meets the definition of a finance lease.
The following is a schedule of
the net book value of the finance lease.
Assets
|
|
June 30,
2019
|
|
December
31, 2018
|
Leased
equipment under finance lease,
|
|
$
|
100,097
|
|
|
$
|
100,097
|
|
less accumulated amortization
|
|
|
(47,592
|
)
|
|
|
(35,176
|
)
|
Net
|
|
$
|
52,505
|
|
|
$
|
64,921
|
|
Liabilities
|
|
June 30,
2019
|
|
December
31, 2018
|
Obligations
under finance lease (current)
|
|
$
|
34,898
|
|
|
$
|
34,039
|
|
Obligations under finance
lease (noncurrent)
|
|
|
2,988
|
|
|
|
20,654
|
|
Total
|
|
$
|
37,886
|
|
|
$
|
54,693
|
|
Below
is a reconciliation of leases to the financial statements.
|
|
ROU Operating Leases
|
|
Finance Leases
|
|
Short Term Leases
|
Leased asset balance
|
|
$
|
336,227
|
|
|
$
|
52,505
|
|
|
$
|
—
|
|
Other fixed assets
|
|
|
—
|
|
|
|
31,518
|
|
|
|
—
|
|
Total
|
|
|
336,227
|
|
|
|
84,023
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance
|
|
|
338,127
|
|
|
|
37,886
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow (operating)
|
|
|
76,900
|
|
|
|
—
|
|
|
|
4,000
|
|
Cash flow (financing)
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
18,624
|
|
|
$
|
1,193
|
|
|
$
|
—
|
|
The following is a schedule, by years, of future
minimum lease payments required under the operating and finance leases.
Years Ending
December 31,
|
|
ROU Operating Leases
|
|
Finance Leases
|
|
Short Term Leases
|
|
2019
|
*
|
|
$
|
77,700
|
|
|
$
|
18,000
|
|
|
$
|
—
|
|
|
2020
|
|
|
|
127,050
|
|
|
|
21,000
|
|
|
|
—
|
|
|
2021
|
|
|
|
117,600
|
|
|
|
—
|
|
|
|
—
|
|
|
2022
|
|
|
|
68,600
|
|
|
|
—
|
|
|
|
—
|
|
|
2023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
$
|
390,950
|
|
|
$
|
39,000
|
|
|
$
|
—
|
|
|
Less imputed interest
|
|
|
|
(52,823
|
)
|
|
|
(1,114
|
)
|
|
|
—
|
|
|
Total liability
|
|
|
$
|
338,127
|
|
|
$
|
37,886
|
|
|
$
|
—
|
|
*
Excludes six months ended June 30, 2019
Other
information related to leases is as follows:
Lease
Type
|
|
Weighted
Average Remaining Term
|
|
Weighted
Average Discount Rate (1)
|
Operating
Leases
|
|
|
1.9
years
|
|
|
|
10
|
%
|
Finance Leases
|
|
|
1.0
years
|
|
|
|
10
|
%
|
(1)
This discount rate is consistent with our borrowing rates from various lenders.
Legal Matters
The
Company may be involved in legal actions and claims arising in the ordinary course of business, from time to time, none of which
at the time are considered to be material to the Company’s business or financial condition.
15. SUPPLEMENTAL STATEMENT OF CASH FLOWS
INFORMATION
During the six months
ended June 30, 2019, there were the following non-cash activities.
|
-
|
Recorded the initial values of ROU operating leases, which increased
ROU assets by $365,460 and operating lease liability by $365,460, netting to zero on the statement of cash flows.
|
During
the six months ended June 30, 2018
, there were the following non-cash financing activities:
|
-
|
On February 1, 2018, the Company acquired Parscale Media for $1,000,000
payable by a note over twelve months.
|
|
-
|
On April 17, 2018, a lender converted a portion of
the March 2013 Note into common stock. The conversion included $16,000 of principal, plus $8,106 of interest, which was converted
into 6,026,301 common shares.
|
16. SUBSEQUENT EVENTS
Management
has evaluated subsequent events according to ASC TOPIC 855 as of the date of the financial statements and has determined that the
following subsequent events are reportable.
On July 16, 2019 the Company issued
a convertible note (the “July 16, 2019 Note”) in the amount of $43,000, at which time an advance of $40,000 was received
to cover operational expenses. The July 16, 2019 Note accrues interest at a rate of 10% per year
,
is payable on July 16, 2020, and is convertible into common stock after 180 days. The conversion price is calculated as a 50% discount
off of the average of the one lowest trading prices during the 25 trading days prior to conversion.
The July 16, 2019 Note
matures on July 16, 2020.
On July 17, 2019 a lender presented
a conversion notice to the Company, which converted $12,000 principle plus interest into 1,967,213 shares of common stock. This
conversion was in accordance with the terms of the convertible note.
On July 22, 2019, a shareholder
relinquished his holdings of Company stock, in the amount of 8,400 common shares. This reduced the number of outstanding shares
by 8,400.
On July 23, 2019 the Company issued
an unsecured promissory note (the “July 23, 2019 Note”) in the amount of $25,000, at which time an advance of $25,000
was received to cover operational expenses. The July 23, 2019 Note accrues interest at a rate of 5% per year. The July 23, 2019
Note matures on July 23, 2020.
On August 5, 2019 a lender presented
a conversion notice to the Company, which converted $7,839 principle plus interest into 2,550,000 shares of common stock. This
conversion was in accordance with the terms of the convertible note.
Taking into consideration the
two stock conversions and the relinquished shares mentioned above, total outstanding shares is calculated as follows:
|
137,512,588
|
|
|
|
Shares outstanding, as of June 30, 2019
|
|
|
1,967,213
|
|
|
|
Conversion, dated July 17, 2019
|
|
|
(8,400
|
)
|
|
|
Share relinquishment, dated July 22. 2019
|
|
|
2,550,000
|
|
|
|
Conversion, dated August 5, 2019
|
|
|
142,021,401
|
|
|
|
Shares outstanding, as of August 13, 2019
|
|