The
accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
CLOUDCOMMERCE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT
OF CASH FLOWS
|
|
Years Ended
|
|
|
December 31, 2019
|
|
December 31, 2018
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,123,380
|
)
|
|
$
|
(2,870,013
|
)
|
Adjustment to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
(used in) operating activities
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
114,748
|
|
|
|
262,571
|
|
Depreciation and amortization
|
|
|
1,019,472
|
|
|
|
1,017,262
|
|
Loss on sale of fixed assets
|
|
|
6,452
|
|
|
|
24,442
|
|
Loss on impairment of goodwill & intangibles
|
|
|
6,760,767
|
|
|
|
—
|
|
Non-cash compensation expense
|
|
|
391,959
|
|
|
|
479,182
|
|
Amortization of Beneficial Conversion Feature
|
|
|
60,274
|
|
|
|
139,726
|
|
(Gain)/loss on derivative liability valuation
|
|
|
56,923
|
|
|
|
|
|
Derivative expense
|
|
|
493,700
|
|
|
|
—
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
30,182
|
|
|
|
(651,581
|
)
|
Prepaid expenses and other assets
|
|
|
47,435
|
|
|
|
(35,116
|
)
|
Costs in excess of billings
|
|
|
77,411
|
|
|
|
(99,017
|
)
|
Lease deposit
|
|
|
4,000
|
|
|
|
(500
|
)
|
Accounts payable
|
|
|
290,952
|
|
|
|
614,912
|
|
Accrued expenses
|
|
|
(96,201
|
)
|
|
|
308,460
|
|
Change in lease obligation
|
|
|
—
|
|
|
|
4,199
|
|
Customer Deposits
|
|
|
1,326,904
|
|
|
|
77,927
|
|
Deferred income
|
|
|
(327,712
|
)
|
|
|
383,139
|
|
Deferred taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY / (USED) IN OPERATING ACTIVITIES
|
|
|
133,886
|
|
|
|
(344,407
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash paid for purchase of fixed assets
|
|
|
(2,104
|
)
|
|
|
(54,650
|
)
|
Proceeds from the sale of fixed assets
|
|
|
—
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED) IN INVESTING ACTIVITIES
|
|
|
(2,104
|
)
|
|
|
(52,072
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments on capital lease obligation
|
|
|
(34,038
|
)
|
|
|
(36,582
|
)
|
Payment of dividend
|
|
|
(24,142
|
)
|
|
|
(109,478
|
)
|
Conversion of Debt for Equity
|
|
|
—
|
|
|
|
—
|
|
Proceeds on line of credit, net
|
|
|
(97,005
|
)
|
|
|
(57,850
|
)
|
Proceeds from issuance of notes, related party
|
|
|
53,500
|
|
|
|
206,000
|
|
Proceeds from issuance of notes payable
|
|
|
541,000
|
|
|
|
950,000
|
|
Principal payments on term loan
|
|
|
(493,081
|
)
|
|
|
(375,000
|
)
|
Principal payments on debt, related party
|
|
|
—
|
|
|
|
(336,620
|
)
|
Proceeds from issuance of term loan
|
|
|
625,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
571,234
|
|
|
|
240,470
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE / (DECREASE) IN CASH
|
|
|
703,016
|
|
|
|
(156,009
|
)
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
|
116,312
|
|
|
|
272,321
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
819,328
|
|
|
$
|
116,312
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
123,223
|
|
|
$
|
64,764
|
|
Taxes paid
|
|
$
|
—
|
|
|
$
|
17,545
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Conversion of notes payable to common stock
|
|
$
|
321,265
|
|
|
$
|
24,106
|
|
Change in deferred tax estimate
|
|
$
|
—
|
|
|
$
|
1,021,566
|
|
Beneficial conversion feature
|
|
$
|
—
|
|
|
$
|
200,000
|
|
Exchange of accounts receivable for notes payable
|
|
$
|
—
|
|
|
$
|
662,534
|
|
Cashless exercise of stock options
|
|
$
|
—
|
|
|
$
|
1,234
|
|
Acquisition of Parscale Media for notes payable
|
|
$
|
—
|
|
|
$
|
1,000,000
|
|
Derivative settlement
|
|
$
|
287,668
|
|
|
$
|
—
|
|
Right of use assets
|
|
$
|
398,506
|
|
|
$
|
—
|
|
Derivative discount
|
|
$
|
467,019
|
|
|
$
|
—
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
|
1.
|
ORGANIZATION AND LINE OF BUSINESS
|
Organization
CloudCommerce,
Inc. (“we”, “us”, “our” or the “Company”) is a Nevada corporation formerly known
as Warp 9, Inc., Roaming Messenger, Inc., and Latinocare Management Corporation (“LMC”). On July 9, 2015, we changed
the name of the Company from Warp 9, Inc. to CloudCommerce, Inc. to reflect a new plan of strategically
acquiring profitable data driven marketing solutions providers with strong management teams. The Company, based in San Antonio,
Texas, began operations on October 1, 1999. We develop solutions that help our clients acquire, engage,
and retain their customers by leveraging cutting edge digital strategies and technologies. We focus intently on using data analytics
to drive the creation of great user experiences and effective digital marketing campaigns. Whether it is creating omni-channel
experiences, engaging a specific audience, or energizing voters in political campaigns, we believe data is the key to digital success.
Our goal is to become the industry leader by always applying a “data first” strategy and acquiring other companies
that can help us achieve this vision. The Company consists of four subsidiaries, Parscale Digital, Inc., which merged
with Parscale Creative, Inc., as a result of an acquisition dated August 1, 2017, WebTegrity, LLC, which was acquired November
15, 2017, Data Propria, Inc., which the Company launched February 1, 2018, and Giles Design Bureau, Inc., which spun out from Parscale
Digital in May, 2018. On January 17, 2018, the board of directors of the Company elected to change its year end from June 30 to
December 31. The Company focuses on four main areas, data analytics, digital marketing, branding and creative services, and web
development.
Data Propria – Data Analytics
To deliver
the highest Return on Investment (“ROI”) for our customer’s digital marketing campaign, we utilize sophisticated
data science to identify the correct universes to target relevant audiences. Our ability to understand and translate data drives
every decision we make. By listening to and analyzing our customers’ data we are able to make informed decisions that positively
impact our customers’ business. We leverage industry-best tools to aggregate and visualize data across multiple sources,
and then our data and behavioral scientists segment and model that data to be deployed in targeted marketing campaigns. We have
data analytics expertise in retail, wholesale, distribution, logistics, manufacturing, political, and several other industries.
Parscale Digital – Digital
Marketing
We help our
customers get their message out, educate their market and tell their story. We do so creatively and effectively by deploying powerful
call-to-action digital campaigns with national reach and boosting exposure and validation with coordinated advertising in print
media. Our fully-developed marketing plans are founded on sound research methodologies, brand audits and exploration of the competitive
landscape. Whether our customer is a challenger brand, a political candidate, or a well-known household name, our strategists are
skillful at leveraging data and creating campaigns that move people to make decisions.
Giles Design Bureau –
Branding and Creative Services
We approach
branding from a “big picture” perspective, establishing a strong identity and then building on that to develop a comprehensive
branding program that tells our customer’s story, articulates what sets our customer apart from their competitors and establishes
our customer in their market.
WebTegrity – Development
and Managed Infrastructure Support
Commerce-focused,
user-friendly digital websites and apps elevates our customer’s marketing position and draw consumers to their products and
services. Our platform-agnostic approach allows us to architect and build solutions that are the best fit for each customer. Once
the digital properties are built, our experts will help manage and protect the website or app and provide the expertise needed
to scale the infrastructure needed as our customer’s business grows.
Going Concern
The
accompanying 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
financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. As
of December 31, 2019, the Company had negative working capital of $5,935,500 and has historically reported net losses, 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. The Company has obtained funds from its lenders and shareholders since its inception through December
31, 2019. It is management’s plan to generate additional working capital from increasing sales from the Company’s service
offerings, in addition to acquiring profitable service providers.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies of CloudCommerce is presented to assist in understanding the Company’s financial
statements. The 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 financial statements.
