CLOUDCOMMERCE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year Ended
|
|
|
December
31, 2020
|
|
December
31, 2019
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net loss
|
|
$
|
(1,270,650
|
)
|
|
$
|
(10,123,380
|
)
|
Adjustment to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
(used in) operating activities
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
16,868
|
|
|
|
114,748
|
|
Depreciation and amortization
|
|
|
113,287
|
|
|
|
1,019,472
|
|
Loss on sale of fixed assets
|
|
|
—
|
|
|
|
6,452
|
|
Loss on impairment of goodwill & intangibles
|
|
|
560,000
|
|
|
|
6,760,767
|
|
Gain on forgiveness of PPP loan
|
|
|
(780,680
|
)
|
|
|
—
|
|
Non-cash compensation expense
|
|
|
390,035
|
|
|
|
391,959
|
|
Non-cash service expense
|
|
|
98,343
|
|
|
|
—
|
|
Amortization of Debt Discount
|
|
|
270,607
|
|
|
|
60,274
|
|
(Gain)/loss on derivative liability valuation
|
|
|
(131,018
|
)
|
|
|
56,923
|
|
Derivative expense
|
|
|
—
|
|
|
|
493,700
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) Decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
497,299
|
|
|
|
30,182
|
|
Prepaid expenses and other assets
|
|
|
(3,581
|
)
|
|
|
47,435
|
|
Costs in excess of billings
|
|
|
21,606
|
|
|
|
77,411
|
|
Lease deposit
|
|
|
—
|
|
|
|
4,000
|
|
Accounts payable
|
|
|
(323,670
|
)
|
|
|
290,952
|
|
Accrued expenses
|
|
|
(31,597
|
)
|
|
|
(96,201
|
)
|
Customer Deposits
|
|
|
(1,239,472
|
)
|
|
|
1,326,904
|
|
Deferred income
|
|
|
—
|
|
|
|
(327,712
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY /
(USED IN) OPERATING ACTIVITIES
|
|
|
(1,812,623
|
)
|
|
|
133,886
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash paid for purchase
of fixed assets
|
|
|
(5,253
|
)
|
|
|
(2,104
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING
ACTIVITIES
|
|
|
(5,253
|
)
|
|
|
(2,104
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments on capital lease
obligation
|
|
|
(20,654
|
)
|
|
|
(34,038
|
)
|
Payment of dividend
|
|
|
(23,452
|
)
|
|
|
(24,142
|
)
|
Proceeds on line of credit, net
|
|
|
60,106
|
|
|
|
(97,005
|
)
|
Proceeds from issuance of notes, related party
|
|
|
|
|
|
|
53,500
|
|
Proceeds from issuance
of preferred stock
|
|
|
60,325
|
|
|
|
|
|
Principal payments on
debt, third party
|
|
|
(91,000
|
)
|
|
|
—
|
|
Proceeds from issuance of notes payable
|
|
|
1,530,680
|
|
|
|
541,000
|
|
Principal payments on term loan
|
|
|
(506,919
|
)
|
|
|
(493,081
|
)
|
Proceeds from issuance of term loan
|
|
|
—
|
|
|
|
625,000
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
|
1,009,086
|
|
|
|
571,234
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE / (DECREASE) IN CASH
|
|
|
(808,790
|
)
|
|
|
703,016
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD
|
|
|
819,328
|
|
|
|
116,312
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD
|
|
$
|
10,538
|
|
|
$
|
819,328
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
285,293
|
|
|
$
|
123,223
|
|
Taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Conversion of notes
payable to common stock
|
|
$
|
291,940
|
|
|
$
|
321,265
|
|
Exchange of Debt-to-Equity
(Preferred)
|
|
$
|
259,698
|
|
|
$
|
—
|
|
Derivative settlement
|
|
$
|
339,105
|
|
|
$
|
287,668
|
|
Shares issued to lenders
|
|
$
|
334,377
|
|
|
$
|
—
|
|
Right of use assets
|
|
$
|
95,209
|
|
|
$
|
398,506
|
|
Derivative discount
|
|
$
|
127,273
|
|
|
$
|
467,019
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
|
1.
|
ORGANIZATION
AND LINE OF BUSINESS
|
Organization
CloudCommerce,
Inc. (“we”, “us”, “our” or the “Company”) is a Nevada corporation formerly known
as Warp 9, Inc., Roaming Messenger, Inc., and Latinocare Management Corporation (“LMC”). On July 9, 2015, we changed
the name of the Company from Warp 9, Inc. to CloudCommerce, Inc. to reflect a new plan of strategically
acquiring profitable data driven marketing solutions providers with strong management teams. The Company, based in San
Antonio, Texas, began operations on October 1, 1999. We develop solutions that help our clients acquire,
engage, and retain their customers by leveraging cutting edge digital strategies and technologies. We focus intently on using
data analytics to drive the creation of great user experiences and effective digital marketing campaigns. Whether it is creating
omni-channel experiences, engaging a specific audience, or energizing voters in political campaigns, we believe data is the key
to digital success. Our goal is to become the industry leader by always applying a “data first” strategy and acquiring
other companies that can help us achieve this vision. The Company has six subsidiaries, CLWD Operations, Inc. (formerly
Indaba Group, Inc.), Parscale Digital, Inc., which merged with Parscale Creative, Inc., as a result of an acquisition dated August
1, 2017, WebTegrity, LLC (“WebTegrity”), which was acquired November 15, 2017, Data Propria, Inc., which the Company
launched February 1, 2018, Giles Design Bureau, Inc., which spun out from Parscale Digital in May, 2018, and aiAdvertising, Inc.,
which was formed January 14, 2021. The Company focuses on four main areas, data analytics, digital marketing, branding and creative
services, and web development.
Data
Propria – Data Analytics
To
deliver the highest Return on Investment (“ROI”) for our customer’s digital marketing campaign, we utilize sophisticated
data science to identify the correct universes to target relevant audiences. Our ability to understand and translate data drives
every decision we make. By listening to and analyzing our customers’ data we are able to make informed decisions that positively
impact our customers’ business. We leverage industry-best tools to aggregate and visualize data across multiple sources,
and then our data and behavioral scientists segment and model that data to be deployed in targeted marketing campaigns. We have
data analytics expertise in retail, wholesale, distribution, logistics, manufacturing, political, and several other industries.
Parscale
Digital – Digital Marketing
We
help our customers get their message out, educate their market and tell their story. We do so creatively and effectively by deploying
powerful call-to-action digital campaigns with national reach and boosting exposure and validation with coordinated advertising
in print media. Our fully-developed marketing plans are founded on sound research methodologies, brand audits and exploration
of the competitive landscape. Whether our customer is a challenger brand, a political candidate, or a well-known household name,
our strategists are skillful at leveraging data and creating campaigns that move people to make decisions.
Giles
Design Bureau – Branding and Creative Services
We
approach branding from a “big picture” perspective, establishing a strong identity and then building on that to develop
a comprehensive branding program that tells our customer’s story, articulates what sets our customer apart from their competitors
and establishes our customer in their market.
WebTegrity
– Development and Managed Infrastructure Support
Commerce-focused,
user-friendly digital websites and apps elevates our customer’s marketing position and draw consumers to their products
and services. Our platform-agnostic approach allows us to architect and build solutions that are the best fit for each customer.
Once the digital properties are built, our experts will help manage and protect the website or app and provide the expertise needed
to scale the infrastructure needed as our customer’s business grows.
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity
of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying
financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. As
of December 31, 2020, the Company had negative working capital of $4,784,105 and has historically reported net losses, and has
negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The
ability
of
the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other
things, an additional cash infusion. The Company has obtained funds from its lenders and investors since its inception through
December 31, 2020. It is management’s plan to generate additional working capital from increasing sales from the Company’s
service offerings, in addition to acquiring profitable service providers.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies of CloudCommerce is presented to assist in understanding the Company’s financial
statements. The financial statements and notes are representations of the Company’s management, which is responsible for
their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States
of America and have been consistently applied in the preparation of the financial statements.
The
Consolidated Financial Statements include the Company and its wholly owned subsidiaries CLWD Operations, Inc (“CLWD Operations”),
formerly Indaba Group, Inc, a Delaware corporation, Parscale Digital, Inc., a Nevada corporation (“Parscale Digital”),
WebTegrity, Inc., a Nevada corporation, Data Propria, Inc., a Nevada corporation, and Giles Design Bureau, Inc., a Nevada corporation.
All significant inter-company transactions are eliminated in consolidation of the financial statements.
Reclassifications
Certain
prior periods have been recast to reflect current period presentation. During the year ended December 31, 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 contracted terms and how recently payments have been received to determine if
any such amounts will potentially be uncollected. The Company includes any balances that are determined to be uncollectible in
its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The
balance of the allowance account at December 31, 2020 and December 31, 2019 are $742 and $118,589,
respectively. During the years ended December 31, 2020 and December
31, 2019, we included $16,868 and $114,748, respectively, in expense related to balances that were written off as bad debt.
On
November 30, 2016, the Company entered into an agreement whereby accounts receivable amounts due from our customers to CLWD Operations
were pledged to a third party. Under the terms of the agreement, the Company may receive advances in amounts up to $400,000, based
on the amounts we invoice our customers, for a period of one year. Because the Company maintains the collectability risk of all
outstanding balances, we record the customer balances at fair value in accounts receivable, including an allowance for any balances
at risk of collectability, and the amount due to the third party as a liability. On March 23, 2017, the Company amended the secured
borrowing arrangement, which increased the maximum allowable balance by $100,000, to a total of $500,000. As of December
31, 2020, the balance due from this arrangement was $379,797.
On
October 19, 2017, the Company entered into an agreement whereby accounts receivable amounts due from our customers to Parscale
Digital were pledged to a third party. Under the terms of the agreement, the Company may receive advances in amounts up to $500,000,
based on the amounts we invoice our customers, for a period of one year. Because the Company maintains the collectability risk
of all outstanding balances, we record the customer balances at fair value in accounts receivable, including an allowance for
any balances at risk of collectability, and the amount due to the third party as a liability. On April 12, 2018, the Company amended
the secured borrowing arrangement, which increased the maximum allowable balance by $250,000, to a total of
$750,000. This borrowing facility had an expiration date of November 11, 2020 and was not renewed. As of December
31, 2020,
the balance due from this arrangement was zero.
On
August 2, 2018, the Company entered into agreements whereby accounts receivable amounts due from our customers to Giles Design
Bureau, WebTegrity and Data Propria were pledged to a third party. Under the terms of the agreements, the Company may receive
advances in amounts up to $150,000, $150,000 and $600,000, respectively, based on the amounts we invoice our customers, for a
period of one year. Because the Company
maintains
the collectability risk of all outstanding balances, we record the customer balances at fair value in accounts receivable, including
an allowance for any balances at risk of collectability, and the amount due to the third party as a liability.
As of August 22, 2020, these three borrowing facilities have expired and were not renewed. As of December 31,
2020, the
combined balance due from these arrangements 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 three months or less to be cash equivalents.
