The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
SEPTEMBER 30, 2020
1. BASIS OF PRESENTATION
The
accompanying unaudited Consolidated Financial Statements of CloudCommerce, Inc. (“CloudCommerce,” “we,”
“us,” “our,” or the “Company”) and its
wholly-owned subsidiaries, have been prepared in accordance
with the instructions to interim financial reporting as prescribed by the Securities and Exchange Commission (the “SEC”). The
results for the interim periods are not necessarily indicative of results for the entire year. These interim financial statements
do not include all disclosures required by generally accepted accounting principles (“GAAP”) and should be read in
conjunction with our consolidated financial statements and footnotes in the Company's annual report on Form 10-K filed with the
SEC on April 16, 2020. In the opinion of management, the unaudited Consolidated Financial
Statements contained in this report include all known accruals and adjustments necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods reported herein. Any such adjustments are of a normal recurring
nature.
There
were various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the Company's consolidated financial position, results
of operations or cash flows.
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
Consolidated Financial Statements do not reflect any adjustments that might result if the Company is unable to continue as a going
concern. The Company does not generate significant revenue, and has negative cash flows from operations, which raise
substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue
as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, raise additional
capital. Historically, the Company has obtained funds from investors since its inception through sales of our securities. The Company
will also seek to generate additional working capital from increasing sales from its data sciences, creative, website development
and digital advertising service offerings, and continue to pursue its business plan and purposes.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
This
summary of significant accounting policies of CloudCommerce is presented to assist in understanding the Company’s Consolidated
Financial Statements. The Consolidated
Financial Statements and notes are representations of the Company’s
management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles
generally accepted in the United States of America and have been consistently applied in the preparation of the Consolidated
Financial Statements.
The
Consolidated Financial Statements include the Company and its wholly owned subsidiaries, CLWD Operations, Inc., a Delaware corporation
(“CLWD Operations”), Parscale Digital, Inc., a Nevada corporation (“Parscale Digital”), WebTegrity, Inc.,
a Nevada corporation (“WebTegrity”), Data Propria, Inc., a Nevada corporation (“Data Propria”), Parscale
Media, LLC, a Texas limited liability company (“Parscale Media”), and Giles Design Bureau, Inc., a Nevada corporation
(“Giles Design Bureau”). All significant inter-company transactions are eliminated in consolidation.
Reclassifications
Certain
prior periods have been recast to reflect current period presentation. During the quarter ended September 30, 2020 we began to
recognize cost of revenue in the statement of operation. All prior periods have been recast to reflect this change.
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 contractual 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 September 30, 2020 and December 31, 2019 are $75,516 and
$118,589 respectively.
On
November 30, 2016, CLWD Operations entered into a 12-month agreement wherein amounts due from our customers were pledged to a third
party, in exchange for a borrowing facility in amounts up to a total of $400,000. The agreement was amended on March 23, 2017,
which increased the allowable borrowing amount by $100,000, to a maximum of $500,000. On November 30, 2017, the agreement renewed
automatically 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’ assets, and therefore, we will need to obtain such third-party lender’s
written consent to obligate CLWD Operations’ further or pledge its assets against additional borrowing facilities. Because
of this position, it may be difficult for CLWD Operations to secure additional secured borrowing facilities. The cost of this secured
borrowing facility is 0.05% of the daily balance. As of September 30, 2020,
the balance due from this arrangement was $242,082.
On
October 19, 2017, Parscale Digital entered into a 12-month agreement wherein amounts due from our customers were pledged to a third
party, in exchange for a borrowing facility in amounts up to a total of $500,000. The proceeds from the facility are determined
by the amounts we invoice our customers. The Company evaluated this facility in accordance with ASC 860, classifying it as a secured
borrowing arrangement. We record the amounts due from customers in accounts receivable and the amount due to the third party as
a liability, presented as a “Lines of credit” on the Balance Sheet. During the term of this facility, the third-party
lender has a first priority security interest in Parscale Digital, and therefore, we will need to obtain such third-party lender’s
written consent to obligate Parscale Digital further or pledge its assets against additional borrowing facilities. Because of this
position, it may be difficult for the Company to secure additional secured borrowing facilities. The cost of this secured borrowing
facility is 0.05% of the daily balance. On April 12, 2018, the Company amended the secured borrowing arrangement, which increased
the maximum allowable balance by $250,000, to a total of $750,000. As
of September 30, 2020,
the balance due from this arrangement was $55,212.
On
August 2, 2018, Giles Design Bureau, WebTegrity, and Data Propria entered into 12-month agreements wherein amounts due from our
customers were pledged to a third-party, in exchange for borrowing facilities in amounts up to a total of $150,000, $150,000 and
$600,000, respectively. The proceeds from the facility are determined by the amounts we invoice our customers. We evaluated these
facilities in accordance with ASC 860, classifying as secured borrowing arrangements. We record the amounts due from customers
in accounts receivable and the amount due to the third party as a liability, presented under “Lines of credit” on the
Balance Sheet. During the term of these facilities, the third-party lender had a first priority security interest in the respective
entities, and, therefore, we would need to obtain such third-party lender’s written consent to obligate the entities further
or pledge our assets against additional borrowing facilities. Because of this position, it may be difficult for the entities to
secure additional secured borrowing facilities. The cost of this secured borrowing facilities is 0.056%, 0.056% and 0.049%, respectively,
of the daily balance. These three borrowing facilities had an expiration
date of August 22, 2020 and were not renewed. As of September 30, 2020, the combined balance due from these arrangement was zero.
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 nine months or less to be cash equivalents. As of September
30, 2020, the Company held cash and cash equivalents in the amount of $77,364, which was held in the Company’s operating
bank accounts. Of this amount, none was held in any one account, in amounts exceeding the FDIC insured limit of $250,000.
Property and Equipment
Property
and equipment are stated at cost, and are depreciated or amortized using the straight-line method over the following estimated
useful lives:
Furniture, fixtures & equipment
|
|
7 Years
|
Computer equipment
|
|
5 Years
|
Commerce server
|
|
5 Years
|
Computer software
|
|
3 - 5 Years
|
Leasehold improvements
|
|
Length of the lease
|
Depreciation
expenses were $30,598 and $32,305 for the nine months ended September 30, 2020 and 2019, respectively.
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 our 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 on the
balance sheet as 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 September 30, 2020, and December 31, 2019 were $1,360,649 and $2,080,762,
respectively. The costs in excess of billings as of September 30, 2020 and December 31, 2019 was $17,119 and $21,606, respectively.
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 of ASC 606-10-55-39, that the
amounts classified as reimbursable costs should be recorded as gross revenue, 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 discretion in establishing price; and
|
|
●
|
We have discretion in supplier selection.
|
Research and Development
Research
and development costs are expensed as incurred. Total research and development costs were zero for the nine months ended September
30, 2020 and 2019.