The
Consolidated Financial Statements include the Company and its wholly owned subsidiaries CLWD Operations, Inc (“CLWD Operations”),
formerly Indaba Group, Inc, a Delaware corporation, Parscale Digital, Inc., a Nevada corporation (“Parscale Digital”),
WebTegrity, Inc., a Texas corporation, Data Propria, Inc., a Nevada corporation, and Giles Design Bureau, Inc., a Nevada corporation.
All significant inter-company transactions are eliminated in consolidation of the financial statements.
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 December 31, 2019 and December 31, 2018 are $118,589 and $45,613, respectively.
During the years ended December 31, 2019 and December 31, 2018,
we included $114,748 and $262,571, respectively, in expense related to balances that were written off as bad debt.
On
November 30, 2016, the Company entered into an agreement whereby accounts receivable amounts due from our customers to CLWD Operations
were pledged to a third party. Under the terms of the agreement, the Company may receive advances in amounts up to $400,000, based
on the amounts we invoice our customers, for a period of one year. Because the Company maintains the collectability risk of all
outstanding balances, we record the customer balances at fair value in accounts receivable, including an allowance for any balances
at risk of collectability, and the amount due to the third party as a liability. On March 23, 2017, the Company amended the secured
borrowing arrangement, which increased the maximum allowable balance by $100,000, to a total of $500,000. As of December
31, 2019, the balance due from this arrangement was $5,228.
On
October 19, 2017, the Company entered into an agreement whereby accounts receivable amounts due from our customers to Parscale
Digital were pledged to a third party. Under the terms of the agreement, the Company may receive advances in amounts up to $500,000,
based on the amounts we invoice our customers, for a period of one year. Because the Company maintains the collectability risk
of all outstanding balances, we record the customer balances at fair value in accounts receivable, including an allowance for any
balances at risk of collectability, and the amount due to the third party as a liability. 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 December 31,
2019, the balance due from this arrangement was $258,646.
On
August 2, 2018, the Company entered into agreements whereby accounts receivable amounts due from our customers to Giles Design
Bureau, WebTegrity and Data Propria were pledged to a third party. Under the terms of the agreements, the Company may receive advances
in amounts up to $150,000, $150,000 and $600,000, respectively, based on the amounts we invoice our customers, for a period of
one year. Because the Company maintains the collectability risk of all outstanding balances, we record the customer balances at
fair value in accounts receivable, including an allowance for any balances at risk of collectability, and the amount due to the
third party as a liability. As of December
31, 2019, the balance due
from these arrangements was $213,088.
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.
Revenue Recognition
The Company
recognizes income when the service is provided or when product is delivered. We present revenue, net of customer incentives. Most
of the income is generated from professional services and site development fees. We provide online marketing services that we purchase
from third parties. The gross revenue presented in our statement of operations includes digital advertising revenue. We also offer
professional services such as development services. The fees for development services with multiple deliverables constitute
a separate unit of accounting in accordance with ASC 606, which are recognized as the work is performed. Upfront fees for development
services or other customer services are deferred until certain implementation or contractual milestones have been achieved. If
we have performed work for our clients, but have not invoiced clients for that work, then we record the value of the work in an
asset in costs in excess of billings. The terms of services contracts generally are for periods of less than one year. The deferred
revenue and customer deposits as of December 31, 2019 and 2018 was $2,080,762 and $1,081,570, respectively. The costs in excess
of billings as of December 31, 2019 and 2018 was $21,606 and $99,017, respectively. See footnote 3 for
a disclosure of our use of estimates and judgement, as it relates to revenue recognition.
We always
strive to satisfy our customers by providing superior quality and service. Since we typically bill based on a Time and Materials
basis, there are no returns for work delivered. When discrepancies or disagreements arise, we do our best to reconcile those by
assessing the situation on a case-by-case basis and determining if any discounts can be given. Historically, no significant discounts
have been granted.
Included
in revenue 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, due to the following factors:
|
·
|
The Company is primarily in control of the inputs of the project
and responsible for the completion of the client contract;
|
|
·
|
We have latitude in establishing price; and
|
|
·
|
We have discretion
in supplier selection.
|
During the
years ended December 31, 2019 and December 31, 2018, we included $3,344,978 and $3,870,291, respectively, in revenue, related to
reimbursable costs.
The Company records revenue
into the following five categories:
|
·
|
Data Sciences – Includes polling, research,
modeling, data fees, consulting and reporting.
|
|
·
|
Design – Includes branding, photography,
copyrighting, printing, signs and interior design.
|
|
·
|
Development – Includes website coding.
|
|
·
|
Digital Advertising – Includes ad spend,
SEO management and digital ad support.
|
|
·
|
Other – Includes domain name management,
account management, email marketing, web hosting, email hosting, client training, reimbursed expenses and partner commissions.
|
For the years
ended December 31, 2019 and December 31, 2018, revenue was disaggregated into the five categories as follows:
|
|
Year ended December 31, 2019
|
|
Year ended December 31, 2018
|
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
Data Sciences
|
|
$
|
1,150,706
|
|
|
$
|
14,400
|
|
|
$
|
1,165,106
|
|
|
$
|
886,600
|
|
|
$
|
51,100
|
|
|
$
|
937,700
|
|
Design
|
|
|
2,031,974
|
|
|
|
624
|
|
|
|
2,032,598
|
|
|
|
1,840,975
|
|
|
|
393,962
|
|
|
|
2,234,937
|
|
Development
|
|
|
1,425,757
|
|
|
|
46,332
|
|
|
|
1,472,089
|
|
|
|
1,519,337
|
|
|
|
154,048
|
|
|
|
1,673,385
|
|
Digital Advertising
|
|
|
3,650,491
|
|
|
|
179,640
|
|
|
|
3,830,131
|
|
|
|
4,938,067
|
|
|
|
1,289,016
|
|
|
|
6,227,083
|
|
Other
|
|
|
719,960
|
|
|
|
26,579
|
|
|
|
746,539
|
|
|
|
366,426
|
|
|
|
317,297
|
|
|
|
683,723
|
|
Total
|
|
$
|
8,978,888
|
|
|
$
|
267,575
|
|
|
$
|
9,246,463
|
|
|
$
|
9,551,405
|
|
|
$
|
2,205,423
|
|
|
$
|
11,756,828
|
|
Research and
Development
Research
and development costs are expensed as incurred. Total research and development costs were zero for the years ended December 31,
2019 and December 31, 2018.
Advertising Costs
The Company
expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $4,797 and $35,758, for
the years ended December 31, 2019 and December 31, 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 December
31, 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.
ASC
Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level
1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
We
measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring
basis are as follows at December 31, 2019 and 2018:
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
342,850
|
|
|
$
|
342,850
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
342,850
|
|
|
$
|
342,850
|
|
December 31, 2018
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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:
|
|
|
|
As of December 31,
|
|
|
Years
|
|
2019
|
|
2018
|
Equipment
|
|
|
5-7
|
|
|
$
|
163,750
|
|
|
$
|
169,668
|
|
Office furniture
|
|
|
7
|
|
|
|
23,569
|
|
|
|
27,964
|
|
Leasehold improvements
|
|
|
Length of lease
|
|
|
|
—
|
|
|
|
—
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(95,897
|
)
|
|
|
(58,893
|
)
|
Net property and equipment
|
|
|
|
|
|
$
|
91,422
|
|
|
$
|
138,739
|
|
The following
table discloses fixed asset transactions and recordings during the years ended December 31, 2019 and December 31, 2018:
|
|
Year ended December 31, 2019
|
|
Year ended December 31, 2018
|
Depreciation expense
|
|
$
|
42,968
|
|
|
$
|
41,656
|
|
Gain/(loss) on disposals
|
|
|
(6,452
|
)
|
|
|
(24,442
|
)
|
Cash paid for fixed asset additions
|
|
$
|
2,104
|
|
|
$
|
54,650
|
|
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. During the year ended December 31, 2019, management reviewed the intangible
assets and goodwill of WebTegrity and Parscale Digital, and determined that there were indications of impairment of both WebTegrity
and Parscale Digital.
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.
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, 2019 and determined
the fair value of each intangible asset and goodwill did not exceed the respective carrying values. Therefore, an impairment of
indefinite lived intangibles and goodwill was recognized.