Revenue
Recognition
The
Company recognizes income when the service is provided or when product is delivered. We present revenue, net of customer incentives.
Most of the income is generated from professional services and site development fees. We provide online marketing services that
we purchase from third parties. The gross revenue presented in our statement of operations includes digital advertising revenue.
We also offer professional services such as development services. The fees for development services with multiple deliverables
constitute a separate unit of accounting in accordance with ASC 606, which are recognized as the work is performed. Upfront fees
for development services or other customer services are deferred until certain implementation or contractual milestones have been
achieved. If we have performed work for our clients, but have not invoiced clients for that work, then we record the value of
the work in an asset in costs in excess of billings. The terms of services contracts generally are for periods of less than one
year. The deferred revenue and customer deposits as of December 31, 2020 and 2019 was $841,290 and $2,080,762, respectively. The
costs in excess of billings as of December 31, 2020 and 2019 was zero and $21,606, respectively. See
footnote 3 for a disclosure of our use of estimates and judgement, as it relates to revenue recognition.
We
always strive to satisfy our customers by providing superior quality and service. Since we typically bill based on a Time and
Materials basis, there are no returns for work delivered. When discrepancies or disagreements arise, we do our best to reconcile
those by assessing the situation on a case-by-case basis and determining if any discounts can be given. Historically, no significant
discounts have been granted.
Included
in revenue are costs that are reimbursed by our clients, including third party services, such as photographers and stylists, furniture,
supplies, and the largest component, digital advertising. We have determined, based on our review, that the amounts classified
as reimbursable costs should be recorded as gross, due to the following factors:
|
·
|
The
Company is primarily in control of the inputs of the project and responsible for the
completion of the client contract;
|
|
·
|
We
have latitude in establishing price; and
|
|
·
|
We
have discretion in supplier
selection.
|
During
the years ended December 31, 2020 and December 31, 2019, we included $5,155,079 and $3,344,978, respectively, in revenue, related
to reimbursable costs.
The
Company records revenue into the following five categories:
|
·
|
Data
Sciences – Includes polling, research, modeling, data fees, consulting and reporting.
|
|
·
|
Design
– Includes branding, photography, copyrighting, printing, signs and interior design.
|
|
·
|
Development
– Includes website coding.
|
|
·
|
Digital
Advertising – Includes ad spend, SEO management and digital ad support.
|
|
·
|
Other
– Includes domain name management, account management, email marketing, web hosting,
email hosting, client training, reimbursed expenses and partner commissions.
|
For
the years ended December 31, 2020 and December 31, 2019, revenue was disaggregated into the five categories as follows:
|
|
Year ended December
31, 2020
|
|
Year ended December
31, 2019
|
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
Data Sciences
|
|
$
|
596,446
|
|
|
$
|
—
|
|
|
$
|
596,446
|
|
|
$
|
1,150,706
|
|
|
$
|
14,400
|
|
|
$
|
1,165,106
|
|
Design
|
|
|
2,390,676
|
|
|
|
—
|
|
|
|
2,390,676
|
|
|
|
2,031,974
|
|
|
|
624
|
|
|
|
2,032,598
|
|
Development
|
|
|
330,404
|
|
|
|
—
|
|
|
|
330,404
|
|
|
|
1,425,757
|
|
|
|
46,332
|
|
|
|
1,472,089
|
|
Digital Advertising
|
|
|
6,085,038
|
|
|
|
3,640
|
|
|
|
6,088,678
|
|
|
|
3,650,491
|
|
|
|
179,640
|
|
|
|
3,830,131
|
|
Other
|
|
|
336,074
|
|
|
|
—
|
|
|
|
336,074
|
|
|
|
719,960
|
|
|
|
26,579
|
|
|
|
746,539
|
|
Total
|
|
$
|
9,738,638
|
|
|
$
|
3,640
|
|
|
$
|
9,742,278
|
|
|
$
|
8,978,888
|
|
|
$
|
267,575
|
|
|
$
|
9,246,463
|
|
Research
and Development
Research
and development costs are expensed as incurred. Total research and development costs were zero for the years ended December 31,
2020 and December 31, 2019.
Advertising Costs
The
Company expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $119,332 and $4,797,
for the years ended December 31, 2020 and December 31, 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 December 31, 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 three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 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 December 31, 2020 and 2019:
December
31, 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
|
|
Property
and Equipment
Property
and equipment are stated at cost, and are depreciated or amortized using the straight-line method over the following estimated
useful lives:
|
|
|
|
As of December 31,
|
|
|
Years
|
|
2020
|
|
2019
|
Equipment
|
|
|
5-7
|
|
|
$
|
169,003
|
|
|
$
|
163,750
|
|
Office furniture
|
|
|
7
|
|
|
|
23,569
|
|
|
|
23,569
|
|
Leasehold improvements
|
|
|
Length of lease
|
|
|
|
—
|
|
|
|
—
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(136,890
|
)
|
|
|
(95,897
|
)
|
Net property and equipment
|
|
|
|
|
|
$
|
55,682
|
|
|
$
|
91,422
|
|
The
following table discloses fixed asset transactions and recordings during the years ended December 31, 2020 and December 31, 2019:
|
|
Year
ended
December
31, 2020
|
|
Year
ended
December
31, 2019
|
Depreciation expense
|
|
$
|
40,993
|
|
|
$
|
42,968
|
|
Gain/(loss) on disposals
|
|
|
—
|
|
|
|
(6,452
|
)
|
Cash paid for fixed asset additions
|
|
|
5,253
|
|
|
|
2,104
|
|
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the
estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the
long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information
at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future
cash flows based on reasonable and supportable assumptions. During the year ended December 31, 2020, management reviewed the intangible
assets and goodwill of WebTegrity, and determined that there were indications of impairment.
Business
Combinations
The
acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate
of the fair value, at the acquisition date, of assets received, liabilities incurred or assumed, and equity instruments issued
by the Company in exchange for control of the acquiree. Any costs directly attributable to the business combination are expensed
in the period incurred. The acquiree’s identifiable assets and liabilities are recognized at their fair values at the acquisition
date.
Goodwill
arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business
combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities
recognized.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. Significant estimates in valuing certain intangible assets include,
but are not limited to, future expected cash flows from acquired customer lists, acquired technology, and trade names from a market
participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions
believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from
estimates. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from
acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions
to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired
less liabilities assumed is recognized as goodwill.
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance
with its policies, at December 31, 2020 the Company performed a qualitative assessment of indefinite lived intangibles and goodwill
related to WebTegrity and determined there was impairment of indefinite lived intangibles and goodwill. Therefore, an impairment
of indefinite lived intangibles and goodwill was recognized.
The
impairment test conducted by the Company includes an assessment of whether events occurred that may have resulted in impairment
of goodwill and intangible assets. Because it was determined that events had occurred which effected the fair value of goodwill
and intangible assets, the Company conducted the two-step approach to determine the fair value and required adjustment. The steps
are as follows:
|
1.
|
Based on the totality of qualitative factors, determine whether
the carrying amount of the intangible asset may not be recoverable. Qualitative factors and key assumptions reviewed include
the following:
|
|
●
|
Increases in costs, such as labor, materials or other costs
that could negatively affect future cash flows. The Company assumed that costs associated with labor, materials, and other
costs should be consistent with fair market levels. If the costs were materially higher than fair market levels, then such
costs may adversely affect the future cash flows of the Company or reporting units.
|
|
●
|
Financial performance, such as negative or declining cash flows,
or reductions in revenue may adversely affect recoverability of the recorded value of the intangible assets. During our analysis,
the Company assumes that revenues should remain relatively consistent or show gradual growth month-to-month and quarter-to-quarter.
If we report revenue declines, instead of increases or flat levels, then such condition may adversely affect the future cash
flows of the Company or reporting units.
|
|
●
|
Legal, regulatory, contractual, political, business or other
factors that could affect future cash flows. During our analysis, the Company assumes that the legal, regulatory, political
or business conditions should remain consistent, without placing material pressure on the Company or any of its reporting
units. If such conditions were to become materially different than what has been experienced historically, then such conditions
may adversely affect the future cash flows of the Company or reporting units.
|
|
●
|
Entity-specific events such as losses of management, key personnel,
or customers, may adversely affect future cash flows. During our analysis, the Company assumes that members of management,
key personnel, and customers will remain consistent period-over-period. If not effectively replaced, the loss of members of
management and key employees could adversely affect operations, culture, morale and overall success of the company. In addition,
if material revenue from key customers is lost and not replaced, then future cash flows will be adversely affected.
|
|
●
|
Industry or market considerations, such as competition, changes
in the market, changes in customer dependence on our service offering, or obsolescence could adversely affect the Company
or its reporting units. We understand that the markets we serve are constantly changing, requiring us to change with it. During
our analysis, we assume that we will address new opportunities in service offering and industries served. If we do not make
such changes, then we may experience declines in revenue and cash flow, making it difficult to re-capture market share.
|
|
●
|
Macroeconomic conditions such as deterioration in general economic
conditions or limitations on accessing capital could adversely affect the Company. During our analysis, we acknowledge that
macroeconomic factors, such as the economy, may affect our business plan because our customers may reduce budgets for our
services. If there are material declines in the economy, which lead to reductions in revenue then such conditions may adversely
affect the Company.
|
|
2.
|
Compare the carrying amount of the intangible asset to the fair
value.
|
|
3.
|
If the carrying amount is greater than the fair value, then
the carrying amount is reduced to reflect fair value.
|
In
accordance with its policies, the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at December
31, 2019 and determined there was impairment of indefinite lived intangibles and goodwill from our Parscale Media and Parscale
Creative acquisitions. Accordingly, all intangible assets and goodwill related to the Parscale Media and Parscale Creative acquisitions
have been written off, amounting to $744,444 for Parscale Media and $6,016,323 for Parscale Creative. This amount reduced the
consolidated balances of Parscale Digital, as outlined below. This amount is included in Operating Expenses on the Income Statement,
for the year ended December 31, 2019. An impairment assessment was also conducted during the year ended December 31, 2020 related
to the WebTegrity acquisition and determined that impairment of indefinite lived intangibles and goodwill was necessary. Accordingly,
all intangible assets and goodwill related to the WebTegrity acquisition have been written off, amounting to $560,000. This amount
reduced the consolidated balances of WebTegrity, as outlined below. This amount is included in Operating Expenses on the Income
Statement, for the year ended December 31, 2020. At the time of the impairment analysis, the remaining prior year balance of the
Customer List ($71,606) had already been expensed throughout the year ended December 31, 2020.
Goodwill
and Intangible assets are comprised of the following, presented as net of amortization:
|
|
December
31, 2020
|
|
|
Parscale
Digital
|
|
WebTegrity
|
|
CloudCommerce
|
|
Total
|
Customer
list
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-compete agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Domain name and trademark
|
|
|
—
|
|
|
|
—
|
|
|
|
26,582
|
|
|
|
26,582
|
|
Brand name
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
|
|
26,582
|
|
|
|
26,582
|
|
|
|
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
|
|
Concentrations
of Business and Credit Risk
The
Company operates in a single industry segment. The Company markets its services to companies and individuals in many industries
and geographic locations. The Company’s operations are subject to rapid technological advancement and intense competition.