Advertising
Costs
The Company
expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $117,691 and $4,797 for
the nine months ended September 30, 2020 and 2019, 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 September
30, 2020 and December 31, 2019, 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 nine-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 1measurements)
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 September 30, 2020 and December 31, 2019:
September 30, 2020
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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
|
|
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the
estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the
long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information
at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future
cash flows based on reasonable and supportable assumptions.
Indefinite Lived Intangibles
and Goodwill Assets
The Company
accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based
on their estimated fair values. Significant estimates in valuing certain intangible assets include, but are not limited to, future
expected cash flows from acquired customer lists, acquired technology, and trade names from a market participant perspective, useful
lives and discount rates. Management’s estimates of fair value are based upon assumptions we believe 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 exceeded the respective carrying values. Therefore, no impairment of indefinite
lived intangibles and goodwill was recognized.
The impairment
test conducted by the Company includes a nine-step approach to determine whether it is more likely than not that impairment exists.
If it is determined, after step one, that it is not more likely than not, that impairment exists, then no further analysis is conducted.
The nine 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 offerings, or obsolescence could adversely affect the Company or its reporting units. We understand that the markets we serve are constantly changing, requiring us to change with them. 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:
|
|
September 30, 2020
|
|
|
Parscale Digital
|
|
WebTegrity
|
|
CloudCommerce
|
|
Total
|
Customer list
|
|
$
|
—
|
|
|
$
|
7,161
|
|
|
$
|
—
|
|
|
$
|
7,161
|
|
Non-compete agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Domain name and trademark
|
|
|
—
|
|
|
|
—
|
|
|
|
26,754
|
|
|
|
26,754
|
|
Brand name
|
|
|
—
|
|
|
|
130,000
|
|
|
|
—
|
|
|
|
130,000
|
|
Goodwill
|
|
|
—
|
|
|
|
430,000
|
|
|
|
—
|
|
|
|
430,000
|
|
Total
|
|
$
|
—
|
|
|
$
|
567,161
|
|
|
$
|
26,754
|
|
|
$
|
593,915
|
|
|
|
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
|
|
Business
Combinations
The acquisition
of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair
value, at the acquisition date, of assets received, liabilities incurred or assumed, and equity instruments issued by the Company
in exchange for control of the acquiree. Any costs directly attributable to the business combination are expensed in the period
incurred. The acquiree’s identifiable assets and liabilities are recognized at their fair values at the acquisition date.
Goodwill
arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination
over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized.
Concentrations
of Business and Credit Risk
The Company
operates in a single industry segment. The Company markets its services to companies and individuals in many industries and geographic
locations. The Company’s operations are subject to rapid technological advancement and intense competition. Accounts receivable
represent financial instruments with potential credit risk. The Company typically
offers its customers credit terms.
The Company makes periodic evaluations of the credit worthiness of its enterprise customers
and other than obtaining deposits pursuant to its policies, it generally does not require collateral. In the event of nonpayment,
the Company has the ability to terminate services. As of September 30, 2020, the Company held cash and cash equivalents
in the amount of $77,364, which was held in the operating bank accounts. Of this amount, none was held in any one account, in amounts
exceeding the FDIC insured limit of $250,000. 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 nine months
ended September 30, 2020, included compensation expense for the stock-based payment awards granted prior to, but not yet vested,
as of September 30, 2020 based on the grant date fair value estimated. Stock-based compensation expense recognized in the consolidated
statement of operations for the nine months ended September 30, 2020 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 nine months ended September 30, 2020 and 2019 were $344,665 and $246,822, 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 nine
months ended September 30, 2020, the Company has excluded 216,242,922 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, 2,597 Series G Preferred shares convertible into 136,684,211 shares of common stock and 18,136,300 shares of common
stock underlying $181,363 in convertible notes, because their impact on the loss per share is anti-dilutive.
For the nine
months ended September 30, 2019, the Company has excluded 151,475,799 shares of common stock underlying options, 10,000 Series
A Preferred shares convertible into 100,000,000 shares of common stock, 18,025 Series B Preferred shares convertible into 450,625,000
shares of common stock, 14,425 Series C Preferred shares convertible into 144,250,000 shares of common stock, 90,000 Series D Preferred
shares convertible into 225,000,000 shares of common stock, 10,000 Series E Preferred shares convertible into 20,000,000 shares
of common stock and 87,138,607 shares of common stock underlying $766,530 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
The Company
does not elect to delay complying with any new or revised accounting standards, but to apply all standards required of public companies,
according to those required application dates.
Management
reviewed accounting pronouncements issued during the quarter ended September 30, 2020, and no pronouncements were adopted during
the period.
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
$352,943 and operating lease liability, in the amount of $352,943, 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. As of September 30, 2020, and December
31, 2019, the finance lease obligation totaled zero and $20,654, respectively.
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 nine months ended
September 30, 2020, we used the federal tax rate of 21% in our determination of the deferred tax assets and liabilities balances.
|
|
For the nine months ended
|
|
|
September 30, 2020
|
Current tax provision:
|
|
|
Federal
|
|
|
Taxable income
|
|
$
|
—
|
|
Total current tax provision
|
|
$
|
—
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
Federal
|
|
|
|
|
Loss carryforwards
|
|
$
|
3,339,113
|
|
Change in valuation allowance
|
|
|
(3,339,113
|
)
|
Total deferred tax provision
|
|
$
|
—
|
|
3. REVENUE RECOGNITION
On January
1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU
(collectively, “ASC 606”), using the modified retrospective method applied to those contracts
which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are
presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic
accounting under Topic 605. Revenues are recognized when control of the promised goods or services is transferred to our customers,
in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The 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 an email detailing the terms of the arrangement,
along with a proposal document. No work is commenced without an understanding between the Company and our customers, that a valid
contract exists.
|
2.
|
Identify the performance obligations in the contract
|
Our sales and account management
teams define the scope of services to be offered, to ensure all parties are in agreement and obligations are being delivered to
the customer as promised. The performance obligation may not be fully identified in a mutually signed contract, but may be outlined
in email correspondence, face-to-face meetings, additional proposals or scopes of work, or phone conversations.
|
3.
|
Determine the transaction price
|
Pricing is discussed and identified
by the operations team prior to submitting a proposal to the customer. Based on the obligation presented, third-party service pricing
is established, and time and labor are estimated, to determine the most accurate transaction pricing for our customer. Price is
subject to change upon agreed parties, and could be fixed or variable, milestone focused or time and materials.
|
4.
|
Allocate the transaction price to the performance obligations
in the contract
|
If a contract involves multiple
obligations, the transaction pricing is allocated accordingly, during the performance obligation phase (criteria 2 above).
|
5.
|
Recognize revenue when (or as) we satisfy a performance obligation
|
The Company uses several means
to satisfy the performance obligations:
|
a.