The impairment
test conducted by the Company includes an assessment of whether events occurred that may have resulted in impairment of goodwill
and intangible assets. Because it was determined that events had occurred which effected the fair value of goodwill and intangible
assets, the Company conducted the two-step approach to determine the fair value and required adjustment. The steps are as follows:
|
1.
|
Based on the totality of qualitative factors, determine whether the carrying amount of the intangible asset may not be recoverable. Qualitative factors and key assumptions reviewed include the following:
|
|
●
|
Increases in costs, such as labor, materials or other costs that could negatively affect future cash flows. The Company assumed that costs associated with labor, materials, and other costs should be consistent with fair market levels. If the costs were materially higher than fair market levels, then such costs may adversely affect the future cash flows of the Company or reporting units.
|
|
●
|
Financial performance, such as negative or declining cash flows, or reductions in revenue may adversely affect recoverability of the recorded value of the intangible assets. During our analysis, the Company assumes that revenues should remain relatively consistent or show gradual growth month-to-month and quarter-to-quarter. If we report revenue declines, instead of increases or flat levels, then such condition may adversely affect the future cash flows of the Company or reporting units.
|
|
●
|
Legal, regulatory, contractual, political, business or other factors that could affect future cash flows. During our analysis, the Company assumes that the legal, regulatory, political or business conditions should remain consistent, without placing material pressure on the Company or any of its reporting units. If such conditions were to become materially different than what has been experienced historically, then such conditions may adversely affect the future cash flows of the Company or reporting units.
|
|
●
|
Entity-specific events such as losses of management, key personnel, or customers, may adversely affect future cash flows. During our analysis, the Company assumes that members of management, key personnel, and customers will remain consistent period-over-period. If not effectively replaced, the loss of members of management and key employees could adversely affect operations, culture, morale and overall success of the company. In addition, if material revenue from key customers is lost and not replaced, then future cash flows will be adversely affected.
|
|
●
|
Industry or market considerations, such as competition, changes in the market, changes in customer dependence on our service offering, or obsolescence could adversely affect the Company or its reporting units. We understand that the market we serve are constantly changing, requiring us to change with it. During our analysis, we assume that we will address new opportunities in service offering and industries served. If we do not make such changes, then we may experience declines in revenue and cash flow, making it difficult to re-capture market share.
|
|
●
|
Macroeconomic conditions such as deterioration in general economic conditions or limitations on accessing capital could adversely affect the Company. During our analysis, we acknowledge that macroeconomic factors, such as the economy, may affect our business plan because our customers may reduce budgets for our services. If there are material declines in the economy, which lead to reductions in revenue then such conditions may adversely affect the Company.
|
|
2.
|
Compare the carrying amount of the intangible asset to the fair value.
|
|
3.
|
If the carrying amount is greater than the fair value, then the carrying amount is reduced to reflect fair value.
|
In accordance
with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December 31,
2019 and determined there was impairment of indefinite lived intangibles and goodwill from our Parscale Media and Parscale Creative
acquisitions. Accordingly, all intangible assets and goodwill related to the Parscale Media and Parscale Creative acquisitions
have been written off, amounting to $744,444 for Parscale Media and $6,016,323 for Parscale Creative. This amount reduced the consolidated
balances of Parscale Digital, as outlined below. This amount is included in Operating Expenses on the Income Statement, for the
year ended December 31, 2019. An impairment assessment was also conducted during the year ended December 31, 2019 related to the
WebTegrity acquisition and determined that no impairment of intangible assets or goodwill was necessary.
Goodwill and Intangible
assets are comprised of the following, presented as net of amortization:
|
|
December
31, 2019
|
|
|
Parscale Digital
|
|
WebTegrity
|
|
CloudCommerce
|
|
Total
|
Customer list
|
|
|
—
|
|
|
|
71,606
|
|
|
|
—
|
|
|
|
71,606
|
|
Non-compete agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Domain name and trademark
|
|
|
—
|
|
|
|
—
|
|
|
|
27,271
|
|
|
|
27,271
|
|
Brand name
|
|
|
—
|
|
|
|
130,000
|
|
|
|
—
|
|
|
|
130,000
|
|
Goodwill
|
|
|
—
|
|
|
|
430,000
|
|
|
|
—
|
|
|
|
430,000
|
|
Total
|
|
|
—
|
|
|
|
631,606
|
|
|
|
27,271
|
|
|
|
658,877
|
|
|
|
December 31, 2018
|
|
|
Parscale Digital 1
|
|
WebTegrity
|
|
CloudCommerce
|
|
Total
|
Customer list
|
|
|
1,327,879
|
|
|
|
157,534
|
|
|
|
—
|
|
|
|
1,485,413
|
|
Non-compete agreement
|
|
|
147,778
|
|
|
|
—
|
|
|
|
—
|
|
|
|
147,778
|
|
Domain name and trademark
|
|
|
—
|
|
|
|
—
|
|
|
|
27,960
|
|
|
|
27,960
|
|
Brand name
|
|
|
2,030,000
|
|
|
|
130,000
|
|
|
|
—
|
|
|
|
2,160,000
|
|
Goodwill
|
|
|
4,145,000
|
|
|
|
430,000
|
|
|
|
—
|
|
|
|
4,575,000
|
|
Total
|
|
|
7,650,657
|
|
|
|
717,534
|
|
|
|
27,960
|
|
|
|
8,396,151
|
|
|
1
|
Includes the goodwill and intangible assets of Parscale Media.
|
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 December 31, 2019, the Company held cash and cash equivalents in
the amount of $819,328, which was held in the operating bank accounts. Of this amount, $762,742 was held in one account, in amounts
exceeding the FDIC insured limit of $250,000. For further discussion on concentrations see footnote 14.
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 consolidated statement of operations during the year ended December 31,
2019, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of December 31,
2019 based on the grant date fair value estimated. Stock-based compensation expense recognized in the consolidated statement of
operations for the year ended December 31, 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 consolidated statements of operations during
the year ended December 31, 2019 and 2018 were $391,959 and $479,182, 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 year
ended December 31, 2019, the Company has excluded 150,275,799 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 66,144,941 shares of common stock underlying $543,464
in convertible notes, because their impact on the loss per share is anti-dilutive.
For the year
ended December 31, 2018, 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 40,292,850 shares of common stock underlying $285,363 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.
Accounting for Derivatives
The Company evaluates all of its
financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at
its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations.
For stock-based derivative financial instruments, the Company uses a probability weighted average series Binomial lattice formula
pricing models to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative
instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Recently Adopted Accounting
Pronouncements
Management
reviewed accounting pronouncements issued during the year ended December 31, 2019, and the following pronouncements were adopted
during the period.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). Under
ASU 2016-02, lessees recognize a right-of-use asset and a lease liability
for all of their leases, other than those that meet the definition of a short-term lease.
For income statement purposes, leases must be classified as either operating
or finance. Operating leases will result in straight-line expense, similar
to current operating leases, while finance leases will
result in a front-loaded pattern, similar to current capital leases. We adopted Topic 842 effective January 1, 2019
and elected certain available transitional practical expedients. This adoption resulted in right-of-use assets, in the amount of
$266,758 and operating lease liability, in the amount of $266,758, to be added to the December 31, 2019 balance sheet. These additions
are the result of an office lease in San Antonio. In the prior year, the Company disclosed capital lease obligations, which has
been changed to finance lease obligation in the current year, as a result of this adoption. The finance lease obligation totaled
$20,654 as of December 31, 2019.
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. For the year ended December
31, 2019, we used the federal tax rate of 21% in our determination of the deferred tax assets and liabilities balances.
On
December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law by the President of the United States. TCJA is a tax
reform act that among other things, reduced corporate tax rates from 35 percent to 21 percent effective January 1, 2018. FASB ASC
740, Income Taxes, requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws
or rates in the year of enactment, which is the year in which the change was signed into law. Accordingly, the Company adjusted
its deferred tax assets and liabilities at December 31, 2018, using the new corporate tax rate of 21 percent.
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 adoption
of ASC 606 did not have a material impact on the Company’s
Consolidated Financial Statements.