Accounts receivable represent financial instruments with potential credit risk. The Company typically offers its customers credit
terms. The Company makes periodic evaluations of the credit worthiness of its enterprise customers
and other than obtaining deposits pursuant to its policies, it generally does not require collateral. In the event of nonpayment,
the Company has the ability to terminate services. As of December 31, 2020, the Company held cash and cash equivalents
in the amount of $10,538, which was held in the operating bank accounts. Of this amount, $10,538 was held in multiple accounts,
in amounts that did not exceeding the FDIC insured limit of $250,000. For further discussion on concentrations see footnote 14.
Stock-Based Compensation
The
Company addressed the accounting for share-based payment transactions in which an enterprise receives employee services in exchange
for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity instruments. The transactions are accounted for using a fair-value-based
method and recognized as expenses in our statement of operations.
Stock-based
compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately
expected to vest. Stock-based compensation expense recognized in the consolidated statement of operations during the year ended
December 31, 2020, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of
December 31, 2020 based on the grant date fair value estimated. Stock-based compensation expense recognized in the consolidated
statement of operations for the year ended December 31, 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 year ended December 31, 2020 and 2019 were $390,035 and $391,959, respectively.
Basic and Diluted
Net Income (Loss) per Share Calculations
Income
(Loss) per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share
are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted
earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. The shares for employee options, warrants and convertible notes were used in the calculation of the
income per share.
For
the year ended December 31, 2020, the Company has excluded 106,489,498 shares of common stock underlying options, 20,912,852 shares
of common stock underlying warrants, 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 18,388,400 shares of common stock underlying $183,884 in convertible notes, because their
impact on the loss per share is anti-dilutive.
For
the year ended December 31, 2019, the Company has excluded 150,275,799
shares of common stock underlying options, 10,000 Series A Preferred shares convertible into 100,000,000 shares of common stock,
18,025 Series B Preferred shares convertible into 450,625,000 shares of common stock, 14,425 Series C Preferred shares convertible
into 144,250,000 shares of common stock, 90,000 Series D Preferred shares convertible into 225,000,000 shares of common stock,
10,000 Series E Preferred shares convertible into 20,000,000 shares of common stock and 66,144,941 shares of common stock underlying
$543,464 in convertible notes, because their impact on the loss per share is anti-dilutive.
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. During the year ended December 31, 2020, all convertible notes that contained embedded derivative instruments
were converted, leaving a derivative liability balance of zero. As of December 31, 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. Therefore,
as of December 31, 2020, the Company had no derivative liability.
Recently
Adopted Accounting Pronouncements
Management
reviewed accounting pronouncements issued during the year ended December 31, 2020, and the following pronouncement was adopted
during the period.
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. Due to the limited amount of goodwill
and intangible assets recorded at December 31, 2020, the impact of this ASU on its consolidated financial statements and related
disclosures was immaterial.
Management
reviewed accounting pronouncements issued during the year ended December 31, 2019, and the following pronouncements were adopted
during the period.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). Under
ASU 2016-02, lessees recognize a right-of-use asset and a lease liability
for all of their leases, other than those that meet the definition of a short-term lease.
For income statement purposes, leases must be classified as either operating
or finance. Operating leases will result in straight-line expense, similar
to current operating leases, while finance leases will
result in a front-loaded pattern, similar to current capital leases. We adopted Topic 842 effective January 1, 2019
and elected certain available transitional practical expedients. This adoption resulted in right-of-use assets, in the amount
of $266,758 and operating lease liability, in the amount of $266,758, to be added to the December 31, 2019 balance sheet. These
additions are the result of an office lease in San Antonio. In the prior year, the Company disclosed capital lease obligations,
which has been changed to finance lease obligation in the current year, as a result of this adoption. As of December 31, 2020,
and 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, 2022. 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, 2022. Early
adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and
related disclosures.
Income Taxes
The
Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities
is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance based on the amount of tax benefits that, based on available evidence, is not expected to be realized. For the year
ended December 31, 2020, we used the federal tax rate of 21% in our determination of the deferred tax assets and liabilities balances.
3. REVENUE
RECOGNITION
On
January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to
the ASU (collectively, “ASC 606”), using the modified retrospective method applied
to
those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1,
2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance
with our historic accounting under Topic 605. Revenues are recognized when control of the promised goods or services is transferred
to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The adoption of ASC 606 did not have a material impact on the Company’s
Consolidated Financial Statements.
The
core principles of revenue recognition under ASC 606 includes the following five criteria:
|
1.
|
Identify
the contract with the customer
|
Contract
with our customers may be oral, written, or implied. A written and signed contract stating the terms and conditions is the preferred
method and is consistent with most customers. The terms of a written contract may be contained within the body of an email, during
which proposals are made and campaign plans are outlined, or it may be a stand-alone document signed by both parties. Contracts
that are oral in nature are consummated in status and pitch meetings and may be later followed up with email detail of the terms
of the arrangement, along with a proposal document. No work is commenced without an understanding between the Company and our
customers, that a valid contract exists.
|
2.
|
Identify
the performance obligations in the contract
|
Our
sales and account management teams define the scope of services to be offered, to ensure all parties are in agreement and obligations
are being delivered to the customer as promised. The performance obligation may not be fully identified in a mutually signed contract,
but may be outlined in email correspondence, face-to-face meetings, additional proposals or scopes of work, or phone conversations.
|
3.
|
Determine
the transaction price
|
Pricing
is discussed and identified by the operations team prior to submitting a proposal to the customer. Based on the obligation presented,
third-party service pricing is established, and time and labor is estimated, to determine the most accurate transaction pricing
for our customer. Price is subject to change upon agreed parties, and could be fixed or variable, milestone focused or T&M.
|
4.
|
Allocate
the transaction price to the performance obligations in the contract
|
If
a contract involves multiple obligations, the transaction pricing is allocated accordingly, during the performance obligation
phase (criteria 2 above).
|
5.
|
Recognize
revenue when (or as) we satisfy a performance obligation
|
The
Company uses several means to satisfy the performance obligations:
|
a.
|
Billable
Hours – The company employs a time tracking system where employees record their
time by project. This method of satisfaction is used for time and material projects,
change orders, website edits, revisions to designs, and any other project that is hours-based.
The hours satisfy the performance obligation as the hours are incurred.
|
|
b.
|
Ad
Spend - To satisfy ad spend, the company generates analytical reports monthly or
as required to show how the ad dollars were spent and how the targeting resulted in click-throughs.
The ad spend satisfies the performance obligation, regardless of the outcome or effectiveness
of the campaign. In addition, the Company utilizes third party invoices after the ad
dollars are spent, in order to satisfy the obligation.
|
|
c.
|
Milestones
– If the contract requires milestones to be hit, then the Company satisfies
the performance obligation when that milestone is completed and presented to the customer
for review. As each phase of a project is complete, we consider it as a performance obligation
being satisfied and transferred to the customer. At this point, the customer is invoiced
the amount due based on the transaction pricing for that specific phase and/or we apply
the customer deposit to recognize revenue.
|
|
d.
|
Monthly
Retainer – If the contract is a retainer for work performed, then the customer
is paying the Company for its expertise and accessibility, not for a pre-defines amount
of output. In this case, the obligation is satisfied at the end of the period, regardless
of the amount of work effort required.
|
|
e.
|
Hosting
– Monthly recurring fees for hosting are recognized on a monthly basis, at
a fixed rate. Hosting contracts are typically one-year and reviewed annually for renewal.
Prices are subject to change at management discretion.
|
The
Company generates income from four main revenue streams: data science, creative design, web development, digital marketing, and
other. Each revenue stream is unique, and includes the following features:
Data
Science – Data Propria
We
analyze big data (large volume of information) to reveal patterns and trends associated with human behavior and interactions that
can lead to better decisions and strategic business moves. As a result of our data science work, our clients are able to make
informed and valuable decisions to positively impact their bottom lines. We classify revenue as data science that includes polling,
research, modeling, data fees, consulting and reporting. Contracts are generated to assure both the
Company and the client are committed to partnership and both agree to the defined terms and conditions and are typically less
than one year. Transaction pricing is usually a lump sum, which is estimated by specific project requirements. The Company recognizes
revenue when performance obligations are met, including, when the data sciences service is performed, polling is conducted, or
support hours are expended. If the data sciences service is a fixed fee retainer, then the obligation is earned at the end of
the period, regardless of how much service is performed.
Creative
Design – Giles Design Bureau
We
provide branding and creative design services which set apart our clients from their competitors and establish themselves in their
specific market. We believe in showcasing our client’s brand uniquely and creatively to make the public with curious to
learn more. We classify revenue as creative design that includes branding, photography, copyrighting,
printing, signs and interior design. Contracts are generated to assure both the company and the client
are committed to partnership and both agree to the defined terms and conditions and are typically less than one year. The Company
recognizes revenue when performance obligations are met, usually when creative design services obligations are complete, when
the hours are recorded, designs are presented, website themes are complete, or any other criteria as mutually agreed.
Web
Development – WebTegrity
We
develop websites that attract high levels of traffic for our clients. We offer our clients the expertise to manage and protect
their website, and the agility to adjust their online marketing strategy as their business expands. We
classify revenue as web development that includes website coding, website patch installs, ongoing development support and
fixing inoperable sites. Contracts are generated to assure both the company and the client are committed
to the partnership and both agree to the defined terms and conditions. Although most projects are long-term (6-8 months) in scope,
we do welcome short-term projects which are invoiced as the work is completed at a specified hourly rate. In addition, we offer
monthly hosting support packages, which ensures websites are functioning properly. The Company records web development revenue
as earned, when the developer hours are recorded (if T&M arrangements) or when the milestones are achieved (if a milestone
arrangement).
Digital
Marketing – Parscale Digital
We
have a reputation for providing digital marketing services that get results. Whether presenting a vibrant but simple message about
our clients that will enlighten their audience or deploying an influential digital marketing political campaign across one or
multiple social media platforms, our marketing strategist are poised to execute and deliver valuable marketing results to our
clients. We classify revenue as digital marketing that includes ad spend, SEO management
and digital ad support. Billable hours and advertising spending are estimated based on client specific
needs and subject to change with client concurrence. Revenue is recognized when ads are run on one of the third-party platforms
or when the hours are recorded by the digital marketing specialist, if the obligation relates to support or services.
Other
We
offer services that do not fit into the other four categories but rely heavily on the “other” services to provide
the entire support package for our clients. Included in this category are domain name management,
account management, web hosting, client training, and partner commissions. Revenue is recognized for these services as the service
is performed (such as account management or training) or during the month in which the service was provided (such as hosting,
partner commissions and domain name registration).