|
Billable Hours – The Company employs a time tracking
system where employees record their time by project. This method of satisfaction is used for time and material projects, change
orders, website edits,
|
revisions to designs, and any
other project that is hours-based. The hours satisfy the performance obligation as the hours are incurred.
|
b.
|
Ad Spend - To satisfy ad spend, the Company generates analytical
reports monthly or as required to show how the ad dollars were spent and how the targeting resulted in click-throughs. The ad spend
satisfies the performance obligation, regardless of the outcome or effectiveness of the campaign. In addition, the Company utilizes
third party invoices after the ad dollars are spent, in order to satisfy the obligation.
|
|
c.
|
Milestones – If the contract requires milestones to
be hit, then the Company satisfies the performance obligation when that milestone is completed and presented to the customer for
review. As each phase of a project is complete, we consider it as a performance obligation being satisfied and transferred to the
customer. At this point, the customer is invoiced the amount due based on the transaction pricing for that specific phase and/or
we apply the customer deposit to recognize revenue.
|
|
d.
|
Monthly Retainer – If the contract is a retainer for
work performed, then the customer is paying the Company for its expertise and accessibility, not for a pre-defined 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 five 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 we believe, set apart our clients from their competitors and establish them
in their specific markets. We believe in showcasing our clients’ brands 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. 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
nine months ended September 30, 2020 and 2019, we included $4,518,054 and $5,385,924 respectively, in revenue, related to reimbursable
costs.
The deferred
revenue and customer deposits as of September 30, 2020 and December 31, 2019 were $1,360,649 and $2,080,762, respectively.
For the nine
months ended September 30, 2020 and 2019 (unaudited), revenue was disaggregated into the five categories as follows:
|
|
Nine months ended
September 30, 2020 (unaudited)
|
|
Nine months ended
September 30, 2019 (unaudited)
|
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
Data Sciences
|
|
$
|
490,195
|
|
|
$
|
—
|
|
|
$
|
490,195
|
|
|
$
|
844,052
|
|
|
$
|
14,400
|
|
|
$
|
858,452
|
|
Design
|
|
|
1,891,221
|
|
|
|
—
|
|
|
|
1,891,221
|
|
|
|
1,503,778
|
|
|
|
624
|
|
|
|
1,504,402
|
|
Development
|
|
|
284,613
|
|
|
|
—
|
|
|
|
284,613
|
|
|
|
1,326,802
|
|
|
|
29,620
|
|
|
|
1,356,422
|
|
Digital Advertising
|
|
|
5,093,191
|
|
|
|
3,640
|
|
|
|
5,096,831
|
|
|
|
2,082,378
|
|
|
|
152,860
|
|
|
|
2,235,238
|
|
Other
|
|
|
256,944
|
|
|
|
—
|
|
|
|
256,944
|
|
|
|
892,891
|
|
|
|
28,524
|
|
|
|
921,415
|
|
Total
|
|
$
|
8,016,163
|
|
|
$
|
3,640
|
|
|
$
|
8,019,804
|
|
|
$
|
6,649,901
|
|
|
$
|
226,028
|
|
|
$
|
6,875,929
|
|
4. LIQUIDITY
AND OPERATIONS
The
Company had a net loss of $925,047 for the nine months ended September
30, 2020, and $1,944,335 for the nine months ended September
30, 2019, and net cash used in operating activities of $1,302,285 and $845,906, in the same periods,
respectively.
As of September
30, 2020, the Company had a short-term borrowing relationship with nine 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 September 30, 2020, 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 to finance its growth and business operations
in which event, the Company may need to seek outsider source of capital. There can be no assurance that such capital will be available
on terms that are favorable to the Company or at all.
5. BUSINESS ACQUISITIONS
Parscale Creative,
Inc.
On August
1, 2017, the Company completed the acquisition of Parscale Creative, Inc., (“Parscale Creative”) through a merger agreement
with the surviving entity, the Company’s wholly owned subsidiary, Parscale Digital, Inc., (“Parscale Digital”),
surviving the merger. 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 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 nine months ended September 30, 2020, we did not
pay any dividend related to the Series D Convertible Preferred stock, and as of September 30, 2020, the accrued balance of the
Series D Preferred dividend payable was $237,664. At the closing of the acquisition, Brad Parscale, the 100% owner of Parscale
Creative, was appointed to the Company’s Board of Directors. The Company assumed net liabilities of $535,000, related to
this acquisition.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $7,945,000, which was the fair value
of Parscale Creative at the time of acquisition. The assets and liabilities of Parscale Creative were recorded at their respective
fair values as of the date of acquisition. The acquisition date estimated fair value of the consideration transferred and purchase
price allocation consisted of the following:
Cash
|
|
$
|
200,000
|
|
Customer deposits and accrued expenses
|
|
|
(535,000
|
)
|
Net tangible liabilities
|
|
$
|
(335,000
|
)
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
280,000
|
|
Brand name
|
|
|
1,930,000
|
|
Customer list
|
|
|
2,090,000
|
|
Goodwill
|
|
|
3,645,000
|
|
Total purchase price
|
|
$
|
7,945,000
|
|
Issuance of series D convertible preferred stock
|
|
$
|
7,610,000
|
|
Net tangible liabilities
|
|
|
335,000
|
|
Total purchase price
|
|
$
|
7,945,000
|
|
|
|
|
|
|
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, for the year ended December 31, 2019.
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., merged with WebTegrity and the name of the combined subsidiary remained unchanged as 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. On April 16, 2018, we organized WebTegrity
as a Nevada corporation, and split WebTegrity from Parscale Digital.
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.
Under the terms of the agreement, the Company agreed to pay Mr. Parscale $1,000,000 in cash, upon closing the transaction, but
in no event later than January 1, 2018.
On February
1, 2018, the Company entered into an amended purchase agreement which provided for the issuance of a promissory note to Mr. Parscale
as consideration for the acquisition, under which the Company agreed to pay Mr. Parscale $1,000,000 in twelve equal installments,
and interest of 4% on the promissory note (the “Parscale Media Note”). On November 20, 2018, the Company exchanged
the remaining balance of the Parscale Media Note for an equal amount owed by Mr. Parscale to the Company. As of November 20, 2018,
the balance on the Parscale Media Note was zero.
Current assets
|
|
$
|
—
|
|
Brand name
|
|
|
100,000
|
|
Customer list
|
|
|
400,000
|
|
Goodwill
|
|
|
500,000
|
|
Total purchase price
|
|
$
|
1,000,000
|
|
|
|
|
|
|
During
the year ended December 31, 2019, we determined that the goodwill and intangibles related to the Parscale Media acquisition were
imparted. 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, for the year ended December 31, 2019.
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.
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. We use the domain 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 September 30, 2020,
we determined that this domain has an indefinite useful life, and as such, is not included in depreciation and amortization expense.
