The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - UNAUDITED
SEPTEMBER 30, 2017
1. BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of
CloudCommerce, Inc. (“CloudCommerce,”
“we,” “us,” or the “Company”),
have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments
considered necessary for a fair presentation have been included. Operating results for the three months ended September
30, 2017 are not necessarily indicative of the results that may be expected for the year ending June 30, 2018. For further
information, refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June
30, 2017.
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
Condensed Consolidated Financial Statements include the Company and its majority-owned subsidiaries, Indaba Group, Inc., a Delaware
corporation (“Indaba”) and Parscale Digital, Inc., a Nevada corporation (“Parscale Digital”). All significant
inter-company transactions are eliminated in consolidation.
Accounts Receivable
The
Company extends credit to its customers, who are located nationwide. Accounts receivable are customer obligations due under normal
trade terms. The Company performs continuing credit evaluations of its customers’ financial condition. Management reviews
accounts receivable on a regular basis, based on contracted terms and how recently payments have been received to determine if
any such amounts will potentially be uncollected. The Company includes any balances that are determined to be uncollectible in
its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The
balance of the allowance account at
September 30, 2017
and June 30, 2017 are $6,333 and $10,493
respectively.
On
November 30, 2016, the Company entered into an agreement with a third party to sell the rights, with recourse, to accounts receiveable
amounts due from our customers to Indaba. 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 amounts due from customers as a secured borrowing arrangement, with 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 September 30, 2017, the balance due from this arrangement was $282,175.
On
October 19, 2017, the Company entered into an agreement with a third party to sell the rights, with recourse, to accounts receiveable
amounts due from our customers to Parscale Digital. 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 amounts due from customers as a secured borrowing arrangement, with 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.
Use
of Estimates
The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial
statements include revenue recognition, the allowance for doubtful accounts, long-lived assets, intangible assets, business combinations,
the deferred tax valuation allowance, and the fair value of stock options and warrants. Actual results could differ from those
estimates.
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 is in accordance with ASC 605-45. 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 605-25, 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. The
terms of services contracts generally are for periods of less than one year. The deferred revenue and customer deposits as of
September
30
, 2017 and the fiscal year ended June 30, 2017 was $821,171 and $632,134, respectively.
We always
strive to satisfy our customers by providing superior quality and service. Since we typically bill based on a Time and Materials
basis, there are no returns for work delivered. When discrepancies or disagreements arise, we do our best to reconcile those by
assessing the situation on a case-by-case basis and determining if any discounts can be given. Historically, no significant discounts
have been granted.
Included
in revenue are costs that are reimbursed by our clients, including third party services, such as photographers and stylists, furniture,
supplies, and the largest component, digital advertising. We have determined, based on our review of ASC 605-45, that the amounts
classified as reimbursable costs should be recorded as gross, 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
three months ended September 30, 2017 and September 30, 2016, we included $669,628 and $0, respectively, in revenue, related to
reimburseable costs.
Research and Development
Research
and development costs are expensed as incurred. Total research and development costs were zero for the three months ended
September
30
, 2017 and 2016.
Advertising Costs
The Company
expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $6,844 and $48,358 for the
three months ended
September 30
, 2017 and 2016, respectively.
Fair value of
financial instruments
The Company’s
financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are
carried at cost, which approximates their fair value, due to the relatively short maturity of these instruments. As of
September
30
, 2017 and June 30, 2017, 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 that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes
the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical
instruments in active markets;
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices
for identical or similar instruments in markets that are not active; and
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market
data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques
in which one or more significant inputs or significant value drivers are unobservable.
|
We
measure certain financial instruments at fair value on a recurring basis. As of September 30, 2017 and the fiscal year ended June
30, 2017, the Company had no assets or liabilities that are required to be valued on a recurring basis.
Property and Equipment
Property
and equipment are stated at cost, and are depreciated or amortized using the straight-line method over the following estimated
useful lives:
Furniture, fixtures & equipment
|
|
7 Years
|
Computer equipment
|
|
5 Years
|
Commerce server
|
|
5 Years
|
Computer software
|
|
3 - 5 Years
|
Leasehold improvements
|
|
Length of the lease
|
Depreciation
expenses were $6,039 and $6,137 for the three months ended
September 30
, 2017 and 2016, respectively.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the
estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the
long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information
at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future
cash flows based on reasonable and supportable assumptions.
Indefinite Lived Intangibles
and Goodwill Assets
The Company
accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based
on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted,
up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities
assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible
assets acquired less liabilities assumed is recognized as goodwill.