Included
in creative design and digital marketing revenues are costs that are reimbursed by our clients, including third party services,
such as photographers and stylists, furniture, supplies, and the largest component, digital advertising. We have determined, based
on our review, that the amounts classified as reimbursable costs should be recorded as gross (principal), due to the following
factors:
|
-
|
The
Company is the primary obligor in the arrangement;
|
|
-
|
We
have latitude in establishing price;
|
|
-
|
We
have discretion in supplier
selection; and
|
|
-
|
The
Company has credit risk
|
During
the year ended December 31, 2020 and 2019, we included $5,155,079 and $3,344,978 respectively, in revenue, related to reimbursable
costs. The deferred revenue and customer deposits as of December
31, 2020 and December 31, 2019 were $841,290 and $2,080,762, respectively.
For
the year ended December 31, 2020 and 2019, revenue was disaggregated into the five categories as follows:
|
|
Year Ended December
31, 2020
|
|
Year Ended December
31, 2019
|
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
|
Third Parties
|
|
Related Parties
|
|
Total
|
Data Sciences
|
|
$
|
596,446
|
|
|
$
|
—
|
|
|
$
|
596,446
|
|
|
$
|
1,150,706
|
|
|
$
|
14,400
|
|
|
$
|
1,165,106
|
|
Design
|
|
|
2,390,676
|
|
|
|
—
|
|
|
|
2,390,676
|
|
|
|
2,031,974
|
|
|
|
624
|
|
|
|
2,032,598
|
|
Development
|
|
|
330,404
|
|
|
|
—
|
|
|
|
330,404
|
|
|
|
1,425,757
|
|
|
|
46,332
|
|
|
|
1,472,089
|
|
Digital Advertising
|
|
|
6,085,038
|
|
|
|
3,640
|
|
|
|
6,088,678
|
|
|
|
3,650,491
|
|
|
|
179,640
|
|
|
|
3,830,131
|
|
Other
|
|
|
336,074
|
|
|
|
—
|
|
|
|
336,074
|
|
|
|
719,960
|
|
|
|
26,579
|
|
|
|
746,539
|
|
Total
|
|
$
|
9,738,638
|
|
|
$
|
3,640
|
|
|
$
|
9,742,278
|
|
|
$
|
8,978,888
|
|
|
$
|
267,575
|
|
|
$
|
9,246,463
|
|
4. LIQUIDITY
AND OPERATIONS
The
Company had s net loss of $1,210,650 for the year ended December
31, 2020, and $10,123,380 for the year ended December
31, 2019, and net cash used in operating activities of $(1,812,623) and provided
by operating activities of $133,886, in the same periods, respectively.
As
of December 31, 2020, the Company had a short-term borrowing relationship with five lenders. The lenders provided short-term and
long-term financing under a secured borrowing arrangement, using our accounts receivable as collateral or uncollateralized term
loans, disclosed in footnote 7, as well as convertible notes disclosed in footnote 8. As of December 31, 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 or have sufficient capital to finance
its growth and business operations, or that such capital will be available on terms that are favorable to the Company or at all.
It could become difficult for the Company to obtain working capital and other business financing. There is no assurance
that the Company would be able to obtain additional working capital through the sale of its securities or from any other source.
5. BUSINESS ACQUISITIONS
Parscale
Creative, Inc.
On
August 1, 2017, the Company completed the acquisition of Parscale Creative, Inc., a Nevada corporation (“Parscale Creative”).
As of that date, the Company’s wholly owned operating subsidiary, Parscale Digital, Inc., a Nevada corporation (“Parscale
Digital”), merged with Parscale Creative, and the name of the combined subsidiary was changed to Parscale Digital. The total
purchase price of $7,945,000, was paid in the form of the issuance of ninety thousand (90,000) shares of the Company's Series
D Convertible Preferred Stock, at a
liquidation
preference of one hundred dollars ($100) per share, plus dividend payments based on 5% of adjusted revenue of Parscale Digital.
Adjusted revenue is defined as total revenue, minus digital marketing media buys. Based on the growth of the Parscale Digital,
the actual amount of the dividend payments is estimated to be in the range of $850,000 and $1,300,000, over 36 months, if we achieve
0.5% to 3% monthly adjusted revenue growth. The dividend payments are recorded as a reduction to additional paid in capital. During
the year ended December 31, 2020, we did not pay any dividend related to the Series D Convertible Preferred stock, and as of December
31, 2020, the accrued balance of the Series D Preferred dividend payable was $237,753. As of the date of closing, Brad Parscale,
the 100% owner of Parscale Creative, was appointed to the Company’s Board of Directors. On December 10, 2019, Mr. Parscale
resigned from the Company’s Board of Directors. The Company assumed net liabilities of $535,000, related to this acquisition.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $7,945,000, which was the fair value
of Parscale Creative at the time of acquisition. The assets and liabilities of Parscale Creative were recorded at their respective
fair values as of the date of acquisition. The acquisition date estimated fair value of the consideration transferred and purchase
price allocation consisted of the following:
Cash
|
|
$
|
200,000
|
|
Customer
deposits and accrued expenses
|
|
|
(535,000
|
)
|
Net
tangible liabilities
|
|
$
|
(335,000
|
)
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
280,000
|
|
Brand name
|
|
|
1,930,000
|
|
Customer list
|
|
|
2,090,000
|
|
Goodwill
|
|
|
3,645,000
|
|
Total purchase price
|
|
$
|
7,945,000
|
|
Issuance of series
D convertible preferred stock
|
|
$
|
7,610,000
|
|
Net
tangible liabilities
|
|
|
335,000
|
|
Total purchase price
|
|
$
|
7,945,000
|
|
During
the year ended December 31, 2019, we determined that the goodwill and intangibles related to the Parscale Creative acquisition
were impaired. Therefore, all remaining indefinite and finite-lived intangibles, and goodwill were written off at that time. 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., a Nevada corporation, merged with WebTegrity and the name of the combined subsidiary remained unchanged
as Parscale Digital. On April 16, 2018, we organized WebTegrity as a Nevada corporation, and split WebTegrity from Parscale Digital.
The total purchase price of $900,000, was paid in the form of the issuance of ten thousand (10,000) shares of the Company's Series
E Convertible Preferred Stock, at a liquidation preference of one hundred dollars ($100) per share.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $900,000, which was the fair value
of WebTegrity at the time of acquisition. The assets and liabilities of WebTegrity were recorded at their respective fair values
as of the date of acquisition. The acquisition date estimated fair value of the consideration transferred and purchase price allocation
consisted of the following:
Current assets
|
|
$
|
78,000
|
|
Fixed assets
|
|
|
30,000
|
|
Liabilities
|
|
|
(48,000
|
)
|
Net assets
|
|
|
60,000
|
|
Brand name
|
|
|
130,000
|
|
Customer list
|
|
|
280,000
|
|
Goodwill
|
|
|
430,000
|
|
Total purchase price
|
|
$
|
900,000
|
|
Issuance
of Series E Convertible Preferred Stock
|
|
$
|
900,000
|
|
The
Parscale Creative and WebTegrity acquisitions are based on a preliminary purchase price allocation,
and include identifiable intangible assets, which were based on their estimated fair values as of the acquisition date. The excess
of purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as
goodwill. The allocation of the purchase price required management to make significant estimates in determining the fair values
of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values
were based on information obtained from management of the acquired companies and historical experience and, with respect to the
long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm.
During
the year ended December 31, 2020, the Company performed an impairment analysis of the goodwill and intangible assets and found
that the fair value of those assets were less than the respective carrying values. Therefore, the Company recorded an impairment
loss of $560,000 from the brand name and goodwill. All customer list intangible assets were fully amortized before the impairment
analysis was conducted and are therefore included in amortization expense on the statement of cash flows and the income statement.
Parscale Media, LLC
On
August 1, 2017, the Company entered into a purchase agreement with Brad Parscale, to purchase Parscale Media, LLC, a website hosting
business, formed under the laws of Texas. Under the terms of the agreement, the Company agreed to pay Mr. Parscale $1,000,000
in cash, upon closing the transaction, but in no event later than January 1, 2018.
On
February 1, 2018, the Company entered into an amended purchase agreement which provided for the issuance of a promissory note
to Mr. Parscale as consideration for the acquisition, under which the Company agreed to pay Mr. Parscale $1,000,000 in twelve
equal installments, and interest of 4% on the promissory note (the “Parscale Media Note”). For the year ended December
31, 2018, the Company made total payments of $350,600 on the promissory note, which includes $11,693 of interest expense.
For the year ended December 31, 2018, we included $12,859 in interest
expense related to this liability. On November 20, 2018, the Company exchanged the remaining balance of the Parscale Media Note
for an equal amount owed by Mr. Parscale to the Company. As of November 20, 2018, the balance on the Parscale Media Note was zero.
Current assets
|
|
$
|
—
|
|
Brand name
|
|
|
100,000
|
|
Customer list
|
|
|
400,000
|
|
Goodwill
|
|
|
500,000
|
|
Total purchase price
|
|
$
|
1,000,000
|
|
During
the year ended December 31, 2019, we determined that the goodwill and intangibles related to the Parscale Media acquisition were
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.
6. INTANGIBLE
ASSETS
The
Company conducted an impairment analysis for the year ended December 31, 2020 and determined that based on qualitative factors
that impairment was necessary for the intangible assets or goodwill of WebTegrity.
Domain
Name
On
June 26, 2015, the Company purchased the rights to the domain “CLOUDCOMMERCE.COM”, from a private party at a purchase
price of $20,000, plus transaction costs of $202, which will be used as the main landing page for the Company. The total recorded
cost of this domain of $20,202 has been included in other assets on the balance sheet. As of December 31, 2020, we have determined
that this domain has an indefinite useful life, and as such, is not included in depreciation and amortization expense. The Company
will assess this intangible asset annually for impairment, in addition to it being classified with indefinite useful life.
Trademark
On
September 22, 2015, the Company purchased the trademark rights to “CLOUDCOMMERCE”, from a private party at a purchase
price of $10,000. The total recorded cost of this trademark of $10,000 has been included in other assets on the balance sheet.
The trademark expires in 2020 and may be renewed for an additional 10 years. As of September 30, 2015, we determined that this
intangible asset has a definite useful life of 174 months, and as such, will be included in depreciation and amortization expense.
For the year ended December 31, 2020 and
2019, the Company included $689 and $690, respectively, in depreciation and amortization expense related to this trademark. As
of December 31, 2020, the balance on this intangible asset was $6,381.
Non-Compete
Agreements
In
connection with the Company’s August 1, 2017, acquisition of Parscale Creative Brad
Parscale agreed to certain non-compete provisions, for a period of three years. The Company has placed a value on this non-compete
agreement at $280,000, amortized over a period of 36 months. For the year ended December 31, 2020 and 2018 we have included $93,333
and $93,333 in amortization expense related to this non-compete agreement. During our annual impairment analysis in the 2019 fiscal
year, it was determined that the intangible assets of Parscale Creative were impaired. Therefore, as of December 31, 2019, the
remaining balance of this intangible asset of $54,444 was written off and included in loss on impairment of goodwill and intangible
assets on the income statement. As of December 31, 2020, the balance on this intangible asset was zero.