The Company will assess this intangible asset annually for impairment, in addition to it being classified with indefinite useful
life.
Trademark
On
September 22, 2015, the Company purchased the trademark rights 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 nine months ended September 30, 2020 and 2019, the Company included $517 and $517, respectively,
in depreciation and amortization expense related to this trademark. As of September 30, 2020, the balance on this intangible asset
was $6,552.
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 nine years. The Company has placed a value on this non-compete
agreement at $280,000, amortized over a period of 36 months. For the years 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, we 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 September 30, 2020, the balance on this intangible asset was zero.
Customer List
On August
1, 2017, the Company acquired Parscale Creative, and has calculated the value of the customer list acquired at $2,090,000, with
a useful life of 3 years. During the year ended December 31, 2019, the Company performed our annual impairment analysis and we
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 has calculated the value of the customer list acquired at $280,000, with a useful
life of 3 years. For the years ended September 30, 2020 and 2019, we included $64,445 and $64,446 in depreciation and amortization
expense related to the customer list, and as of September 30, 2020, the remaining balance of this intangible asset was $7,161.
On February
1, 2018, the Company acquired Parscale Media, and has calculated the value of the customer list acquired at $400,000, with a useful
life of 3 years. During the year ended December 31, 2019, the Company performed our annual impairment analysis and we 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.
As of December 31, 2019, the balance of this intangible asset was zero.
Brand Name
On August
1, 2017, the Company acquired Parscale Creative, and has calculated the value of the brand name at $1,930,000, which is included
in other assets on the balance sheet. As of September 30, 2020, 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. The name Parscale was revered in the digital advertising
space.
|
|
o
|
Expected useful life of related group –
The Parscale 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 – The Company
has experience with intangible assets, both definite and indefinite lived, in extending the life of the asset. However, this asset
does not require an extension or renewal, in order for it to remain on our balance sheet.
|
|
o
|
Effects of other factors – The Company
did consider this in evaluating the useful life. Given the political and media climate in the country, there is a chance that the
Parscale name could be harmed. The factor that we evaluated was whether that harm could affect the reputation and quality clients
came to rely upon. We came to the conclusion that even if the political or media climate diminished the Parscale name, our client
base is dedicated to the name, and not swayed by politics or media coverage. In addition, there is a large group of clients who
find more appeal to the Parscale name, because of political or media pressure.
|
|
o
|
Maintenance required – There is no maintenance
expenditure to obtain future cash flows. Therefore, this criterion was not taken into consideration.
|
During the
year ended December 31, 2019, the Company performed our annual impairment analysis and we determined that the intangible assets
of Parscale Creative were impaired. Therefore, as of December 31, 2019, the remaining balance of this intangible asset of $1,930,000
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 brand name at $130,000, which is included
in other assets on the balance sheet. As of September 30, 2020, 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 –WebTegrity
was in a highly competitive industry, mostly relying on the WordPress platform. We also considered whether there was 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 February
1, 2018, the Company acquired Parscale Media, and have calculated the value of the brand name at $100,000, which is included
in other assets on the balance sheet. As of September 30, 2020, 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. Many of the digital advertising clients also relied upon
Parscale Media to provide hosting services, so the Parscale name was very synonymous with dependability and quality.
|
|
o
|
Expected useful life of related group –
Although the Parscale name is typically thought of in connection with digital advertising, we determined that it did not belong
in a group of costs related to digital advertising. 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 – See explanation
of the Parscale name above.
|
|
o
|
Maintenance required – There is no maintenance
expenditure to obtain future cash flows. Therefore, this criterion was not taken into consideration.
|
During the
year ended December 31, 2019, the Company performed our annual impairment analysis and 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 $100,000
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 of this intangible asset was zero.
Goodwill
On August
1, 2017, the Company acquired Parscale Creative, and have calculated the value of the goodwill at $3,645,000, which was included
in other assets on the balance sheet. During the year ended December 31, 2019, the Company performed our annual impairment
analysis and it was determined that the goodwill and intangible assets of Parscale Creative were impaired. Therefore, as of December
31, 2019, the balance of this goodwill of $3,645,000 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 of this goodwill was zero.
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 the year ended December 31, 2019, the Company performed our annual impairment
analysis and it was determined that the goodwill and intangible assets of Parscale Media were impaired. Therefore, as of December
31, 2019, the balance of this goodwill of $500,000 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 of this goodwill was zero.
The
Company’s intangible assets consist of the following:
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Customer list
|
|
$
|
280,000
|
|
|
$
|
(272,839
|
)
|
|
$
|
7,161
|
|
|
$
|
280,000
|
|
|
$
|
(208,394
|
)
|
|
$
|
71,606
|
|
Non-compete agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Domain name and trademark
|
|
|
30,201
|
|
|
|
(3,447
|
)
|
|
|
26,754
|
|
|
|
30,201
|
|
|
|
(2,930
|
)
|
|
|
27,271
|
|
Brand name
|
|
|
130,000
|
|
|
|
—
|
|
|
|
130,000
|
|
|
|
130,000
|
|
|
|
—
|
|
|
|
130,000
|
|
Goodwill
|
|
|
430,000
|
|
|
|
—
|
|
|
|
430,000
|
|
|
|
430,000
|
|
|
|
—
|
|
|
|
430,000
|
|
Total
|
|
$
|
870,201
|
|
|
$
|
(276,286
|
)
|
|
$
|
593,915
|
|
|
$
|
870,201
|
|
|
$
|
(211,324
|
)
|
|
$
|
658,877
|
|
Total
amortization expense charged to operations for the nine months ended September 30, 2020, and 2019 were $64,962 and $732,379, 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
|
|
|
$
|
7,333
|
|
|
2021
|
|
|
|
690
|
|
|
2022
|
|
|
|
690
|
|
|
2023
|
|
|
|
690
|
|
|
Thereafter
|
|
|
|
4,310
|
|
|
Total
|
|
|
$
|
13,713
|
|
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 renewed
automatically 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 need to obtain 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 nine months ended September
30, 2020 and 2019, the Company included $16,310 and $1,745, respectively,
in interest expense, related to this secured borrowing facility, and as of September
30, 2020 and December 31, 2019, the outstanding balances were $242,082
and $5,228, respectively.
On
October 19, 2017, Parscale Digital entered into a 12 month agreement with a third party to sell the rights to amounts due from
our customers, in exchange for a borrowing facility in amounts up to a total of $500,000. The agreement was amended on April 12,
2018, which increased the allowable borrowing amount by $250,000, to a maximum of $750,000. The proceeds from the facility are
determined by the amounts we invoice our customers. We evaluated this facility in accordance with ASC 860, classifying it as a
secured borrowing arrangement. As such, we record the amounts due from customers in accounts receivable and the amount due to the
third party as a liability, presented 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 therefore, we will need to obtain 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 nine months ended September
30, 2020 and 2019, the Company included $39,883 and $59,557, respectively,
in interest expense, related to this secured borrowing facility, and as of September
30, 2020 and December 31, 2019, the outstanding balances were $55,212
and $258,646, respectively. This borrowing facility expired on October 19, 2020 and was not renewed.