The Company
tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances
indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies,
the Company performed a qualitative assessment of indefinite lived intangibles and goodwill at June 30, 2017, and determined there
was no impairment of indefinite lived intangibles and goodwill.
Business Combinations
The Company
allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired
based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions,
especially with respect to intangible assets. 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. During the measurement
period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed,
with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded
to earnings.
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 in the SAAS industry.
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.
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 three months
ended
September 30
, 2017, included compensation expense for the stock-based payment awards granted
prior to, but not yet vested, as of
September 30
, 2017 based on the grant date fair value estimated.
Stock-based compensation expense recognized in the statement of operations for the three months ended
September
30
, 2017 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 three months ended
September
30
, 2017 and 2016 was $132,824 and $126,531, 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 three
months ended
September 30, 2017
, the Company has excluded 134,800,000 shares of common stock
underlying options, 10,000 Series A Preferred shares convertible into 100,000,000 shares of common stock, 18,025 Series B Preferred
shares convertible into 450,625,000 shares of common stock, 14,425 Series C Preferred shares convertible into 144,250,000 shares
of common stock, 90,000 Series D Preferred shares convertible into 225,000,000 shares of common stock, and 23,837,250 shares of
common stock underlying $95,349 in convertible notes, because their impact on the loss per share is anti-dilutive.
For the three
months ended September 30, 2016, the Company has excluded 123,000,000 shares of common stock underlying options, 10,000 Series
A Preferred shares convertible into 100,000,000 shares of common stock, 18,025 Series B Preferred shares convertible into 450,625,000
shares of common stock, and 22,187,250 shares of common stock underlying $88,749 in convertible notes, because their impact on
the loss per share is anti-dilutive
Dilutive
per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities,
using the treasury stock method if their effect would be dilutive.
Recently Issued Accounting
Pronouncements
Management
reviewed accounting pronouncements issued during the three months ended September 30
, 2017
, and
no pronouncements were adopted during the period.
Income Taxes
The
Company uses the 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.
Reclassification
Certain
amounts at June 30, 2017 have been reclassified to conform with the presentation at September 30, 2017.
3. LIQUIDITY AND
OPERATIONS
The
Company had net loss of $356,071 for the three months ended September 30
, 2017
and net loss of
$214,570 for the three months ended September 30
, 2016
, and net cash used in operating activities
of $603,405 and $166,416 for the same periods, respectively.
While the
Company expects that its capital needs in the foreseeable future may be met by cash-on-hand and projected positive cash-flow, there
is no assurance that the Company will be able to generate enough positive cash flow or have sufficient capital to finance its growth
and business operations, or that such capital will be available on terms that are favorable to the Company or at all. In the current
financial environment, it could become difficult for the Company to obtain equipment leases and other business financing.
There is no assurance that the Company would be able to obtain additional working capital through the private placement of common
stock or from any other source.
Going
Concern
The
accompanying 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. The Company
does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s
ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness
of using the going concern basis is dependent upon, among other things, an additional cash infusion. The Company has obtained funds
from its shareholders since its inception. It is management’s plan to generate additional working capital from increasing
sales from its desktop and mobile service offerings, and then continue to pursue its business plan and purposes.
4. BUSINESS ACQUISITIONS
Parscale Digital,
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 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 $10,209,830, 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 $928,745 in dividend payments, based on 5% of
adjusted revenue of Parscale Digital. Adjusted revenue is defined as total revenue, minus digital marketing media buys. As of the
date of closing, Brad Parscale, the 100% owner of Parscale Creative, was appointed to the Company’s Board of Directors.
Under
the purchase method of accounting, the transactions were valued for accounting purposes at $10,209,830, 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 consisted
of the following:
Cash
|
|
$
|
200,000
|
|
Deferred Revenue
|
|
|
(481,085
|
)
|
Net tangible liabilities
|
|
|
(281,085
|
)
|
Non-compete agreements
|
|
|
476,661
|
|
Brand name
|
|
|
2,245,000
|
|
Customer list
|
|
|
3,105,837
|
|
Goodwill
|
|
|
6,082,417
|
|
Deferred tax liability
|
|
|
(1,419,000
|
)
|
Total purchase price
|
|
$
|
10,209,830
|
|
Issuance of Series D Convertible Preferred Stock
|
|
$
|
9,000,000
|
|
Purchase price contingency
|
|
|
928,745
|
|
Net tangible liabilities
|
|
|
281,085
|
|
Total purchase price
|
|
$
|
10,209,830
|
|
The
above estimated fair value of the intangible assets is based on a preliminary purchase price allocation prepared by management.
As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination
date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After
the preliminary purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to
the purchase price allocation period in our operating results in the period in which the adjustments were determined.