Customer
List
On
August 1, 2017, the Company acquired Parscale Creative, and we have 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 we have calculated the value of the customer list acquired at $280,000,
with a useful life of 3 years. During the year ended December 31, 2020, the Company performed our annual impairment analysis and
we determined that the intangible assets of WebTegrity
were
impaired. Therefore, as of December 31, 2020, the remaining balance of this intangible asset of $7,161 was written off and included
in loss on impairment of goodwill and intangible assets on the income statement. As of December 31, 2020, the balance on this
intangible asset was zero.
On
February 1, 2018, the Company acquired Parscale Media, and we have 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
November 15, 2017, the Company acquired WebTegrity, and we 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, 2018, we have determined that this
brand name has an indefinite useful life, and as such, is not included in
depreciation and amortization expense. The Company will assess this intangible asset annually for impairment, in addition
to it being classified with an indefinite useful life. In evaluating whether this brand had an indefinite useful life,
the Company considered the following criteria:
|
o
|
Expected
use – We expected to retain the name and brand, leveraging the good reputation
and client following. Within the WordPress industry, the WebTegrity name was well known,
and the founder of the company has been asked to speak at various conferences.
|
|
o
|
Expected
useful life of related group – The WebTegrity name does not relate to another intangible
asset or group of intangible assets. Therefore, this criterion was not considered.
|
|
o
|
Limits
to useful life – There was no legal, regulatory, or contractual limitation to this
intangible asset’s life.
|
|
o
|
Historical
experience – This asset does not require an extension or renewal, in order for
it to remain on our balance sheet.
|
|
o
|
Effects
of other factors – We did consider this criterion in determining useful life, especially
since WebTegrity was in a highly competitive industry, mostly relying on the WordPress
platform. We considered whether there was a chance of obsolescence or decline due to
competition. 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.
|
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 we have calculated the value of the brand name at $130,000, which is included
in other assets on the balance sheet. During our annual impairment analysis we determined that the intangible assets of
WebTegrity was impaired. Therefore, as of December 31, 2020, the balance of these intangible asset of $130,000 was written off
and included in loss on impairment of goodwill and intangible assets on the income statement.
Goodwill
On
August 1, 2017, the Company acquired Parscale Creative, and we 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 we 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 we have calculated the value of the goodwill at $430,000, which is included
in other assets on the balance sheet. During the year ended December
31, 2020, the Company performed our annual impairment analysis and we determined that the goodwill and intangible assets of WebTegrity
were impaired. Therefore, as of December 31, 2020, the balance of this goodwill of $430,000 was written off and included in loss
on impairment of goodwill and intangible assets on the income statement. As of December 31, 2020, the balance of this goodwill
was zero.
On
February 1, 2018, the Company acquired Parscale Media, and we 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 we 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:
|
|
December
31, 2020
|
|
December
31, 2019
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Customer list
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
280,000
|
|
|
$
|
(208,394
|
)
|
|
$
|
71,606
|
|
Non-compete agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Domain name and trademark
|
|
|
30,201
|
|
|
|
(3,619
|
)
|
|
|
26,582
|
|
|
|
30,201
|
|
|
|
(2,930
|
)
|
|
|
27,271
|
|
Brand name
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
130,000
|
|
|
|
—
|
|
|
|
130,000
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
430,000
|
|
|
|
—
|
|
|
|
430,000
|
|
Total
|
|
$
|
30,201
|
|
|
$
|
(3,619
|
)
|
|
$
|
26,582
|
|
|
$
|
870,201
|
|
|
$
|
(211,324
|
)
|
|
$
|
658,877
|
|
Total
amortization expense charged to operations for the year ended December 31, 2020, and 2019 were $72,294
and $976,504, 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:
|
2021
|
|
|
|
690
|
|
|
2022
|
|
|
|
690
|
|
|
2023
|
|
|
|
690
|
|
|
Thereafter
|
|
|
|
4,311
|
|
|
Total
|
|
|
$
|
6,381
|
|
7.
CREDIT FACILITIES
Lines
of Credit
On
November 30, 2016, CLWD Operations entered into a 12-month agreement wherein amounts due from our customers were pledged to a
third party, in exchange for a borrowing facility in amounts up to a total of $400,000. The agreement was amended on March 23,
2017, which increased the allowable borrowing amount by $100,000, to a maximum of $500,000. On November 30, 2017, the agreement
auto renewed for another twelve months. The proceeds from the facility are determined by the amounts we invoice our customers.
We record the amounts due from customers in accounts receivable and the amount due to the third party as a liability, presented
under “Lines of credit” on the Balance Sheet. During the term of this facility, the third-party lender has a first
priority security interest in CLWD Operations, and therefore, we will require such third-party lender’s written consent
to obligate CLWD Operations further or pledge our assets against additional borrowing facilities. Because of this position, it
may be difficult for CLWD Operations to secure additional secured borrowing facilities. The cost of this secured borrowing facility
is 0.05% of the daily balance. During the year ended December
31, 2020 and 2019, the Company included $34,921 and $650
respectively, in interest expense, related to this secured borrowing facility, and as of December
31, 2020 and December 31, 2019, the outstanding balances
were $379,797 and $5,228, respectively.
On
October 19, 2017, Parscale Digital entered into a 12-month agreement with a third party to pledge the rights to amounts due from
our customers, in exchange for a borrowing facility in amounts up to a total of $500,000. The agreement was amended on April 12,
2018, which increased the allowable borrowing amount by $250,000, to a maximum of $750,000. The proceeds from the facility are
determined by the amounts we invoice our customers. We evaluated this facility in accordance with ASC 860, classifying it as a
secured borrowing arrangement. As such, we record the amounts due from customers in accounts receivable and the amount due to
the third party as a liability, presented under “Lines of credit” on the Balance Sheet. During the term of this facility,
the third-party lender has a first priority security interest in Parscale Digital, and will, therefore, we will require such third-party
lender’s written consent to obligate it further or pledge our assets against additional borrowing facilities. Because of
this position, it may be difficult for Parscale Digital to secure additional secured borrowing facilities. The cost of this secured
borrowing facility is 0.05% of the daily balance. During the year ended December
31, 2020 and 2019, the Company included $45,605 and $85,291,
respectively, in interest expense, related to this secured borrowing facility, and as of
year ended December 31, 2020 and
2019, the combined outstanding balances were zero and $258,646,
respectively. This borrowing facility had an expiration date of November 11, 2019 and were not renewed.
On
August 2, 2018, Giles Design Bureau, WebTegrity, and Data Propria entered into 12-month agreements with a third party to pledge
the rights to amounts due from our customers, in exchange for borrowing facilities in amounts up to a total of $150,000, $150,000
and $600,000, respectively. The proceeds from the facility are determined by the amounts we invoice our customers. We evaluated
these facilities in accordance with ASC 860, classifying as secured borrowing arrangements. As such, we record the amounts due
from customers in accounts receivable and the amount due to the third party as a liability, presented under “Lines of credit”
on the Balance Sheet. During the term of these facilities, the third-party lender has a first priority security interest in the
respective entities, and therefore, we will require such third-party lender’s written consent to obligate the entities further
or pledge their assets against additional borrowing facilities. Because of this position, it may be difficult for the entities
to secure additional secured borrowing facilities. The cost of these secured borrowing facilities are 0.056%, 0.056% and 0.049%,
respectively, of the daily balance. During the year ended December
31, 2020 and 2019, the Company included $73,054 and $119,809,
respectively, in interest expense, related to these secured borrowing facilities, and as of year
ended December 31, 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
The
conversion prices for each of the convertible 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. 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. 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 December 31, 2020, the Company had a single convertible note, which is convertible at a fixed
price and therefore does not contain an embedded derivative. Therefore, as of December 31, 2020, the Company had no derivative
liability. As of December 31, 2020, the balance of the discount was also zero. The discount is amortized throughout the term of
the notes and included in interest expense. For the year ended December 31, 2020, the amount of amortization related to the discount,
included in interest expense was $211,222.
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, allowed 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 December 31, 2020 was zero. This note was converted within the terms of the agreement.
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 December
31, 2020, was $183,884, which includes $22,778 of accrued interest. This note was converted within the terms of the agreement.
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. This note was converted within the terms of the agreement.
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
year ended December 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. This note was converted within the terms of the agreement. As of December 31, 2020, the balance of
the January 31, 2019 Note was zero.
On
February 21, 2019 the Company issued a promissory note (the “February 21, 2019 Note”) in the amount of $53,000 at
which time the Company received $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. This note was converted within the terms of the agreement. As of December 31, 2020, the balance of the
February 21, 2019 Note was zero.
On
April 24, 2019 the Company issued a promissory note (the “April 24, 2019 Note”) in the amount of $43,000 at which
time the Company received $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. This note was converted within the terms of the agreement. As of December 31, 2020, the balance of the April
24, 2019 Note was zero.
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 year ended December 31, 2020, the lender converted $40,772 principal and fees into
39,200,000 shares, and $13,578 principal, interest and fees into 22,258,360 shares, leaving a balance of zero. This note was converted
within the terms of the agreement.
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. This note was converted within
the terms of the agreement.
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 included the July 16, 2019 Note in the valuation and accounting for derivatives once the 180 days conversion
restriction period expired. During the year ended December 31, 2020, the lender converted $52,300 principal, interest and fees
into 91,500,000 shares, leaving a balance of zero. This note was converted within the terms of the agreement.
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 included the September 4, 2019 Note in the valuation
and accounting for derivatives once the 180 days conversion restriction period expired. During the year ended December 31, 2020,
the lender converted $48,000 principal into 35,357,143 shares, and $7,650 principal and interest into 7,806,122 shares, leaving
a balance of zero. This note was converted within the terms of the agreement.
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 year ended December 31, 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 year ended December 31, 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 maturity date of
the August 3, 2017 Note was extended to August 31, 2021. The balance of the August 3, 2017 Note, as of December
31, 2020 is $29,267, which includes $4,267 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 maturity date of
the August 15, 2017 Note was extended to August 31, 2021. The balance of the August 15, 2017 Note, as of December
31, 2020 is $39,747 which includes $5,747 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 maturity date of
the August 28, 2017 Note was extended to August 31, 2021. The
balance
of the August 28, 2017 Note, as of December 31, 2020 is $107,388
which includes $15,388 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 maturity
date of the September 28, 2017 Note was extended to August 31, 2021. The balance of the September 28, 2017 Note, as of December
31, 2020 is $73,968, which includes $10,368 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 maturity
date of the October 11, 2017 Note was extended to August 31, 2021. The balance of the October 11, 2017 Note, as of December
31, 2020 is $120,188, which includes $16,688 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 maturity
date of the October 27, 2017 Note was extended to August 31, 2021. The balance of the October 27, 2017 Note, as of December
31, 2020 is $122,858, which includes $16,858 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 maturity
date of the November 15, 2017 Note was extended to August 31, 2021. The balance of the November 15, 2017 Note, as of December
31, 2020 is $71,699, which includes $9,699 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 maturity
date of the November 27, 2017 Note was extended to August 31, 2021. The balance of the November 27, 2017 Note, as of December
31, 2020 is $122,408, which includes $16,408 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 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
maturity date of the December 19, 2017 Note was extended to August 31, 2021. The
balance of the December 15, 2017 Note, as of December
31, 2020 is $48,375, which includes $6,375 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
maturity date of the January 3, 2018 Note was extended to August 31, 2021. The
balance of the January 3, 2018 Note, as of December
31, 2020 is $56,337, which includes $7,337 of accrued interest.