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 email detail of 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 is 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 T&M.
|
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 – Data
Propria
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 – Giles Design Bureau
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 – WebTegrity
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 – Parscale Digital
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
year ended December 31, 2019 and 2018, we included $3,344,978 and $5,385,924 respectively, in revenue, related to reimbursable
costs. The deferred revenue and customer deposits as of December
31, 2019 and December 31, 2018 were $2,080,762 and $1,081,570, respectively
For the year
ended December 31, 2019 and 2018, revenue was disaggregated into the five categories as follows:
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
Data Sciences
|
|
$
|
1,150,706
|
|
|
$
|
14,400
|
|
|
$
|
1,165,106
|
|
|
$
|
886,600
|
|
|
$
|
51,100
|
|
|
$
|
937,700
|
|
Design
|
|
|
2,031,974
|
|
|
|
624
|
|
|
|
2,032,598
|
|
|
|
1,840,975
|
|
|
|
393,962
|
|
|
|
2,234,937
|
|
Development
|
|
|
1,425,757
|
|
|
|
46,332
|
|
|
|
1,472,089
|
|
|
|
1,519,337
|
|
|
|
154,048
|
|
|
|
1,673,385
|
|
Digital Advertising
|
|
|
3,650,491
|
|
|
|
179,640
|
|
|
|
3,830,131
|
|
|
|
4,938,067
|
|
|
|
1,289,016
|
|
|
|
6,227,083
|
|
Other
|
|
|
719,960
|
|
|
|
26,579
|
|
|
|
746,539
|
|
|
|
366,426
|
|
|
|
317,297
|
|
|
|
683,723
|
|
Total
|
|
$
|
8,978,888
|
|
|
$
|
267,575
|
|
|
$
|
9,246,463
|
|
|
$
|
9,551,405
|
|
|
$
|
2,205,423
|
|
|
$
|
11,756,828
|
|
4. LIQUIDITY
AND OPERATIONS
The
Company had net loss of $10,123,380 for the year ended December
31, 2019, and $2,870,013 for the year ended December
31, 2018, and net cash provided by operating activities of $133,886 and used in operating activities
of $344,407, in the same periods, respectively.
As of December
31, 2019, the Company had a short-term borrowing relationship with three lenders. The lenders provided short-term and long-term
financing under a secured borrowing arrangement, using our accounts receivable as collateral, disclosed in footnote 7, as well
as convertible notes disclosed in footnote 8. As of December 31, 2019, there were no unused sources of liquidity, nor were there
any commitments of material capital expenditures.
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 year ended December 31, 2019, we did not pay any dividend related to the
Series D Convertible Preferred stock, and as of December 31, 2019, the accrued balance of the Series D Preferred dividend payable
was $210,961. As of the date of closing, Brad Parscale, the 100% owner of Parscale Creative, was appointed to the Company’s
Board of Directors. On December 10, 2019, Mr. Parscale resigned from 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
|
|
|
|
|
|
|
During
the year ended December 31, 2019, we determined that the goodwill and intangibles related to the Parscale Creative acquisition
were impaired. Therefore, all remaining indefinite and finite-lived intangibles, and goodwill were written off. The amount of the
write off, included in operating expenses was $6,016,323.
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
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”). For the year ended December
31, 2018, the Company made total payments of $350,600 on the promissory note, which includes $11,693 of interest expense.
For the year ended December 31, 2018, we included $12,859 in interest
expense related to this liability. 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, 2019, we determined that the goodwill and intangibles related to the Parscale Media acquisition were
impaired. Therefore, all remaining indefinite and finite-lived intangibles, and goodwill were written off. The amount of the write
off, included in operating expenses was $744,444.
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.
6. INTANGIBLE
ASSETS
The Company
conducted an impairment analysis for the year ended December 31, 2019 and determined that based on qualitative factors that impairment
was necessary for the intangible assets or goodwill of Parscale Media.
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 will be 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 December 31, 2019, we have 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 to “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 year ended December 31, 2019 and
2018, the Company included $690 and $690, respectively, in depreciation and amortization expense related to this trademark. As
of December 31, 2019, the balance on this intangible asset was $7,069.
Non-Compete Agreements
In
connection with the Company’s August 1, 2017, acquisition of Parscale Creative Brad Parscale agreed to certain non-compete
provisions, 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 year ended December 31, 2019 and 2018 we have included $93,333 and $93,333 in amortization expense
related to this non-compete agreement. During our annual impairment analysis, it was determined that the intangible assets of Parscale
Creative were impaired. Therefore, as of December 31, 2019, the remaining balance of this intangible asset of $54,444 was written
off and included in loss on impairment of goodwill and intangible assets on the income statement. As of December 31, 2019, the
balance on this intangible asset was zero.
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 year ended December 31, 2019 and 2018 we included $663,222 and $671,583 in depreciation and amortization
expense related to the customer list. During our annual impairment analysis, it was determined that the intangible assets of Parscale
Creative were impaired. Therefore, as of December 31, 2019, the remaining balance of this intangible asset of $386,879 was written
off and included in loss on impairment of goodwill and intangible assets on the income statement. As of December 31, 2019, the
balance on this intangible asset was zero.
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 year ended December 31, 2019 and 2018, we included $85,927 and $87,779 in depreciation and amortization
expense related to the customer list, and as of December 31, 2019, the remaining balance of this intangible asset was $71,606.
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 year ended December 31, 2019 and 2018, we included $133,333 and $122,222 in depreciation and amortization
expense related to the customer list. During our annual impairment analysis, it was determined that the intangible assets of Parscale
Media were impaired. Therefore, as of December 31, 2019, the remaining balance of this intangible asset of $144,445 was written
off and included in loss on impairment of goodwill and intangible assets on the income statement.
Brand Name
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 December 31, 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. In evaluating whether this brand had an indefinite useful life, the Company considered the
following criteria:
|
o
|
Expected use – We expected to retain
the name and brand, leveraging the good reputation and client following. Within the WordPress industry, the WebTegrity name was
well known, and the founder of the company has been asked to speak at various conferences.
|
|
o
|
Expected useful life of related group –
The WebTegrity name does not relate to another intangible asset or group of intangible assets. Therefore, this criterion was not
considered.
|
|
o
|
Limits to useful life – There was no
legal, regulatory, or contractual limitation to this intangible asset’s life.
|
|
o
|
Historical experience – This asset does
not require an extension or renewal, in order for it to remain on our balance sheet.
|
|
o
|
Effects of other factors – We did consider
this criterion in determining useful life, especially since WebTegrity was in a highly competitive industry, mostly relying on
the WordPress
|
platform. Was there a
chance of obsolescence or decline due to competition. In addition, we concluded that there was not a chance of obsolescence or
decline due to competition. Even though there is much competition, WebTegrity produced a quality product with a great team, resulting
in long term clients.
|
o
|
Maintenance required – There is no maintenance
expenditure to obtain future cash flows. Therefore, this criterion was not taken into consideration.
|
On August
1, 2017 and February 1, 2018, the Company acquired Parscale Creative and Parscale Media, respectively, and have calculated the
value of the Parscale Creative brand name at $1,930,000 and the brand name of Parscale Media at $100,000, which is included
in other assets on the balance sheet. During our annual impairment
analysis it was determined that the intangible assets of Parscale Creative and Parscale Media were impaired. Therefore, as of December
31, 2019, the balance of these intangible asset of $1,930,000 and $100,000, respectively, were written off and included in loss
on impairment of goodwill and intangible assets on the income statement.
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. During our annual impairment
analysis, it was determined that the intangible goodwill of Parscale Creative was impaired. Therefore, as of December 31, 2019,
the balance of goodwill of $3,645,000 was written off and included in loss on impairment of goodwill and intangible assets on the
income statement..
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. During our annual impairment
analysis it was determined that the intangible goodwill of Parscale Media was impaired. Therefore, as of December 31, 2019, the
balance of goodwill of $500,000 was written off and included in loss on impairment of goodwill and intangible assets on the income
statement.