On
August 2, 2018, Giles Design Bureau, WebTegrity, and Data Propria entered into a 12 month agreements with a third party to sell
the rights to amounts due from our customers, in exchange for borrowing facilities in amounts up to a total of $150,000, $150,000
and $600,000, respectively. The proceeds from the facility are determined by the amounts we invoice our customers. We evaluated
these facilities in accordance with ASC 860, classifying as secured borrowing arrangements. As such, we record the amounts due
from customers in accounts receivable and the amount due to the third party as a liability, presented 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 therefore, we would be required to obtain such third party lender’s written consent to obligate
the entities further or pledge their assets against additional borrowing facilities The cost of these secured borrowing facilities
are 0.056%, 0.056% and 0.049%, respectively, of the daily balance. During the nine months ended September
30, 2020 and 2019, the Company included $65,752 and $87,661, respectively,
in interest expense, related to these secured borrowing facilities, and as of September
30, 2020 and December 31, 2019, the combined outstanding balances were
zero and $213,088, respectively. These three borrowing facilities had
an expiration date of August 22, 2020 and were not renewed.
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 September 30, 2020, the balance of the discount was zero. The discount is amortized throughout
the term of the notes and included in interest expense. For the quarter ended September 30, 2020, the amount of amortization related
to the discount, included in interest expense was zero.
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 we received an initial advance of $50,000 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 bore interest at a rate of 10%
per year and matured on March 25, 2018. 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. On June 23, 2020, the lender converted $50,000 of
the outstanding balance and accrued interest of $36,260 into 21,565,068 shares of common stock. The balance of the March 2013 Note,
as of September 30, 2020 was zero.
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 we received an initial advance of $200,000 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. On June 23, 2020, the lender converted $38,894 of the outstanding balance and accrued
interest of $4,236 into 4,313,014 shares of common stock. The balance of the April 2018 Note, as of September 30, 2020, was
$181,363, which includes $20,257 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, and 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 bore interest at a rate of 10% per year, had a maturity
date of January 16, 2020, and was convertible into common stock 180 days after issuance. The conversion price was 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, leaving
a balance of zero. Because the Company records the value of convertible notes at fair value, no gain or loss is recorded upon conversion.
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, and 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 bore interest at a rate of 10% per year, had a maturity date
of January 31, 2020, and was convertible into common stock 180 days after issuance. The conversion price was 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. During the quarter ended
March 31, 2020, the lender converted $3,935 accrued interest and fees into 4,300,327 shares, leaving a balance of zero. Because
the Company records the value of convertible notes at fair value, no gain or loss is recorded upon conversion.
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 $50,000, and 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 bore interest at a
rate of 10% per year, had a maturity
date of February 21, 2020, and was convertible into common stock 180 days after issuance. The conversion price was 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, leaving
a balance of zero. Because the Company records the value of convertible notes at fair value, no gain or loss is recorded upon conversion.
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 $43,000, and 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 bore interest at a rate of 10% per year, had a maturity date of
April 24, 2020, and was convertible into common stock 180 days after issuance. The conversion price was 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, leaving a balance of
zero. Because the Company records the value of convertible notes at fair value, no gain or loss is recorded upon conversion.
On May 2,
2019 the Company issued a convertible promissory note (the “May 2, 2019 Note”) in the amount of $48,500 at which time
the Company received $45,000, and 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 2, 2019 Note bore interest at a rate of 10% per year, had a maturity date of May
2, 2020, and was convertible into common stock 180 days after issuance. The conversion price was calculated as a 39% discount to
the lowest trading price during the 15 trading days prior to conversion. The conversion feature of the May 2, 2019 Note was considered
a derivative in accordance with current accounting guidelines because of the reset conversion features of the May 2, 2019 Note.
The fair value of the May 2, 2019 Notes has been determined by using the Binomial lattice formula from the effective date of the
note. During the quarter ended March 31, 2020, the lender converted $40,772 principal and fees into 39,200,000 shares. During the
quarter ended June 30, 2020, the lender converted $13,578 principal, interest and fees into 22,258,360 shares, leaving a balance
of zero.
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 $50,000, and 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 bore interest at a rate of 10% per year, had a maturity date of June
10, 2020, and was convertible into common stock 180 days after issuance. The conversion price was 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, leaving the balance
of 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 $40,000, and 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 bore interest at a rate of 10% per year, had a maturity
date of July 10, 2020, and was convertible into common stock 180 days after issuance. The conversion price was 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 September 30, 2020, 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 quarter ended June 30, 2020, the lender converted $52,300 principal, interest and fees into 91,500,000
shares, leaving a balance of zero.
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, and 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 bore interest at a rate of 10% per year,
had a maturity date of September 4, 2020, and was convertible into common stock 180 days after issuance. The conversion price was
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 quarter ended March 31, 2020, the lender converted
$48,000 principal into 35,357,143 shares. During the quarter ended June 30, 2020, the lender converted $7,650 principal and interest
into 7,806,122 shares, leaving a balance of zero.
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, and 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 bore interest at a rate of 10% per year,
had a maturity date of December 2, 2020, and was convertible into common stock 180 days
after issuance. The conversion
price was 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. On June 1, 2020, the Company repaid the remaining balance of the December 2, 2019
note, of $55,824, which includes principal, interest and prepayment penalty, leaving a balance of zero. The prepayment penalty
of $16,528 was included in interest expense for the quarter ended June 30, 2020.
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, and 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 bore interest at a rate of 10% per year,
had a maturity date of December 5, 2020, and was convertible into common stock 180 days after issuance. The conversion price was
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. On June 3, 2020, the Company repaid the remaining balance of the December 2, 2019 note, of
$77,859, which includes principal, interest and prepayment penalty, leaving a balance of zero. The prepayment penalty of $22,988
was included in interest expense for the quarter ended June 30, 2020.
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 September 30, 2020 is
$28,952, which includes $3,952 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 September 30, 2020 is
$39,319 which includes $5,319 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 September 30, 2020 is
$106,228 which includes $14,228 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 September 30, 2020 is
$73,166, which includes $9,566 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 September 30, 2020 is
$118,883, which includes $15,383 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 September 30, 2020 is
$121,522, which includes $15,522 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 September 30, 2020 is
$70,918, which includes $8,918 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 September 30, 2020 is $121,072, which includes
$15,072 of accrued interest.
On
December 19, 2017, the Company issued a promissory note (the “December 19, 2017 Note”) in the amount of $42,000, at
which time the entire balance of $42,000 was received to cover operational expenses. The December 19, 2017 Note bears interest
at a rate of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance
of the December 19, 2017 Note, as of September 30, 2020 is $47,845, which includes $5,845 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 September 30, 2020 is $55,719, which includes $6,719 of accrued interest.