As
of December 31, 2020, and December 31, 2019, the notes payable
due to related parties totaled $792,235 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 December 31, 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 bore interest at a rate
of 18% per year and is amortized over 12 months. During the year ended December 31, 2020, the Company made payments totaling $506,919
and included $64,326 in interest expense related to this note. As of December
31, 2020, the outstanding balance on the “February 28, 2019 Note” was zero.
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. On November 13, 2020, the May 2020 Note was forgiven in full. As of December 31, 2020, the balance on the May 2020 Note
was zero, and the Company recorded a gain in the amount of $780,680.
On
October 21, 2020, the Company issued a promissory note (the “October 2020 Note”) in the amount of $600,000, at which
time a balance of $548,250 was received after subtracting lender costs. The October 2020 Note bears interest at a rate of 12%
per year, with 12 months of interest guaranteed. The Company issued 32,232,333 shares of our common stock in connection with this
borrowing, which required the recording of a discount in the amount of $299,761 against the balance, amortized over the term of
the note. As of December 31, 2020, the balance owed on the December 2020 Note was $672,000 and includes $72,000 of interest, and
when the discount of $242,273 is subtracted, the net balance on the balance sheet is $429,727. The Company included a total of
$57,488 of amortization expense in depreciation and amortization on the statement of cash flows and the income statement. Since
the entire interest amount is guaranteed, the Company recorded $72,000 in interest expense related to this note.
On
December 10, 2020, the Company issued a promissory note (the “December 2020 Note”) in the amount of $150,000, at which
time a balance of $130,875 was received after subtracting lender costs. The December 2020 Note bears interest at a rate of 12%
per year, with 12 months of interest guaranteed. The Company issued 5,769,230 shares of our common stock in connection with this
borrowing, which required the recording of a discount in the amount of $34,615 against the balance, amortized over the term of
the note. As of December 31, 2020, the balance owed on the December 2020 Note was $168,000 and includes $18,000 of interest, and
when the discount of $32,718 is subtracted, the net balance on the balance sheet is $135,282. The Company included a total of
$1,897 of amortization expense in depreciation and amortization on the statement of cash flows and the income statement. Since
the entire interest amount is guaranteed, the Company recorded $18,000 in interest expense related to this note.
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 December 31, 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 re as of December 31, 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 December 31, 2020
|
|
$
|
—
|
|
During
the year ended December 31, 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 year ended December 31, 2020 and 2019, the Company recorded $37,787 and
$31,168, respectively, of interest expense and $270,607 and $387,124 respectively, of debt discount amortization expense. As of
December 31, 2020, and 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
December 31, 2020 and 2019, the Company’s authorized stock consists of 2,000,000,000 shares of common stock, par value $0.001
per share. The Company is also authorized to issue 5,000,000 shares of preferred stock, par value of $0.001 per share. The
rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to
issuance of such shares. The conversion of certain outstanding preferred stock could have a significant impact on our common stockholders.
As of the date of this report, the Board has designated Series A, Series B, Series C, Series D, Series E, Series F and Series
G Preferred Stock.
Series
A Preferred
The
Company has designated 10,000 shares of its preferred stock as Series A Preferred Stock. Each share of Series A Preferred Stock
is convertible into 10,000 shares of the Company’s common stock. The holders of outstanding shares of Series A Preferred
Stock 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
December 31, 2020, the Company has 10,000 shares of Series A Preferred Stock outstanding. During
the year ended December 31, 2020 and 2019, we paid dividends of $20,000 and $20,000, respectively, to the holders of Series A
Preferred stock. As of December 31, 2020, the balance owed on the Series A Preferred stock dividend was $140,000.
Series
B Preferred
The
Company has designated 25,000 shares of its preferred stock as Series B Preferred Stock. Each share of Series B Preferred Stock
shall have a stated value of $100. The Series B Preferred Stock is convertible into shares of the Company's common stock in an
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 December 31, 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 in an amount determined 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 December 31, 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 means 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 December 31, 2020, the Company has 90,000 shares of Series D Preferred
Stock outstanding. During the year ended December 31, 2020, and 2019, we paid dividends
of zero, and zero respectively, to the holders of Series D Preferred stock. As of December 31, 2020, the balance owed on the Series
D Preferred stock dividend was $237,753, $26,792 of which relates to the year ended December 31, 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. Series E Preferred Stock shall not be entitled
to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration
at any meeting of stockholders of the Company. As of December 31, 2020, the Company had 10,000 shares of Series E Preferred Stock
outstanding.
Series
F Preferred
The
Company has designated 800,000 shares of its preferred stock as Series F Preferred Stock. Each share of Series F Preferred Stock
has a stated value of $25. The Series F Preferred Stock is not convertible into common stock. The holders of outstanding shares
of Series F Preferred Stock are entitled to receive dividends, at the annual rate of 10%, payable monthly, payable in preference
and priority to any payment of any dividend on the Company’s common stock. The Series F Preferred Stock does have voting
rights, except as required by law and with respect to certain protective provisions set forth in the Certificate of Designation.
To the extent it may lawfully do so, the Company may, in its sole discretion, after the first anniversary of the original issuance
date of the Series F Preferred Stock, redeem any or all of the then outstanding shares of Series F Preferred Stock at a redemption
price of $25 per share plus any accrued but unpaid dividends. The Series F Preferred Stock was offered in connection with the
Company’s offering under Regulation A under the Securities Act of 1933, as amended. As of December 31, 2020, the Company
had 2,413 shares of Series F Preferred Stock outstanding, and an accrued dividend balance of $615.
Series
G Preferred
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 December 31, 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 a price of $0.01 per share. The stock options vest equally over a period of 36 months and expire August 1, 2022. These options
allow the optionee to exercise on a cashless basis, resulting in no cash payment to the company upon exercise. If the optionee
exercises on a cashless basis, then the above water value (difference between the option price and the fair market price at the
time of exercise) is used to purchase shares of common stock. Under this method, the number of shares of common stock issued will
be less than the number of options used to obtain those shares of common stock. On
September 30, 2018, the employee exercised, on a cashless basis, 3,324,201 options, resulting in 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 a price of $0.05 per share. The
stock options vest equally over a period of 36 months and expire September 18, 2022. These options
allow the optionee to exercise on a cashless basis, resulting in no cash payment to the company upon exercise. During
the 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 a key employee,
at a price of $0.04 per share. During the year ended December 31, 2020, the key employee left the Company and the options were
forfeited.
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 year ended December
31, 2020 and 2019, were determined using the Black Scholes method with the following assumptions:
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31, 2020
|
|
December 31, 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:
|
|
Year
Ended
December 31, 2020
|
|
Year
Ended
December 31, 2019
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
|
exercise
|
|
|
|
exercise
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
Outstanding -
beginning of year
|
|
|
150,275,799
|
|
|
$
|
0.0160
|
|
|
|
151,475,799
|
|
|
$
|
0.017
|
|
Granted
|
|
|
300,000,000
|
|
|
$
|
0.0018
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(20,600,000
|
)
|
|
$
|
0.04
|
|
|
|
(1,200,000
|
)
|
|
$
|
0.050
|
|
Outstanding
- end of year
|
|
|
429,675,799
|
|
|
$
|
0.0051
|
|
|
|
150,275,799
|
|
|
$
|
0.016
|
|
Exercisable
at the end of year
|
|
|
223,165,297
|
|
|
$
|
0.0081
|
|
|
|
141,466,119
|
|
|
$
|
0.015
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted during
the year
|
|
|
|
|
|
$
|
568,300
|
|
|
|
|
|
|
$
|
—
|
|
As
of December 31, 2020, and December 31, 2019, the intrinsic value of the stock options was approximately $1,366,650 and zero, respectively.
Stock option expense for the year ended December 31, 2020, and 2019 were $390,035 and $324,959,
respectively.
The
Black Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair
value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The
weighted average remaining contractual life of options outstanding, as of December 31, 2020 was as follows:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
remaining
|
Exercise
|
|
options
|
|
contractual
|
prices
|
|
outstanding
|
|
life
(years)
|
$
|
0.0150
|
|
|
|
35,000,000
|
|
|
|
1.65
|
|
$
|
0.0131
|
|
|
|
60,000,000
|
|
|
|
1.09
|
|
$
|
0.0130
|
|
|
|
15,000,000
|
|
|
|
1.22
|
|
$
|
0.0100
|
|
|
|
6,675,799
|
|
|
|
1.58
|
|
$
|
0.0053
|
|
|
|
12,500,000
|
|
|
|
1.62
|
|
$
|
0.0040
|
|
|
|
500,000
|
|
|
|
0.78
|
|
$
|
0.0019
|
|
|
|
283,000,000
|
|
|
|
4.05
|
|
$
|
0.0018
|
|
|
|
17,000,000
|
|
|
|
4.42
|
|
|
|
|
|
|
429,675,799
|
|
|
|
|
|
Warrants
During
the fiscal year ended December 31, 2020 the Company issued 10,912,852 warrants through four agreements, related to borrowings,
which are exercisable immediately on a cashless basis at prices ranging from $0.005 to $0.0118 per share. As of December 31,2020,
and 2019, there were 20,912,852 and 10,000,000 warrants outstanding, respectively.
The
fair value of warrants granted during the year ended December 31, 2020 and 2019, were determined using the Black Scholes method
with the following assumptions:
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Risk free interest rate
|
|
|
0.40
– 0.42%
|
|
|
|
1.86
|
%
|
Stock volatility factor
|
|
|
335.7 - 337.1%
|
|
|
|
272
|
%
|
Weighted average expected warrant life
|
|
|
5 years
|
|
|
|
10 years
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
A
summary of the Company’s warrant activity and related information follows:
|
|
Year
Ended
December 31, 2020
|
|
Year
Ended
December 31, 2019
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
|
exercise
|
|
|
|
exercise
|
|
|
Warrants
|
|
price
|
|
Warrants
|
|
price
|
Outstanding - beginning of period
|
|
|
10,000,000
|
|
|
$
|
0.007
|
|
|
|
—
|
|
|
$
|
—
|
|
Issued
|
|
|
10,912,852
|
|
|
$
|
0.007
|
|
|
|
10,000,000
|
|
|
$
|
0.007
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding - end of
period
|
|
|
20,912,852
|
|
|
$
|
0.007
|
|
|
|
10,000,000
|
|
|
$
|
0.007
|
|
Exercisable
at the end of period
|
|
|
20,912,852
|
|
|
$
|
0.007
|
|
|
|
10,000,000
|
|
|
$
|
0.007
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants granted during
the period
|
|
|
|
|
|
$
|
98,343
|
|
|
|
|
|
|
$
|
67,000
|
|
Warrant
expense for the year ended December 31, 2020, and 2019 were $98,343 and $67,000, respectively.