The
Company’s intangible assets consist of the following:
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Customer list
|
|
|
280,000
|
|
|
|
(208,394
|
)
|
|
|
71,606
|
|
|
|
2,770,000
|
|
|
|
(1,284,587
|
)
|
|
|
1,485,413
|
|
Non-compete agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
280,000
|
|
|
|
(132,222
|
)
|
|
|
147,778
|
|
Domain name and trademark
|
|
|
30,201
|
|
|
|
(2,930
|
)
|
|
|
27,271
|
|
|
|
30,201
|
|
|
|
(2,241
|
)
|
|
|
27,960
|
|
Brand name
|
|
|
130,000
|
|
|
|
—
|
|
|
|
130,000
|
|
|
|
2,160,000
|
|
|
|
—
|
|
|
|
2,160,000
|
|
Goodwill
|
|
|
430,000
|
|
|
|
—
|
|
|
|
430,000
|
|
|
|
4,575,000
|
|
|
|
—
|
|
|
|
4,575,000
|
|
Total
|
|
|
870,201
|
|
|
|
(211,324
|
)
|
|
|
658,877
|
|
|
|
9,815,201
|
|
|
|
(1,419,050
|
)
|
|
|
8,396,151
|
|
Total
amortization expense charged to operations for the year ended December 31, 2019, and 2018 were $976,504 and $975,606, 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:
|
2020
|
|
|
$
|
72,296
|
|
|
2021
|
|
|
|
690
|
|
|
2022
|
|
|
|
690
|
|
|
2023
|
|
|
|
690
|
|
|
Thereafter
|
|
|
|
4,310
|
|
|
Total
|
|
|
$
|
78,676
|
|
7. CREDIT FACILITIES
Lines
of Credit
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 under “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 year ended December 31, 2019 and
2018, the Company included $650 and $16,012 respectively, in interest expense, related to this secured borrowing facility, and
as of December 31, 2019 and
December 31, 2018, the outstanding balances were $5,228 and zero, respectively.
On
October 19, 2017, Parscale Digital entered into a 12-month agreement with a third party to pledge 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 under “Lines 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 year ended December
31, 2019 and 2018, the Company included $85,291 and $78,566, respectively,
in interest expense, related to this secured borrowing facility, and as of December
31, 2019 and December 31, 2018, the outstanding balances were $258,646
and $96,512, respectively.
On
August 2, 2018, Giles Design Bureau, WebTegrity, and Data Propria entered into 12-month agreements with a third party to pledge
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 under “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 their 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 year ended December
31,
2019
and 2018, the Company included $119,809 and $21,276, respectively, in interest expense, related to
these secured borrowing facilities, and as of December 31, 2019 and December 31, 2018, the
combined outstanding balances were $213,088 and $321,106, respectively.
8. CONVERTIBLE
NOTES PAYABLE
During fiscal
year 2019, the Company issued convertible promissory notes with variable conversion prices, as outlined below. The conversion prices
for each of the notes is tied to the trading price of the Company’s common stock. Because of the fluctuation in stock price,
the Company is required to report derivative gains and losses each quarter, which was included in earnings, and an overall derivative
liability balance on the balance sheet, beginning during the quarter ended September 30, 2019. The Company also records a discount
related to the convertible notes, which reduces the outstanding balance of the total amount due and presented as a net outstanding
balance on the balance sheet. As of December 31, 2019, the balance of the discount was $75,319. The discount is amortized throughout
the term of the notes and included in interest expense. For the year ended December 31, 2019, the amount of amortization related
to the discount, included in interest expense was $387,124.
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 December
31, 2019 was $83,377, which includes $33,377 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. During the year ended December 31, 2018, it was determined that the April 2018 Note offered a conversion price
which was lower than the market price, and therefore included a beneficial conversion feature. The Company included the amortization
of this beneficial conversion feature in interest expense in the amount of $139,726 during the year ended December 31, 2018, and
$60,274 during the year ended December 31, 2019. During the year ended December 31, 2019, it was determined that the conversion
feature of the April 2018 Note was considered a derivative in accordance with current accounting guidelines because of the reset
conversion features of the April 2018 Note. The fair value of the April 2018 Notes has been determined by using the Binomial lattice
formula from the effective date of the note. During the period ended December 31, 2019, there were no conversions from the April
2018 Note. The balance of the April 2018 Note, as of December 31, 2019, was $216,986, which includes
$16,986 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 $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 180 days after issuance. 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. During the year ended December
31, 2019, the lender converted the entire balance of $103,000, plus $5,150 interest into 44,780,900 shares. Because the Company
records the value of convertible notes at fair value, no gain or loss is recorded upon conversion. As of December 31, 2019, the
balance of the January 16, 2019 Note was zero.
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 $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 180 days after issuance. The conversion price is calculated as a 39%
discount to the lowest trading prices during the 15 trading days prior to conversion. During the year ended December 31, 2019,
the lender converted the entire balance of $53,500, plus $3,165 interest and fee into 56,483,670 shares. Because the Company records
the value of convertible notes at fair value, no gain or loss is recorded upon conversion. As of December 31, 2019, the balance
of the January 31, 2019 Note was zero.
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 180 days after issuance. The conversion price is calculated as a 39% discount to
the average of the two lowest trading prices during the 20 trading days prior to conversion. During the year ended December 31,
2019, the lender converted the entire balance of $53,000, plus $2,650 interest into 62,281,512 shares. Because the Company records
the value of convertible notes at fair value, no gain or loss is recorded upon conversion. As of December 31, 2019, the balance
of the February 21, 2019 Note was zero.
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 180 days after issuance. 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. During the year ended December
31, 2019, the lender converted the entire balance of $43,000, plus $2,150 interest into 53,117,648 shares. Because the Company
records the value of convertible notes at fair value, no gain or loss is recorded upon conversion. As of December 31, 2019, the
balance of the April 24, 2019 Note was zero.
On
May 02, 2019 the Company issued a convertible promissory note (the “May 02, 2019 Note”) in the amount of $48,500 at
which time the Company received $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 180 days after issuance. The conversion price is calculated as a 39% discount
to the lowest trading price during the 15 trading days prior to conversion. The conversion feature of the May 02, 2019 Note was
considered a derivative in accordance with current accounting guidelines because of the reset conversion features of the May 02,
2019 Note. The fair value of the May 02, 2019 Notes has been determined by using the Binomial lattice formula from the effective
date of the note. During the period ended December 31, 2019, there were no conversions from the May 02, 2019 Note. The balance
of the May 02, 2019 Note, as of December 31, 2019 was $51,729, which includes $3,229 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 180 days after issuance. The conversion price is calculated as a 39% discount to the average
of the two lowest trading prices during the 20 trading days prior to conversion. During the year ended December 31, 2019, the lender
converted the entire balance of $53,000, plus $2,650 interest into 65,470,589 shares. As of December 31, 2019, the balance of the
June 10, 2019 Note was zero.
On July 16,
2019 the Company issued a convertible promissory note (the “July 16, 2019 Note”) in the amount of $43,000 at which
time the company received of $40,000 the remaining $3,000 was retained by the lender to cover legal and administrative cost. The
proceeds were used to cover operational expenses. The July 16, 2019 Note bears interest at a rate of 10% per year, is payable on
July 10, 2020, and is convertible into common stock 180 days after issuance. The conversion price is calculated as a 39% discount
to the lowest trading price during the 15 trading days prior to conversion. Because the conversion feature of the July 16, 2019
Note was not available to the lender, as of December 31, 2019, the July 16, 2019 Note was not considered a derivative. The Company
will include the July 16, 2019 Note in the valuation and accounting for derivatives once the 180 days conversion restriction period
expires. During the period ended December 31, 2019, there were no conversions from the July
16, 2019 Note. The balance of
the July 16, 2019 Note, as of December 31, 2019 is $44,979 which includes $1,979 of accrued interest.
On
September 4, 2019 the Company issued a convertible promissory note (the “September 4, 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 September 4, 2019 Note bears interest at a rate of 10% per year,
is payable on September 4, 2020, and is convertible into common stock 180 days after issuance. The conversion price is calculated
as a 39% discount to the average of the two lowest trading prices during the 20 trading days prior to conversion. Because the conversion
feature of the September 4, 2019 Note was not available to the lender, as of December 31, 2019, the September 4, 2019 Note was
not considered a derivative. The Company will include the September 4, 2019 Note in the valuation and accounting for derivatives
once the 180 days conversion restriction period expires. During the period ended December 31, 2019, there were no conversions from
the September 4, 2019 Note. The balance of the September 4, 2019 Note, as of December 31, 2019 is
$54,713, which includes $1,713 of accrued interest.
On
December 2, 2019 the Company issued a convertible promissory note (the “December 2, 2019 Note”) in the amount of $38,000
at which time the Company received of $35,000, the remaining $3,000 was retained by the lender to cover legal and administrative
cost. The proceeds were used to cover operational expenses. The December 2, 2019 Note bears interest at a rate of 10% per year,
is payable on December 2, 2020, and is convertible into common stock 180 days after issuance. The conversion price is calculated
as a 39% discount to the average of the two lowest trading prices during the 20 trading days prior to conversion. Because the conversion
feature of the December 2, 2019 Note was not available to the lender, as of December 31, 2019, the December 2, 2019 Note was not
considered a derivative. The Company will include the December 2, 2019 Note in the valuation and accounting for derivatives once
the 180 days conversion restriction period expires. During the period ended December 31, 2019, there were no conversions from the
December 2, 2019 Note. The balance of the December 2, 2019 Note, as of December 31, 2019 is $38,302,
which includes $302 of accrued interest.