As
of September 30, 2020, and December 31, 2019, the notes payable due to related parties totaled
$783,626 and $1,018,524, respectively.
On January
17, 2020, the Company exchanged the below related party notes payable for 2,597 shares of Series G preferred stock. The table includes
the balances of each note, on the date of the exchange. During the quarter ended June 30, 2020, the Company included $560 in interest
expense, related to the exchanged notes. As of June 30, 2020, the balances of the exchanged notes were zero.
Note Date
|
|
Principal
|
|
Accrued Interest
|
|
Total Due
|
|
Gain on Exchange
|
|
Series G Preferred Shares
|
November 30, 2017
|
|
$
|
30,000
|
|
|
$
|
3,197
|
|
|
$
|
33,197
|
|
|
$
|
70
|
|
|
$
|
331
|
|
January 30, 2018
|
|
|
72,000
|
|
|
|
7,072
|
|
|
|
79,072
|
|
|
|
168
|
|
|
|
789
|
|
February 1, 2018
|
|
|
85,000
|
|
|
|
8,314
|
|
|
|
93,314
|
|
|
|
198
|
|
|
|
931
|
|
July 23, 2019
|
|
|
25,000
|
|
|
|
610
|
|
|
|
25,610
|
|
|
|
58
|
|
|
|
256
|
|
August 20, 2019
|
|
|
10,000
|
|
|
|
205
|
|
|
|
10,205
|
|
|
|
23
|
|
|
|
102
|
|
August 28, 2019
|
|
|
18,500
|
|
|
|
360
|
|
|
|
18,860
|
|
|
|
43
|
|
|
|
188
|
|
Total
|
|
$
|
240,500
|
|
|
$
|
19,758
|
|
|
$
|
260,258
|
|
|
$
|
560
|
|
|
$
|
2,597
|
|
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 nine months ended September 30, 2020, the Company made payments totaling $142,735,
and included $63,818 in interest expense related to this note. As of September 30, 2020, the
outstanding balance on the February 28, 2019 Note was $428,002. The company is not in default
on this note.
On May 5,
2020, the Company issued a promissory note (the “May 2020 Note”) in the amount of $780,680, at which time the entire
balance of $780,680 was received to cover payroll and other operating expenses. This May 2020 Note was issued through the Small
Business Administration Paycheck Protection Program (the “PPP Program”), and bears interest at a rate of 1% per year.
The PPP Program loans allow a deferment period of 6 months, which would require payments to be made starting November 5, 2020.
Although we anticipate that this loan will be forgiven, based on the terms of the PPP Program, we have included the balance on
the Balance Sheet as Notes Payable. As of September 30, 2020, the balance on the May 2020 Note was $783,846, which includes $3,166
of accrued interest.
10. DERIVATIVE LIABILITIES
During
the prior year, the Company determined that the convertible notes outstanding as of December 31, 2019 contained embedded derivative
instruments 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. During the quarter ended June 30,
2020, all
convertible notes that contained embedded derivative instruments were converted, leaving a derivative liability balance of zero.
As of September 30, 2020, the Company had a single convertible note (see footnote 8), which is convertible at a fixed price and
therefore does not contain an embedded derivative.
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 June 30, 2020 and December 31, 2019 is as follows:
Balance at December 31, 2019
|
|
$
|
342,850
|
|
Additions due to new convertible notes
|
|
|
127,273
|
|
Reduction due to conversions and adjustments
|
|
|
(339,105
|
)
|
Mark-to-market adjustment
|
|
|
(131,018
|
)
|
Balance at September 30, 2020
|
|
$
|
—
|
|
During
the nine months ended September 30, 2020 and 2019, the Company incurred losses of $0 and $0, respectively, on the conversion of
convertible notes. In connection with the convertible notes, for the nine months ended September 30, 2020 and 2019, the Company
recorded $9,295 and $31,168, respectively, of interest expense and $260,140 and $113,970, respectively, of debt discount amortization
expense. As of September 30, 2020, and December 31, 2019, the Company had approximately zero and $57,964, respectively, of accrued
interest related to the convertible notes that contained embedded derivative.
11. CAPITAL STOCK
At September
30, 2020 and December 31, 2019, the Company’s authorized stock consists of 2,000,000,000 shares of common stock, par value
$0.001 per share, and 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 are entitled to receive dividends, payable quarterly, out of any assets of the Corporation legally available therefor, at
the rate of $8 per share annually, payable in preference and priority to any payment of any dividend on the common stock. As of
September 30, 2020, the Company has 10,000 shares of Series A Preferred Stock outstanding. During the nine months ended
September 30, 2020 and 2019, we paid dividends of $20,000 and $20,000, respectively, to the holders of Series A Preferred stock.
As of September 30, 2020, the balance owed on the Series A Preferred stock dividend was $120,000.
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 has a stated
value of $100. The Series B Preferred Stock is convertible into shares of the Company's common stock in amount determined by dividing
the stated value by a conversion price of $0.004 per share. The Series B Preferred Stock does not have voting rights except as
required by law and with respect to certain protective provisions set forth in the Certificate of Designation of Series B Preferred
Stock. As of September 30, 2020, 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 has a stated
value of $100. The Series C Preferred Stock is convertible into shares of the Company's common stock by dividing the stated value
by a conversion price of $0.01 per share. The Series C Preferred Stock does not have voting rights except as required by law and
with respect to certain protective provisions set forth in the Certificate of Designation of Series C Preferred Stock. As of September
30, 2020, 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
has 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. The Series D Preferred Stock does not have
voting rights except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation
of Series D Preferred Stock. As of September 30, 2020, the Company had 90,000 shares of Series D Preferred Stock outstanding. During
the nine months ended September 30, 2020, and 2019, we paid dividends of zero, and zero respectively,
to the holders of Series D Preferred stock. As of September 30, 2020, the balance owed on the Series D Preferred stock dividend
was $237,664, $12,116 of which relates to the quarter ended September 30, 2020.
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 has a stated
value of $100. The Series E Preferred Stock is convertible into shares of the Company's common stock in an amount determined by
dividing the stated value by a conversion price of $0.05 per share. The Series E Preferred Stock does not have voting rights except
as required by law and with respect to certain protective provisions set forth in the Certificate of Designation of Series E Preferred
Stock. As of September 30, 2020, the Company has 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
offering under Regulation A under the Securities Act of 1933, as amended. As of September 30, 2020, the Company had 2,413 shares
of Series F Preferred Stock 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 has a stated value of $100. The Series G Preferred Stock is convertible into shares of the Company's common stock in an amount
determined by dividing the stated value by a conversion price of $0.0019 per share. The Series G Preferred Stock does not have
voting rights except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation
of Series G Preferred Stock. As of September 30, 2020, the Company had 2,597 shares of Series G Preferred Stock outstanding.