The
weighted average remaining contractual life of warrants outstanding, as of December 31, 2020 was as follows:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
remaining
|
Exercise
|
|
warrants
|
|
contractual
|
prices
|
|
outstanding
|
|
life
(years)
|
$
|
0.0118
|
|
|
|
2,423,269
|
|
|
|
4.81
|
|
$
|
0.0072
|
|
|
|
989,583
|
|
|
|
4.95
|
|
$
|
0.0067
|
|
|
|
10,000,000
|
|
|
|
8.62
|
|
$
|
0.0050
|
|
|
|
6,000,000
|
|
|
|
4.81
|
|
$
|
0.0050
|
|
|
|
1,500,000
|
|
|
|
4.95
|
|
|
|
|
|
|
20,912,852
|
|
|
|
|
|
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 December
31, 2020 and December 31, 2019, principal on the Bountiful Notes and accrued interest totaled $792,235
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 year ended December
31, 2020 and 2019, the Company earned $3,640 and $194,492, respectively, in revenue from providing
services to Parscale Strategy, and as of December 31,2020 and 2019, Parscale Strategy had an
outstanding accounts receivable of zero and $5,417, respectively.
On
August 1, 2017, Parscale Digital signed a lease with Bureau, Inc., a related party, to provide a workplace for the employees of
Parscale Digital. Bureau, Inc., is wholly owned by Jill Giles, an employee of the Company. Details on this lease are included
in Note 15.
On
August 1, 2017, Parscale Digital signed a lease with Parscale Strategy for computer equipment and office furniture. Parscale Strategy
is wholly owned by Brad Parscale, who served on the CloudCommerce board of directors from August 1, 2017 until his resignation
on December 10, 2019. Details of this lease are included in Note 15.
As
of December 31, 2020, we had convertible notes in the amount of $183,884 with a relative of a shareholder that owns in excess
of 5% of our outstanding common stock. We believe that the terms of those convertible notes are consistent with arm’s length
transactions.
14. CONCENTRATIONS
For
the year ended December 31, 2020 and 2019, the Company had two and one major customers that represented approximately 34% and
22% of total revenue, respectively. At December 31, 2020 and December 31, 2019, accounts receivable from two and two customers,
represented approximately 32% and 35% of total accounts receivable, respectively. The customers comprising the concentrations
within the accounts receivable are not the same customers that comprise the concentrations with the revenues discussed above.
15. COMMITMENTS
AND CONTINGENCIES
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic
840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition
by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12
months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess
the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance
or operating, with classification affecting the pattern and classification of expense recognition in the income statement, over
the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, current
operating lease liabilities and non-current operating lease liabilities. We determine if an arrangement is a lease at inception.
Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on our
consolidated balance sheets. Finance leases are included in property and equipment, current liabilities, and long-term liabilities
on our consolidated balance sheets.
The
Company adopted the new lease guidance effective January 1, 2019 using the modified retrospective transition approach, applying
the new standard to all of its leases existing at the date of initial application which is the effective date of adoption. Consequently,
financial information will not be updated and the disclosures required under the new standard will not be provided for dates and
periods before January 1, 2019. The Company has elected the practical expedient to combine lease and non-lease
components as a single component. We did not elect the hindsight practical expedient which permits entities to use hindsight in
determining the lease term and assessing impairment. The adoption of the lease standard did not change our previously reported
consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. As of December
31, 2020, the company recognized ROU assets of $171,549 and operating lease liabilities of $171,549.
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
On
August 1, 2017, Parscale Digital signed a lease agreement with Bureau, Inc., a related party, which commenced on August 1, 2017,
for approximately 8,290 square feet, at 321 Sixth Street, San Antonio, TX 78215, for $9,800 per month, plus a pro rata share of
the common building expenses. The lease expires on July 31, 2022. As of December 31, 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 December 31, 2020, the ROU asset and liability
balances of this lease were $171,549 and $171,549, respectively.
Total
operating lease expense for the year ended December 31, 2020 and 2019 was $155,119 and $190,860, respectively. The Company is
also required to pay its pro rata share of taxes, building maintenance costs, and insurance in according to the lease agreement.
On
May 21, 2014, the Company entered into a settlement agreement with the landlord of our previous location at 6500 Hollister Ave.,
Goleta, CA, to make monthly payments on past due rent totaling $227,052. Under the terms of the agreement, the Company will make
monthly payments of $350 on a reduced balance of $40,250. Upon payment of $40,250, the Company will record a gain on extinguishment
of debt of $186,802. As of December 31, 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 December 31, 2020, and December
31, 2019, the Company owed $12,600 and $16,800 on the outstanding reduced payment terms, respectively.
The
Company is required to pay its pro rata share of taxes, building maintenance costs, and insurance in accordance with the operating
lease agreements of Parscale Digital.
Finance Leases
On
August 1, 2017, Parscale Digital signed a lease agreement with Parscale Strategy, a related party, for the use of office equipment
and furniture. The lease provides for a term of thirty-six (36) months, at a monthly payment of $3,000, and an option to purchase
all items at the end of the lease for one dollar. It is certain that the Company will exercise this purchase option. We have evaluated
this lease in accordance with ASC 840-30 and determined that it meets the definition of a finance lease.
The
following is a schedule of the net book value of the finance lease.
Assets
|
|
December 31, 2020
|
|
December 31, 2019
|
Leased equipment under finance
lease,
|
|
$
|
100,097
|
|
|
$
|
100,097
|
|
less accumulated amortization
|
|
|
(84,837
|
)
|
|
|
(60,007
|
)
|
Net
|
|
$
|
15,260
|
|
|
$
|
40,090
|
|
Liabilities
|
|
December 31, 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
|
|
$
|
171,549
|
|
|
$
|
15,260
|
|
Liability balance
|
|
|
171,549
|
|
|
|
—
|
|
Cash flow (operating)
|
|
|
—
|
|
|
|
—
|
|
Cash flow (financing)
|
|
|
—
|
|
|
|
—
|
|
Interest expense
|
|
$
|
22,390
|
|
|
$
|
—
|
|
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
|
|
2021
|
|
|
$
|
117,600
|
|
|
$
|
15,260
|
|
|
2022
|
|
|
|
68,600
|
|
|
|
—
|
|
|
2023
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
|
186,200
|
|
|
|
15,260
|
|
|
Less
imputed interest
|
|
|
|
(14,651
|
)
|
|
|
—
|
|
|
Total
liability
|
|
|
$
|
171,549
|
|
|
$
|
15,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
information related to leases is as follows:
Lease Type
|
|
Weighted
Average Remaining Term
|
|
Weighted
Average Discount Rate (1)
|
Operating Leases
|
|
|
19
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 the time are considered to be material to the Company’s business or financial condition.
16. SUPPLEMENTAL STATEMENT
OF CASH FLOWS INFORMATION
During
the year ended December 31, 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. The Company recorded no losses on these conversions. As a result of these
conversions, we recorded a reduction to the derivative liability of $339,105. Detail
of the conversions is below.
|
Conversion Date
|
|
Note Date
|
|
Principal
|
|
Interest/Fees
|
|
Shares
|
January 21,
2020
|
|
January 31, 2019
|
|
$
|
—
|
|
|
$
|
249
|
|
|
|
4,300,327
|
|
January 29, 2020
|
|
May 2, 2019
|
|
|
9,815
|
|
|
|
250
|
|
|
|
11,000,000
|
|
February 6, 2020
|
|
May 2, 2019
|
|
|
10,291
|
|
|
|
250
|
|
|
|
10,800,000
|
|
February 11, 2020
|
|
May 2, 2019
|
|
|
19,917
|
|
|
|
250
|
|
|
|
17,400,000
|
|
March 6, 2020
|
|
September 4, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
10,000,000
|
|
March 9, 2020
|
|
September 4, 2019
|
|
|
18,000
|
|
|
|
—
|
|
|
|
12,857,143
|
|
March 11, 2020
|
|
September 4, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
12,500,000
|
|
April 6, 2020
|
|
September 4, 2019
|
|
|
5,000
|
|
|
|
2,650
|
|
|
|
7,806,122
|
|
April 27, 2020
|
|
May 2, 2019
|
|
|
8,478
|
|
|
|
5,100
|
|
|
|
22,258,360
|
|
May 14, 2020
|
|
July 16, 2019
|
|
|
12,000
|
|
|
|
1,000
|
|
|
|
26,000,000
|
|
June 16, 2020
|
|
July 16, 2019
|
|
|
14,900
|
|
|
|
1,000
|
|
|
|
26,500,000
|
|
June 18, 2020
|
|
July 16, 2019
|
|
|
9,800
|
|
|
|
1,000
|
|
|
|
18,000,000
|
|
June 22, 2020
|
|
July 16, 2019
|
|
|
5,000
|
|
|
|
1,000
|
|
|
|
10,000,000
|
|
June 23, 2020
|
|
March 25, 2013
|
|
|
50,000
|
|
|
|
36,260
|
|
|
|
21,565,068
|
|
June 23, 2020
|
|
April 20, 2018
|
|
|
38,894
|
|
|
|
4,236
|
|
|
|
4,313,014
|
|
June
25, 2020
|
|
July 16, 2019
|
|
|
1,300
|
|
|
|
5,300
|
|
|
|
11,000,000
|
|
|
|
|
|
$
|
233,395
|
|
|
$
|
58,545
|
|
|
|
226,300,034
|
|
|
-
|
The
values of the ROU operating leases assets and liabilities each declined $95,209, 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.
|
|
-
|
Recorded
the value of shares issued to lenders in the amount of $334,377.
|
During
the year ended December 31, 2019, there were the following non-cash activities.