On
December 5, 2019 the Company issued a convertible promissory note (the “December 5, 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 December 5, 2019 Note bears interest at a rate of 10% per year,
is payable on December 5, 2020, and is convertible into common stock 180 days after issuance. The conversion price is calculated
as a 39% discount to the average of the two lowest trading prices during the 20 trading days prior to conversion. Because the conversion
feature of the December 5, 2019 Note was not available to the lender, as of December 31, 2019, the December 5, 2019 Note was not
considered a derivative. The Company will include the December 5, 2019 Note in the valuation and accounting for derivatives once
the 180 days conversion restriction period expires. During the period ended December 31, 2019, there were no conversions from the
December 5, 2019 Note. The balance of the December 5, 2019 Note, as of December 31, 2019 is $53,378,
which includes $378 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 December 31, 2019 is
$28,212, which includes 3,212 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 December 31, 2019 is
$38,252 which includes $4,252 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 December 31, 2019 is
$103,191 which includes $11,191 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 December 31, 2019 is
$70,796, which includes $7,196 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 December 31, 2019 is
$114,998, which includes $11,498 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 December 31, 2019 is
$117,544, which includes $11,544 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 December 31, 2019 is
$68,591, which includes $6,591 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 December 31, 2019 is
$117,094, which includes $11,094 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 December 31, 2019 is
$33,127, which includes $3,127 of accrued interest.
On
December 15, 2017, the Company issued a promissory note (the “December 15, 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 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 December 15, 2017 Note, as of December 31, 2019 is $46,269, which includes $4,269 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 December 31, 2019 is $53,880, which includes $4,880 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 December 31, 2019 is $78,904, which includes $6,904 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 acquisition 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 December 31, 2019 is $93,116, which includes $8,116 of accrued interest.
On
July 23, 2019, the Company issued a promissory note (the “July 23, 2019 Note”) in the amount of $25,000, at which time
the entire balance of $25,000 was received to cover operational expenses. The July 23, 2019 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 July 23,
2019 Note, as of December 31, 2019 is $25,551, which includes $551 of accrued interest.
On
August 19, 2019, the Company issued a promissory note (the “August 19, 2019 Note”) in the amount of $10,000, at which
time the entire balance of $10,000 was received to cover operational expenses. The August 19, 2019 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
19, 2019 Note, as of December 31, 2019 is $10,182, which includes $182 of accrued interest.
On
August 27, 2019, the Company issued a promissory note (the “August 27, 2019 Note”) in the amount of $18,500, at which
time the entire balance of $18,500 was received to cover operational expenses. The August 27, 2019 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
27, 2019 Note, as of December 31, 2019 is $18,817, which includes $317 of accrued interest.
As
of December 31, 2019, and December 31, 2018, the notes payable due to related parties totaled
$1,018,524 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 the
promissory note was refinanced, and the balance increased 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 year ended December 31, 2019, the Company made payments totaling $617,987, and
included $124,906 in interest expense related to this note. As of December
31, 2019, the outstanding balance on the February 28, 2019 Note was $506,919. The
company is not in default on this note.
10. DERIVATIVE LIABILITIES
The
Company determined that the convertible notes outstanding as of December 31, 2019 contained an embedded derivative instrument as
the conversion price was based on a variable that was not an input to the fair value of a “fixed-for-fixed” option
as defined under FASB ASC Topic No. 815 – 40.
The
Company determined the fair values of the embedded convertible notes derivatives and tainted convertible notes using the lattice
valuation model. The balance of the fair value of the derivative liability as of December 31, 2019 and December 31, 2018 is as
follows:
|
Balance at December 31, 2018
|
|
|
$
|
—
|
|
|
Additions
|
|
|
|
573,595
|
|
|
Conversions
|
|
|
|
(287,668
|
)
|
|
Fair value gain
|
|
|
|
56,923
|
|
|
Balance at December 31, 2019
|
|
|
$
|
342,850
|
|
The
Company recorded derivative expense as follows:
Amortization of debt discount
|
|
$
|
387,124
|
|
Excess derivative
|
|
|
106,576
|
|
Total
|
|
$
|
493,700
|
|
11. CAPITAL
STOCK
At December
31, 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.
As of the date of this report, the Board has designated Series A, Series B, Series C, Series D, Series E, Series F and Series G
Preferred Stock.
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 December 31, 2018, the Company has 10,000 shares of Series A Preferred Stock outstanding. During the year ended December
31, 2019 and 2018, we paid dividends of $20,000 and $60,000, respectively, to the holders of Series A Preferred stock. As of December
31, 2019, the balance owed on the Series A Preferred stock dividend was $80,000.
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 December 31, 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 December 31, 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 December 31, 2019, the Company has 90,000 shares of Series D Preferred Stock
outstanding. During the year ended December 31, 2019, and 2018, we
paid dividends of zero, and $49,478
respectively, to the holders of Series D Preferred stock. As of December 31, 2019, the balance owed on the Series D Preferred stock
dividend was $210,961, $82,999 of which relates to the year ended December 31, 2019.
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 December 31, 2019, the Company had 10,000 shares of Series
E Preferred Stock outstanding.
Series F Preferred
The Company
has designated 800,000 shares of its preferred stock as Series F Preferred Stock. Each share of Series F Preferred Stock has a
stated value of $25. The Series F Preferred Stock is not convertible into common stock. The holders of outstanding shares of Series
F Preferred Stock are entitled to receive dividends, at the annual rate of 10%, payable monthly, payable in preference and priority
to any payment of any dividend on the Company’s common stock. The Series F Preferred Stock does have voting rights, except
as required by law and with respect to certain protective provisions set forth in the Certificate of Designation. To the extent
it may lawfully do so, the Company may, in its sole discretion, after the first anniversary of the original issuance date of the
Series F Preferred Stock, redeem any or all of the then outstanding shares of Series F Preferred Stock at a redemption price of
$25 per share plus any accrued but unpaid dividends. The Series F Preferred Stock is being offered in connection with the Company’s
Reg A+ offering, which was qualified by the Securities and Exchange Commission as of December 27, 2019. As of December 31, 2019,
the Company had 800,000 shares of Series F Preferred Stock available and zero shares outstanding.
Series G Preferred
On February
6, 2020, the Company designated 2,600 shares of its preferred stock as Series G Preferred Stock. Each share of Series G Preferred
Stock shall have a stated value of $100. The Series G Preferred Stock is convertible into shares of the Company's common stock
by dividing the stated value by a conversion price of $0.0019 per share. Series G 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 December 31, 2019, the Company had zero shares of Series G Preferred Stock
outstanding.
12. 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. Currently, there are no outstanding options issued under the plan.
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. During the quarter ended September 30, 2019, two of the employees
who held 1,200,000 options, collectively, left the company and the options were forfeited. As of December 31, 2019, 600,000 of
these options are still active.