12. STOCK OPTIONS AND WARRANTS
Stock Options
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 an exercise 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. During the quarter ended September 30, 2018, the
employee exercised, on a cashless basis, 3,324,201 options, resulting in the issuance of 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 an exercise 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 year ended December 31, 2019, two of the
employees who held
1,200,000 options, collectively,
left the company and the options were forfeited, and during the period ended June 30, 2020, a key employee who held 600,000 options
left the Company and the options were forfeited.
On
January 3, 2018, we granted non-qualified stock options to purchase up to 20,000,000 shares of our common stock to nine key employees,
at an exercise 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.
On
January 17, 2020, we granted non-qualified stock options to purchase up to 283,000,000 shares of our common stock to ten key employees
and nine directors, at an exercise price of $0.0019 per share. The stock options vest equally over a period of 36 months
and expire January 17, 2025. These options allow the optionee to exercise on a cashless basis,
resulting in no cash payment to the Company upon exercise, anytime after January 17, 2021.
On
June 2, 2020, we granted non-qualified stock options to purchase up to 17,000,000 shares of our common stock to a director, at
an exercise price of $0.0018 per share. The stock options vest equally over a period of 36 months and expire June 2, 2025.
These options allow the optionee to exercise on a cashless basis, resulting in no cash payment to the Company upon exercise,
anytime after June 2, 2021.
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 nine months ending September
30, 2020 and 2019, were determined using the Black Scholes method with the following assumptions:
|
|
Nine months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
Risk free interest rate
|
|
|
1.86
|
%
|
|
|
—
|
|
Stock volatility factor
|
|
|
272
|
%
|
|
|
—
|
|
Weighted average expected option life
|
|
|
5 years
|
|
|
|
—
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
—
|
|
A summary of the Company’s
stock option activity and related information follows:
|
|
Nine months ended
September 30, 2020
|
|
Nine months ended
September 30, 2019
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
|
exercise
|
|
|
|
exercise
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
Outstanding - beginning of period
|
|
|
150,275,799
|
|
|
$
|
0.0160
|
|
|
|
154,800,000
|
|
|
$
|
0.017
|
|
Granted
|
|
|
300,000,000
|
|
|
$
|
0.0018
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,324,201
|
)
|
|
$
|
0.010
|
|
Forfeited
|
|
|
(600,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding - end of period
|
|
|
449,675,799
|
|
|
$
|
0.0067
|
|
|
|
151,475,799
|
|
|
$
|
0.017
|
|
Exercisable at the end of period
|
|
|
216,242,922
|
|
|
$
|
0.0116
|
|
|
|
129,108,310
|
|
|
$
|
0.014
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted during the period
|
|
|
|
|
|
$
|
568,300
|
|
|
|
|
|
|
$
|
800,000
|
|
As of September
30, 2020, and December 31, 2019, the intrinsic value of the stock options was approximately $1,397,950 and zero, respectively.
Stock option expense for the nine months ended September 30, 2020, and 2019 were $344,665 and
$246,822, 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 September 30, 2020 was as follows:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
remaining
|
Exercise
|
|
options
|
|
contractual
|
prices
|
|
outstanding
|
|
life (years)
|
$
|
0.0400
|
|
|
|
20,000,000
|
|
|
|
2.26
|
|
$
|
0.0150
|
|
|
|
35,000,000
|
|
|
|
1.90
|
|
$
|
0.0131
|
|
|
|
60,000,000
|
|
|
|
1.35
|
|
$
|
0.0130
|
|
|
|
15,000,000
|
|
|
|
1.47
|
|
$
|
0.0100
|
|
|
|
6,675,799
|
|
|
|
1.84
|
|
$
|
0.0053
|
|
|
|
12,500,000
|
|
|
|
1.87
|
|
$
|
0.0040
|
|
|
|
500,000
|
|
|
|
1.03
|
|
$
|
0.0019
|
|
|
|
283,000,000
|
|
|
|
4.30
|
|
$
|
0.0018
|
|
|
|
17,000,000
|
|
|
|
4.67
|
|
|
|
|
|
|
449,675,799
|
|
|
|
|
|
Warrants
During the
fiscal year ended December 31, 2019 the Company entered into a consulting agreement related to our offering under Regulation A.
The Company agreed to pay a consultant a monthly fee, plus a warrant to purchase 10,000,000 shares of the Company’s capital
stock on a cashless basis. The warrant was issued at a price of $0.0067 per share. As of September 30, 2020, and December 31, 2019,
there were 10,000,000 and 10,000,000 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:
|
|
Nine months ended
|
|
Year Ended
|
|
|
September 30, 2020
|
|
December 31, 2019
|
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:
|
|
Nine months ended
September 30, 2020
|
|
Year Ended
December 31, 2019
|
|
|
|
|
Weighted average
|
|
|
|
Weighted average
|
|
|
Warrants
|
|
exercise price
|
|
Warrants
|
|
exercise price
|
Outstanding - beginning of period
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
|
|
—
|
|
|
$
|
—
|
|
Issued
|
|
|
—
|
|
|
$
|
—
|
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding - end of period
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
Exercisable at the end of period
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
|
|
10,000,000
|
|
|
$
|
0.0067
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants granted during the period
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
67,000
|
|
Warrant expense for the nine months
ended September 30, 2020, and 2019 were both zero.
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. On January 17, 2020, notes payable amounting to $240,500 and accrued interest of $19,758 were
converted into 2,597 shares of Series G preferred stock. At September 30, 2020 and December
31, 2019, principal on the Bountiful Notes and accrued interest totaled $783,626
and $1,018,524. 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 from 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. During the nine months ended
September 30, 2020 and 2019, the Company earned $3,640 and $194,492,
respectively, in revenue from providing services to Parscale Strategy, and as of September 30, 2020 and
December 31, 2019, Parscale Strategy had an outstanding accounts receivable of zero and $5,417, respectively.
On
August 1, 2017, Parscale Digital signed a lease with Giles-Parscale, Inc., a related party, to provide a workplace for the employees
of Parscale Digital. Giles-Parscale, Inc., is wholly owned by Jill Giles, an employee of the Company. Details on this lease are
included in Note 15.
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. Details of this lease are included in Note 15.
As
of September 30, 2020, we had convertible notes in the amount of $181,363 with a relative of a shareholder that owns in excess
of 5% of our common stock. We believe that the terms of those convertible notes are consistent with arm’s length transactions.
14. CONCENTRATIONS
For the nine
months ended September 30, 2020 and 2019, the Company had three and one major customers who represented approximately 52% and 13%
of total revenue, respectively. At September 30, 2020 and December 31, 2019, accounts receivable from three and two customers,
represented approximately 34% and 46% 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 September 30, 2020, the company recognized ROU assets of $196,247 and lease liabilities of $196,247.