|
-
|
Lenders
converted debt into common stock, within the terms of the agreements. The Company recording
no losses on the following conversions:
|
Conversion
Date
|
|
Note
Date
|
|
Principal
|
|
Interest/Fees
|
|
Shares
|
July 17, 2019
|
|
January 16, 2019
|
|
$
|
12,000
|
|
|
$
|
—
|
|
|
|
1,967,213
|
|
August 5, 2019
|
|
January 31, 2019
|
|
|
7,838
|
|
|
|
250
|
|
|
|
2,550,000
|
|
August 27, 2019
|
|
January 16, 2019
|
|
|
12,000
|
|
|
|
—
|
|
|
|
3,870,968
|
|
September 4, 2019
|
|
January 16, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
5,172,414
|
|
September 4, 2019
|
|
January 31, 2019
|
|
|
7,777
|
|
|
|
250
|
|
|
|
2,800,000
|
|
September 5, 2019
|
|
January 16, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
5,172,414
|
|
September 13, 2019
|
|
January 16, 2019
|
|
|
16,000
|
|
|
|
—
|
|
|
|
6,956,522
|
|
September 25, 2019
|
|
January 16, 2019
|
|
|
14,800
|
|
|
|
—
|
|
|
|
7,047,619
|
|
October 28, 2019
|
|
January 16, 2019
|
|
|
11,300
|
|
|
|
—
|
|
|
|
7,062,500
|
|
November 4, 2019
|
|
January 16, 2019
|
|
|
6,900
|
|
|
|
5,150
|
|
|
|
7,531,250
|
|
November 20, 2019
|
|
February 21, 2019
|
|
|
6,900
|
|
|
|
—
|
|
|
|
4,928,571
|
|
November 26, 2019
|
|
February 21, 2019
|
|
|
7,900
|
|
|
|
—
|
|
|
|
9,294,118
|
|
November 27, 2019
|
|
February 21, 2019
|
|
|
7,900
|
|
|
|
—
|
|
|
|
9,294,118
|
|
December 2, 2019
|
|
February 21, 2019
|
|
|
8,900
|
|
|
|
—
|
|
|
|
10,470,588
|
|
December 4, 2019
|
|
February 21, 2019
|
|
|
8,900
|
|
|
|
—
|
|
|
|
10,470,588
|
|
December 4, 2019
|
|
February 21, 2019
|
|
|
8,900
|
|
|
|
—
|
|
|
|
10,470,588
|
|
December 4, 2019
|
|
January 31, 2019
|
|
|
6,359
|
|
|
|
250
|
|
|
|
8,333,670
|
|
December 5, 2019
|
|
February 21, 2019
|
|
|
3,600
|
|
|
|
2,650
|
|
|
|
7,352,941
|
|
December 5, 2019
|
|
January 31, 2019
|
|
|
9,663
|
|
|
|
250
|
|
|
|
12,500,000
|
|
December 6, 2019
|
|
April 24, 2019
|
|
|
9,800
|
|
|
|
—
|
|
|
|
11,529,412
|
|
December 6, 2019
|
|
April 24, 2019
|
|
|
9,800
|
|
|
|
—
|
|
|
|
11,529,412
|
|
December 6, 2019
|
|
January 31, 2019
|
|
|
10,456
|
|
|
|
250
|
|
|
|
13,500,000
|
|
December 9, 2019
|
|
April 24, 2019
|
|
|
13,000
|
|
|
|
—
|
|
|
|
15,294,118
|
|
December 9, 2019
|
|
April 24, 2019
|
|
|
10,400
|
|
|
|
2,150
|
|
|
|
14,764,706
|
|
December 11, 2019
|
|
January 31, 2019
|
|
|
11,407
|
|
|
|
1,915
|
|
|
|
16,800,000
|
|
December 16, 2019
|
|
June 10, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
17,647,059
|
|
December 16, 2019
|
|
June 10, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
17,647,059
|
|
December 17, 2019
|
|
June 10, 2019
|
|
|
15,000
|
|
|
|
—
|
|
|
|
17,647,059
|
|
December
17, 2019
|
|
June 10, 2019
|
|
|
8,000
|
|
|
|
2,650
|
|
|
|
12,529,412
|
|
|
|
|
|
|
305,500
|
|
|
|
15,765
|
|
|
|
282,123,319
|
|
|
-
|
Recorded
the initial values of ROU operating leases, which increased ROU assets by $398,506 and
operating lease liability by $398,506, netting to zero on the statement of cash flows.
As of December 31, 2019, the ROU asset and liability balances were $266,758 and $266,758,
respectively.
|
|
-
|
For
the year ended December 31, 2019, the Company recorded a discount on the convertible
notes and derivative liability in the amount of $467,019, which declined by $287,668
during the year due to conversions (derivative settlements).
|
17. INCOME
TAXES
The
provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 were as follows, assuming a 21% and 21% effective
tax rate, respectively:
|
|
For
the years ended December 31,
|
|
|
2020
|
|
2019
|
Deferred tax provision:
|
|
|
|
|
Federal
|
|
|
|
|
Deferred
tax asset
|
|
$
|
3,427,761
|
|
|
$
|
3,263,237
|
|
Valuation
allowance
|
|
|
(3,427,761
|
)
|
|
|
(3,263,237
|
)
|
Total
deferred tax provision
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of December 31, 2020, the Company had approximately $16,322,673 in tax loss carryforwards that can be utilized in future periods
to reduce taxable income through 2040. The deferred tax liability balances as of December 31, 2020 and 2019 were zero and zero,
respectively. During the year ended December 31, 2018, it was determined that, due to the
Company never having paid federal income taxes and having a large net operating loss (NOL), it is unlikely we will pay federal
income taxes in the foreseeable future.
The
Company provided a valuation allowance equal to the deferred income tax assets for the period from June 30, 2011 to December 31,
2020 because it is not presently known whether future taxable income will be sufficient to utilize the tax loss carryforwards.
The
Company has no uncertain tax positions.
18. SUBSEQUENT EVENTS.
On
January 5, 2021, we granted non-qualified stock options to purchase up to 368,000,000 shares of our common stock to six key employees
and three directors, at an exercise price of $0.0068 per share. The stock options vest equally
over a period of 36 months and expire January 5, 2026. These options allow the optionee to exercise
on a cashless basis, resulting in no cash payment to the Company upon exercise, anytime after January 5, 2022.
On
January 14, 2021, the Company formed a new entity aiAdvertising, Inc., as a Nevada corporation, in order to grow our artificial
intelligence-enabled advertising platform SWARM.
On
January 15, 2021, an accredited investor converted $183,130.74 in principal, interest and fees resulting in the issuance of 18,313,074
shares of common stock. This note was converted within the terms of the agreement and did not result in a gain of loss.
On
January 22, 2021, the Company filed form S-3 to offer up to $100,000,000 worth of our stock to accredited investors. The offering
became effective on February 16, 2021.
On
January 28, 2021, the Company entered into an Unsecured Promissory Note ( in the aggregate principal amount of $840,000, with
Bountiful Capital, LLC for gross proceeds of $840,000. The Promissory Note was funded on January 28, 2021. The investor is a related
party. The chief financial officer of the Company, Greg Boden, is also the president of Bountiful Capital, LLC. The note bears
interest at a rate of 5% per year and is not convertible into shares of common stock of the Company. Principal and interest under
the note are due and payable upon maturity on January 28, 2022, and a prepayment of the note is permitted. On March 4, 2021, the
Company paid off the note in full in the amount of $840,000.
On
February 4, 2021, the Company received loan proceeds of $780,680 under the Second Draw of the Paycheck Protection Program (“PPP2”).
The PPP2 is evidenced by a promissory note (, between the Company and the Cache Valley Bank. The note has a five-year term, bears
interest at the rate of 1.00% per year, and may be prepaid at any time without payment of any premium. No payments
of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”). The
principal and accrued interest under the note is forgivable after eight weeks if the Company uses the PPP2 Loan proceeds for eligible
purposes, including payroll, benefits, rent and utilities, and otherwise complies with PPP2 requirements. In order to obtain
forgiveness
of the PPP2 Loan, the Company must submit a request and provide satisfactory documentation regarding its compliance with applicable
requirements. The Company must repay any unforgiven principal amount of the note, with interest, on a monthly basis
following the Deferral Period. The Company intends to use the proceeds of the PPP2 Loan for eligible purposes and to
pursue forgiveness, although the Company may take action that could cause some or all of the PPP Loan to become ineligible for
forgiveness. No assurance is provided that forgiveness for all or any portion of the PPP2 Loan will be obtained. The note contains
customary events of default relating to, among other things, payment defaults and breaches of representations, warranties or covenants. The
occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from
the Company, or filing suit and obtaining judgment against the Company.
On
February 17, 2021, the Company entered into an agreement with a related party lender (Bountiful Capital, LLC) to refinance the
demand notes disclosed in footnote 9 (“Refinance Note”). Under the terms of the agreement, the Company exchanged 10
demand notes dated between August 2017 and January 2018 for a new consolidated note payable with an expiration date of August
31, 2021. The new Refinance Note accrues interest at a rate of 5% per year. At the time of the execution of the Refinance Note,
the Company issued 25,000,000 restricted shares of its common stock to the lender.
On
February 19, 2021, the Company entered into a securities purchase agreement with an accredited investor for the purchase and sale
of an aggregate of 85,000,000 shares of common stock (the “Shares”), (ii) pre-funded warrants to purchase up to 57,857,143
shares of common stock (the “Pre-funded Warrants), and (iii) warrants to purchase up to 142,857,143 shares of common stock
(the “Common Warrants,” and together with the Pre-Funded Warrants, the “Warrants”), in a registered direct
offering at a purchase price of $0.07 per Share and Common Warrant, or $0.069 per Pre-Funded Warrant and Common Warrant. The Common
Warrants are exercisable for a period of five years commencing upon issuance, at an exercise price of $0.07 per share, subject
to certain adjustments set forth therein. The Pre-funded Warrants are exercisable commencing upon issuance and expiring upon the
exercise of the Pre-funded Warrants in full, at an exercise price of $0.001 per share, subject to certain adjustments set forth
therein. The Company received gross proceeds of $10,000,000 from this accredited investor. On March 5, 2021, we and the purchaser
entered into an amendment agreement to the Purchase Agreement (the “Amendment Agreement”) to reduce the exercise price
of the Common Warrants from $0.07 to $0.0454 per share of common stock. We also agreed to issue an additional 28,571,421 Common
Warrants to the purchaser. No other changes to the Common Warrants or other terms of the Purchase Agreement were made.
Following
is the detail of the shares of common stock issued after December 31, 2020:
Date of Issuance
|
|
Type
|
|
|
|
Shares
|
|
January
15, 2021
|
|
|
Debt Conversion
|
|
|
(1
|
)
|
|
|
18,313,074
|
|
|
February
3, 2021
|
|
|
Preferred A Conv
|
|
|
(2
|
)
|
|
|
40,000,000
|
|
|
February
3, 2021
|
|
|
Preferred A Conv
|
|
|
(2
|
)
|
|
|
16,000,000
|
|
|
February
16, 2021
|
|
|
Preferred A Conv
|
|
|
(2
|
)
|
|
|
44,000,000
|
|
|
February
17, 2021
|
|
|
Debt Refinance
|
|
|
(3
|
)
|
|
|
25,000,000
|
|
|
February
18, 2021
|
|
|
Stock Option Exercise
|
|
|
(5
|
)
|
|
|
2,160,294
|
|
|
February
22, 2021
|
|
|
Stock Sale
|
|
|
(4
|
)
|
|
|
85,000,000
|
|
|
February
22, 2021
|
|
|
Stock Option Exercise
|
|
|
(5
|
)
|
|
|
660,192
|
|
|
March
4, 2021
|
|
|
Stock Option Exercise
|
|
|
(5
|
)
|
|
|
708,469
|
|
|
|
|
|
|
|
|
|
|
|
|
231,842,029
|
|
__________________________________________
|
(1)
|
See
subsequent even dated January 15, 2021.
|
|
(2)
|
Holders
of our series A preferred stock converted all 10,000 shares of series A preferred stock
into an aggregate 100,000,000 shares of our common stock. The holders of these shares
are deemed affiliates and are restricted in the number of shares that may be sold.
|
|
(3)
|
See
subsequent event dated February 17, 2021.
|
|
(4)
|
See
subsequent event dated February 19, 2021.
|
|
(5)
|
Stock
options were exercised, and shares of common stock were issued in accordance with the
respective stock option agreements. No officer, director or affiliate were the recipients
of the shares issued.
|