On
January 3, 2018, we granted non-qualified stock options to purchase up to 20,000,000 shares of our common stock to a key employee,
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 year ended December 31, 2019
and 2018, were determined using the Black Scholes method with the following assumptions:
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Risk free interest rate
|
|
|
—
|
|
|
|
2.57
|
%
|
Stock volatility factor
|
|
|
—
|
|
|
|
250
|
|
Weighted average expected option life
|
|
|
—
|
|
|
|
3.5 years
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
none
|
|
A summary of the Company’s
stock option activity and related information follows:
|
|
Year Ended
December 31, 2019
|
|
Year Ended
December 31, 2018
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
|
exercise
|
|
|
|
exercise
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
Outstanding - beginning of year
|
|
|
151,475,799
|
|
|
$
|
0.017
|
|
|
|
134,800,000
|
|
|
$
|
0.013
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
20,000,000
|
|
|
$
|
0.040
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(3,324,201
|
)
|
|
$
|
0.010
|
|
Forfeited
|
|
|
(1,200,000
|
)
|
|
$
|
0.050
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding - end of year
|
|
|
150,275,799
|
|
|
$
|
0.016
|
|
|
|
151,475,799
|
|
|
$
|
0.017
|
|
Exercisable at the end of year
|
|
|
141,466,119
|
|
|
$
|
0.015
|
|
|
|
131,780,091
|
|
|
$
|
0.014
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted during the year
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
800,000
|
|
As of December
31, 2019, and December 31, 2018, the intrinsic value of the stock options was approximately zero and $212,950, respectively. Stock
option expense for the year ended December 31, 2019, and 2018 were $324,959 and $479,182, 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 December 31, 2019 was as follows:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
remaining
|
Exercise
|
|
options
|
|
contractual
|
prices
|
|
outstanding
|
|
life (years)
|
$
|
0.0500
|
|
|
|
600,000
|
|
|
|
2.72
|
|
$
|
0.0400
|
|
|
|
20,000,000
|
|
|
|
3.01
|
|
$
|
0.0150
|
|
|
|
35,000,000
|
|
|
|
2.65
|
|
$
|
0.0131
|
|
|
|
60,000,000
|
|
|
|
2.10
|
|
$
|
0.0130
|
|
|
|
15,000,000
|
|
|
|
2.22
|
|
$
|
0.0100
|
|
|
|
6,675,799
|
|
|
|
2.59
|
|
$
|
0.0053
|
|
|
|
12,500,000
|
|
|
|
2.62
|
|
$
|
0.0040
|
|
|
|
500,000
|
|
|
|
1.78
|
|
|
|
|
|
|
150,275,799
|
|
|
|
|
|
Warrants
During the
fiscal year ended December 31, 2019 the Company entered into a consulting agreement related to our Reg A+ offering. The Company
agreed to pay a consultant a monthly fee, plus a variable unguaranteed warrant of $25 per investor acquired, plus a guaranteed
warrant to purchase 10,000,000 shares of the Company’s capital stock on a cashless basis. Both of the warrants were issued
at a price of $0.0067 per share. As of December 31, 2019 and December 31, 2018, there were 10,000,000 and zero warrants outstanding,
respectively.
The fair
value of warrants granted during the year ended December 31, 2019 and 2018, were determined using the Black Scholes method with
the following assumptions:
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Risk free interest rate
|
|
|
1.86
|
%
|
|
|
—
|
|
Stock volatility factor
|
|
|
272
|
%
|
|
|
—
|
|
Weighted average expected warrant life
|
|
|
10 years
|
|
|
|
—
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
—
|
|
A summary of the Company’s
warrant activity and related information follows:
|
|
Year Ended
December 31, 2019
|
|
Year Ended
December 31, 2018
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
|
exercise
|
|
|
|
exercise
|
|
|
Warrants
|
|
price
|
|
Warrants
|
|
price
|
Outstanding - beginning of year
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Issued
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding - end of year
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercisable at the end of year
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
|
|
—
|
|
|
$
|
—
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants granted during the year
|
|
|
|
|
|
$
|
67,000
|
|
|
|
|
|
|
$
|
—
|
|
Warrant expense
for the year ended December 31, 2019, and 2018 were $67,000 and zero, respectively.
The weighted average remaining contractual
life of warrants outstanding, as of December 31, 2019 was as follows:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
remaining
|
Exercise
|
|
warrants
|
|
contractual
|
prices
|
|
outstanding
|
|
life (years)
|
$
|
0.0067
|
|
|
|
10,000,000
|
|
|
|
9.63
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
13. 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, $85,000 on February 2, 2018, $25,000 on July 23, 2019, $10,000
on August 20, 2019 and $18,500 on August 28, 2019, 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 December 31, 2019 and December 31, 2018,
principal on the Bountiful Notes and accrued interest totaled $1,018,524
and $920,470. The Company’s chief financial officer, Greg Boden, also serves as the president of Bountiful Capital,
LLC.
Brad
Parscale served on the board of directors of the Company since the acquisition of Parscale Creative on August 1, 2017, until his
resignation on December 10, 2019. Mr. Parscale is also the owner of Parscale Strategy, LLC (“Parscale Strategy”), a
customer of the Company. During the year ended December 31, 2019 and
2018, the Company earned $194,492 and $2,562,290, respectively, in revenue from providing services to Parscale Strategy, and as
of December 31, 2019 and December 31, 2018, Parscale Strategy had outstanding accounts receivable
balances of $2,737 and $78,753, and accounts payable of $30,000 and $6,000, respectively. As of
December
31, 2019, Mr. Parscale was not a director, officer, employee or contractor of the company.
On
August 1, 2017, Parscale Digital signed a lease with Bureau, Inc., a related party, to provide a workplace for the employees of
Parscale Digital. Bureau, Inc., is wholly owned by Jill Giles, an employee of the Company. Details on this lease are included in
Note 15. In addition, as of December 31, 2019 and December 31, 2018, the Company had outstanding accounts payable balances to Jill
Giles of $11,738 and zero, respectively.
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 served on the CloudCommerce board of directors from August 1, 2017 until his resignation
on December 10, 2019. Details of this lease are included in Note 15.
As
of December 31, 2019, we had convertible notes in the amount of $300,363 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.
14. CONCENTRATIONS
For the year
ended December 31, 2019 and 2018, the Company had one and five major customers who represented approximately 22% and 38% of total
revenue, respectively. At December 31, 2019 and December 31, 2018, accounts receivable from two and two customers, represented
approximately 35% and 41% 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.
15. 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 consolidated balance sheets. Finance leases are included in property
and equipment, current liabilities, and long-term liabilities on our 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 consolidated
statements of operations and did not result in a cumulative catch-up adjustment to opening equity. As of December 31, 2019,
the company recognized ROU assets of $266,758 and lease liabilities of $266,758.
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 year 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 December 31, 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 October 15, 2019, the Company vacated this office
space and moved to the 321 Sixth Street, San Antonio, TX location. The landlord relieved the Company of any further liability by
leasing the space to another party. As of December 31, 2019, the ROU asset and liability balances of this lease were zero and zero,
respectively.
On August
1, 2017, Parscale Digital signed a lease agreement with Bureau, 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 December 31, 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 December 31, 2019, the ROU asset and liability balances of this
lease were $266,758 and $266,758, 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 December 31, 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 December 31, 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 year ended December 31, 2019 and 2018 was $190,860 and $214,021, 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 December 31, 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 December 31, 2019, and December 31, 2018,
the Company owed $16,800 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.
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
|
|
December 31, 2019
|
|
December 31, 2018
|
Leased equipment under finance lease,
|
|
$
|
100,097
|
|
|
$
|
100,097
|
|
less accumulated amortization
|
|
|
(60,007
|
)
|
|
|
(35,176
|
)
|
Net
|
|
$
|
40,090
|
|
|
$
|
64,921
|
|
Liabilities
|
|
December 31, 2019
|
|
December 31, 2018
|
Obligations under finance lease (current)
|
|
$
|
20,654
|
|
|
$
|
34,039
|
|
Obligations under finance lease (noncurrent)
|
|
|
—
|
|
|
|
20,654
|
|
Total
|
|
$
|
20,654
|
|
|
$
|
54,693
|
|
Below
is a reconciliation of leases to the financial statements.
|
|
ROU Operating Leases
|
|
Finance Leases
|
Leased asset balance
|
|
$
|
266,758
|
|
|
$
|
40,090
|
|
Liability balance
|
|
|
266,758
|
|
|
|
20,654
|
|
Cash flow (operating)
|
|
|
—
|
|
|
|
—
|
|
Cash flow (financing)
|
|
|
—
|
|
|
|
34,038
|
|
Interest expense
|
|
$
|
34,244
|
|
|
$
|
1,961
|
|
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
|
|
2020
|
|
|
$
|
117,600
|
|
|
$
|
21,000
|
|
|
2021
|
|
|
|
117,600
|
|
|
|
—
|
|
|
2022
|
|
|
|
68,600
|
|
|
|
—
|
|
|
2023
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
$
|
303,800
|
|
|
$
|
21,000
|
|
|
Less imputed interest
|
|
|
|
(37,042
|
)
|
|
|
(346
|
)
|
|
Total liability
|
|
|
$
|
266,758
|
|
|
$
|
20,654
|
|
Other
information related to leases is as follows:
Lease Type
|
|
Weighted Average Remaining Term
|
|
Weighted Average Discount Rate (1)
|
Operating Leases
|
|
|
2.7 years
|
|
|
|
10
|
%
|
Finance Leases
|
|
|
0.7 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.