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, 2020,
and $3,150 per month from April 1, 2019 through March 31, 2020. As of December 31, 2019, 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 March 30, 2020, 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 Giles-Parscale, Inc., a related party, which commenced on August 1, 2017,
for approximately 8,290 square feet, at 321 Sixth Street, San Antonio, TX 78215, for $9,800 per month, plus a pro rata share of
the common building expenses. The lease expires on July 31, 2022. As of September 30, 2020, 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 September 30, 2020, the ROU asset and liability
balances of this lease were $196,247 and $196,247, respectively.
Total
operating lease expense for the nine months ended September 30, 2020 and 2019 was $70,511 and $134,093, 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 September 30, 2020, 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 September 30, 2020, and December 31,
2019, the Company owed $14,000 and $16,450 on the outstanding reduced payment terms, respectively.
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
|
|
September 30, 2020
|
|
December 31, 2019
|
Leased equipment under finance lease,
|
|
$
|
100,097
|
|
|
$
|
100,097
|
|
less accumulated amortization
|
|
|
(78,630
|
)
|
|
|
(60,007
|
)
|
Net
|
|
$
|
21,467
|
|
|
$
|
40,090
|
|
Liabilities
|
|
September 30, 2020
|
|
December 31, 2019
|
Obligations under finance lease (current)
|
|
$
|
—
|
|
|
$
|
20,654
|
|
Obligations under finance lease (noncurrent)
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
20,654
|
|
Below is a reconciliation of leases to
the financial statements.
|
|
ROU Operating Leases
|
|
Finance Leases
|
Leased asset balance
|
|
$
|
196,247
|
|
|
$
|
21,467
|
|
Liability balance
|
|
|
196,247
|
|
|
|
—
|
|
Cash flow (non-cash)
|
|
|
70,511
|
|
|
|
—
|
|
Interest expense
|
|
$
|
17,689
|
|
|
$
|
21,467
|
|
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
|
|
|
$
|
29,400
|
|
|
$
|
—
|
|
|
2021
|
|
|
|
117,600
|
|
|
|
—
|
|
|
2022
|
|
|
|
68,600
|
|
|
|
—
|
|
|
2023
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
$
|
215,600
|
|
|
$
|
—
|
|
|
Less imputed interest
|
|
|
|
(19,353
|
)
|
|
|
—
|
|
|
Total liability
|
|
|
$
|
196,247
|
|
|
$
|
—
|
|
Other
information related to leases is as follows:
Lease Type
|
|
Weighted Average Remaining Term
|
|
Weighted Average Discount Rate (1)
|
Operating Leases
|
|
|
22 months
|
|
|
|
10
|
%
|
Finance Leases
|
|
|
0 months
|
|
|
|
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 this time the Company considers to be material to the Company’s business or financial condition.
16. SUPPLEMENTAL STATEMENT OF CASH FLOWS
INFORMATION
During the nine months
ended September 30, 2020, there were the following non-cash activities.
|
-
|
Certain lenders converted a total of $291,940 of principal, interest
and fees, into 226,300,034 common shares. As a result of these conversions, we recorded a reduction to the derivative liability
of $339,105.
|
|
-
|
The values of the ROU operating leases assets and liabilities each
declined $70,511, netting to zero on the statement of cash flows.
|
|
-
|
Recorded an initial derivative discount for notes that became convertible
during the period, in the amount of $127,273, which was converted and eliminated.
|
|
-
|
Related party debt and interest in the amount of $259,698 was exchanged
for 2,597 shares of series G preferred stock. See footnote 9 for the details of this exchange.
|
During the nine months
ended September 30, 2019, there were the following non-cash activities.
|
-
|
On August 5, 2019, a
lender converted a portion of the January 31, 2019 Note into common stock. The conversion included $8,089 of principal, plus $250
of interest, which was converted into 2,550,000 common shares.
|
|
-
|
On September 4, 2019,
a lender converted a portion of the January 31, 2019 Note into common stock. The conversion included $8,028 of principal, plus
$250 of interest, which was converted into 2,800,000 common shares.
|
|
-
|
On July 17, 2019, a lender
converted a portion of the January 16, 2019 Note into common stock. The conversion included $12,000 of principal, plus zero of
interest, which was converted into 1,967,213 common shares.
|
|
-
|
On August 27, 2019, a
lender converted a portion of the January 16, 2019 Note into common stock. The conversion included $12,000 of principal, plus zero
of interest, which was converted into 3,870,968 common shares.
|
|
-
|
On September 4, 2019,
a lender converted a portion of the January 16, 2019 Note into common stock. The conversion included $15,000 of principal, plus
zero of interest, which was converted into 5,172,414 common stock.
|
|
-
|
On September 5, 2019,
a lender converted a portion of the January 16, 2019 Note into common stock. The conversion included $15,000 of principal, plus
zero of interest, which was converted into 5,172,414 common shares.
|
|
-
|
On September 13, 2019,
a lender converted a portion of the January 16, 2019 Note into common stock. The conversion included $16,000 of principal, plus
zero of interest, which was converted into 6,956,522 common shares.
|
|
-
|
On September 25, 2019,
a lender converted a portion of the January 16, 2019 Note into common stock. The conversion included $14,800 of principal, plus
zero of interest, which was converted into 7,047,619 common shares.
|
|
-
|
Recorded the initial
values of ROU operating leases, which increased ROU assets by $365,460 and operating lease liability by $365,460, netting to zero
on the statement of cash flows.
|
17. SUBSEQUENT EVENTS
Management
has evaluated subsequent events according to ASC TOPIC 855 as of the date of the financial statements and has determined that the
following subsequent events are reportable.
|
-
|
On October 21, 2020,
the Company issued a self-amortizing promissory note (the “October 2020 Note”) in the amount of $600,000 at which time
the Company received $570,000 and the remaining $30,000 was retained by the lender as an original issue discount. The proceeds
were used to pay off the June 2018 Note (see footnote 9), as well as to cover operating expenses.
The October 2020 Note bears interest at a rate of 12% per year, and has a maturity date of October 21, 2021, with monthly principal
and interest payments commencing approximately 90 days after issuance of the note. The first payment of $61,889 is due January
19, 2021. The October 2020 Note is convertible into common stock only upon a default, such as missing a payment when due. The conversion
price is equal to the closing bid price on the day prior to conversion, with no discount off the prior day price. It has not been
determined whether the conversion feature of the October 2020 Note qualifies as a derivative instrument, but such analysis will
be conducted during the fourth quarter of 2020.
|
|
-
|
On October 30, 2020, the Company repaid the remaining balance
of the June 2018 Note (see footnote 9), with the proceeds of the October 2020 Note. At the time of the payoff, the principal balance
of the June 2018 Note was approximately $428,000.
|