16. SUPPLEMENTAL STATEMENT OF CASH FLOWS
INFORMATION
During the year ended
December 31, 2019, there were the following non-cash activities.
|
-
|
Lenders converted debt into common stock, within the terms of the
agreements. The Company recording no losses on the following conversions:
|
Conversion Date
|
|
Note Date
|
|
Principal
|
|
Interest/Fees
|
|
Shares
|
July 17, 2019
|
|
January 16, 2019
|
|
$
|
12,000
|
|
|
$
|
—
|
|
|
|
1,967,213
|
|
August 5, 2019
|
|
January 31, 2019
|
|
|
7,838
|
|
|
|
250
|
|
|
|
2,550,000
|
|
August 27, 2019
|
|
January 16, 2019
|
|
|
12,000
|
|
|
|
—
|
|
|
|
3,870,968
|
|
September 4, 2019
|
|
January 16, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
5,172,414
|
|
September 4, 2019
|
|
January 31, 2019
|
|
|
7,777
|
|
|
|
250
|
|
|
|
2,800,000
|
|
September 5, 2019
|
|
January 16, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
5,172,414
|
|
September 13, 2019
|
|
January 16, 2019
|
|
|
16,000
|
|
|
|
—
|
|
|
|
6,956,522
|
|
September 25, 2019
|
|
January 16, 2019
|
|
|
14,800
|
|
|
|
—
|
|
|
|
7,047,619
|
|
October 28, 2019
|
|
January 16, 2019
|
|
|
11,300
|
|
|
|
—
|
|
|
|
7,062,500
|
|
November 4, 2019
|
|
January 16, 2019
|
|
|
6,900
|
|
|
|
5,150
|
|
|
|
7,531,250
|
|
November 20, 2019
|
|
February 21, 2019
|
|
|
6,900
|
|
|
|
—
|
|
|
|
4,928,571
|
|
November 26, 2019
|
|
February 21, 2019
|
|
|
7,900
|
|
|
|
—
|
|
|
|
9,294,118
|
|
November 27, 2019
|
|
February 21, 2019
|
|
|
7,900
|
|
|
|
—
|
|
|
|
9,294,118
|
|
December 2, 2019
|
|
February 21, 2019
|
|
|
8,900
|
|
|
|
—
|
|
|
|
10,470,588
|
|
December 4, 2019
|
|
February 21, 2019
|
|
|
8,900
|
|
|
|
—
|
|
|
|
10,470,588
|
|
December 4, 2019
|
|
February 21, 2019
|
|
|
8,900
|
|
|
|
—
|
|
|
|
10,470,588
|
|
December 4, 2019
|
|
January 31, 2019
|
|
|
6,359
|
|
|
|
250
|
|
|
|
8,333,670
|
|
December 5, 2019
|
|
February 21, 2019
|
|
|
3,600
|
|
|
|
2,650
|
|
|
|
7,352,941
|
|
December 5, 2019
|
|
January 31, 2019
|
|
|
9,663
|
|
|
|
250
|
|
|
|
12,500,000
|
|
December 6, 2019
|
|
April 24, 2019
|
|
|
9,800
|
|
|
|
—
|
|
|
|
11,529,412
|
|
December 6, 2019
|
|
April 24, 2019
|
|
|
9,800
|
|
|
|
—
|
|
|
|
11,529,412
|
|
December 6, 2019
|
|
January 31, 2019
|
|
|
10,456
|
|
|
|
250
|
|
|
|
13,500,000
|
|
December 9, 2019
|
|
April 24, 2019
|
|
|
13,000
|
|
|
|
—
|
|
|
|
15,294,118
|
|
December 9, 2019
|
|
April 24, 2019
|
|
|
10,400
|
|
|
|
2,150
|
|
|
|
14,764,706
|
|
December 11, 2019
|
|
January 31, 2019
|
|
|
11,407
|
|
|
|
1,915
|
|
|
|
16,800,000
|
|
December 16, 2019
|
|
June 10, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
17,647,059
|
|
December 16, 2019
|
|
June 10, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
17,647,059
|
|
December 17, 2019
|
|
June 10, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
17,647,059
|
|
December 17, 2019
|
|
June 10, 2019
|
|
|
8,000
|
|
|
|
2,650
|
|
|
|
12,529,412
|
|
|
|
|
|
|
305,500
|
|
|
|
15,765
|
|
|
|
282,123,319
|
|
|
-
|
Recorded the initial values of ROU operating leases,
which increased ROU assets by $398,506 and operating lease liability by $398,506, netting to zero on the statement of cash flows.
As of December 31, 2019, the ROU asset and liability balances were $266,758 and $266,758, respectively.
|
|
-
|
For the year ended December 31, 2019, the Company recorded
a discount on the convertible notes and derivative liability in the amount of $467,019, which declined by $287,668 during the year
due to conversions (derivative settlements).
|
During
the year ended December 31, 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.
-
On September 30, 2018, an employee exercised, on a cashless basis, 3,324,201 options, resulting in 1,233,509 shares of common
stock.
17. INCOME
TAXES
The
provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 were as follows, assuming a 21% and 21% effective
tax rate, respectively:
|
|
For the years ended December 31,
|
|
|
2019
|
|
2018
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
Deferred
tax asset
|
|
$
|
3,263,237
|
|
|
$
|
2,781,142
|
|
Valuation allowance
|
|
|
(3,263,237
|
)
|
|
|
(2,781,142
|
)
|
Total deferred tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2019, the Company had approximately $15,539,225 in tax loss carryforwards that can be utilized in future periods
to reduce taxable income through 2039. The deferred tax liability balances as of December 31, 2019 and 2018 were zero and zero,
respectively. 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.
The
Company provided a valuation allowance equal to the deferred income tax assets for the period from June 30, 2011 to December 31,
2019 because it is not presently known whether future taxable income will be sufficient to utilize the tax loss carryforwards.
The Company
has no uncertain tax positions.
18. 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.
|
-
|
Lenders converted debt into common stock as follows:
|
Conversion Date
|
|
Note Date
|
|
Principal
|
|
Interest/Fees
|
|
Shares
|
January 21, 2020
|
|
January 31, 2019
|
|
$
|
—
|
|
|
$
|
3,935
|
|
|
|
4,300,327
|
|
January 29, 2020
|
|
May 2, 2019
|
|
|
9,815
|
|
|
|
250
|
|
|
|
11,000,000
|
|
February 6, 2020
|
|
May 2, 2019
|
|
|
10,291
|
|
|
|
250
|
|
|
|
10,800,000
|
|
February 11, 2020
|
|
May 2, 2019
|
|
|
19,917
|
|
|
|
250
|
|
|
|
17,400,000
|
|
March 6, 2020
|
|
September 4, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
10,000,000
|
|
March 9, 2020
|
|
September 4, 2019
|
|
|
18,000
|
|
|
|
—
|
|
|
|
12,857,143
|
|
March 11, 2020
|
|
September 4, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
12,500,000
|
|
April 6, 2020
|
|
September 4, 2019
|
|
|
5,000
|
|
|
|
2,650
|
|
|
|
7,806,122
|
|
|
-
|
On January 17, 2020, the Company entered into an
exchange agreement with Bountiful Capital, to exchange debt in the amount of $259,698 (principal and accrued interest) for
2,597 shares of the Company’s Series G Preferred Stock, $0.001 par
value per share. The exchange agreement closed on February 6, 2020.
|
|
-
|
On January 17, 2020, the Board of Directors of the Company approved the issuance
of an aggregate of 300,000,000 options to purchase the Company’s common stock to key employees. The Options vest equally
over a period of thirty-six months, have an exercise price of $0.0019 per share, and expire five years from the effective date.
The vested Options are exercisable any time after January 17, 2021.
|
|
-
|
On February 6, 2020, the Company filed a Certificate of Designation of Series G Preferred Stock
with the Secretary of State of Nevada. The Certificate of Designation designates 2,600 shares of the Company’s authorized
preferred stock as Series G Preferred Stock. Each share of Series G Preferred Stock has a stated value
of $100. The Series G Preferred Stock is convertible into shares of the Company’s common stock at a conversion price of $0.0019
per share, subject to adjustment.
|