Pro
forma results
The
following tables set forth the unaudited pro forma results of the Company as if the acquisition of Parscale Creative had taken
place on the first day of the period presented. These combined results are not necessarily indicative of the results that may have
been achieved had the companies been combined as of the first day of the period presented.
|
|
Three months ended,
September 30, 2017
|
|
Three months ended,
September 30, 2016
|
Total revenues
|
|
$
|
3,015,311
|
|
|
$
|
2,600,589
|
|
Net loss
|
|
|
(377,438
|
)
|
|
|
(288,260
|
)
|
Basic and diluted net earnings per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
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. As of September 30, 2017, the Company has not consummated
the transaction.
Domain Name
On June 26,
2015, the Company purchased the rights to the domain “CLOUDCOMMERCE.COM”, from a private party at a purchase price
of $20,000, plus transaction costs of $202, which is used as the main landing page for the Company. The total recorded cost of
this domain of $20,202 has been included in other assets on the balance sheet. As of June 30, 2017, 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 of “CLOUDCOMMERCE”, from a private party at a purchase price of
$10,000. The total recorded cost of this trademark of $10,000 has been included in other assets on the balance sheet. The trademark
expires in 2020 and may be renewed for an additional 10 years. As of September 30, 2015, we determined that this intangible asset
has a definite useful life of 174 months, and as such, will be included in depreciation and amortization expense. For the quarter
ended September 30, 2017, the Company included $172 in depreciation and amortization expense related to this trademark.
Non-Compete Agreements
On October
1, 2015, the Company acquired Indaba from three members of the limited liability company. At that time, we retained two of the
members, who currently serve as the Chief Executive Officer and Chief Technology Officer of Indaba. Both employees have non-compete
agreements in place to protect the Company against the risk of either employee leaving Indaba to compete directly with us. We have
calculated the value of those non-compete agreements at $201,014, with a useful life of two years, which coincides with the term
of the non-compete agreement. This amount was included in depreciation and amortization expense until September 30, 2017.
For
the quarter ended September 30, 2017, the Company included $25,127 in depreciation and amortization expense related to these non-compete
agreements. As of September 30, 2017, the balance for the non-compete agreements was zero.
On August
1, 2017, the Company acquired Parscale Creative. At that time, we retained Mr. Parscale to build the Parscale brand as well as
consult with the Company on operating matters. Mr. Parscale has a non-compete agreement in
place to protect the Company against
the risk of Mr. Parscale leaving the Company to compete directly with us. We have calculated the value of this non-compete agreement
at $476,661, with a useful life of three years, which coincides with the term of the non-compete agreement. This amount will be
included in depreciation and amortization expense until July 31, 2020.
For the quarter ended September
30, 2017, the Company included $26,481 in depreciation and amortization expense related to this non-compete agreement. As of September
30, 2017, the balance for the non-compete agreements was $450,180.
Name Brand
In
connection with the Parscale Creative acquisition, the Company obtained the right to use the Parscale name in advertising, marketing
and public relations campaigns.
We have calculated the value of this brand name at $2,245,000.
As
of September 30, 2017, we have determined that this intangible asset 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.
Customer List
On October
1, 2015, the Company acquired Indaba Group, LLC, a Colorado limited liability company, which at the time brought an increase in
revenue and many new customers. We have calculated the value of the Indaba customer list at $447,171, with a useful life of 3 years.
This amount will be included in depreciation and amortization expense until September 30, 2018.
For
the quarter ended September 30, 2017, the Company included $37,264 in depreciation and amortization expense related to the Indaba
customer list.
We have calculated
the value of the Parscale Creative customer list at $3,105,837, with a useful life of 3 years. This amount will be included in
depreciation and amortization expense until July 31, 2020.
For the quarter ended September 30, 2017,
the Company included $172,547 in depreciation and amortization expense related to the Parscale Creative customer list.
The
Company acquired certain intangible assets pursuant to the acquisitions of Indaba and Parscale Creative. The following
is the net book value of the Company’s intangible assets:
|
|
September 30, 2017
|
|
|
|
|
Accumulated
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
Domain Name
|
|
$
|
20,202
|
|
|
$
|
—
|
|
|
$
|
20,202
|
|
Trademark
|
|
|
10,000
|
|
|
|
(1,380
|
)
|
|
|
8,620
|
|
Customer List
|
|
|
3,553,008
|
|
|
|
(470,661
|
)
|
|
|
3,082,347
|
|
Name Brand
|
|
|
2,245,000
|
|
|
|
—
|
|
|
|
2,245,000
|
|
Non-Compete Agreements
|
|
|
677,675
|
|
|
|
(227,495
|
)
|
|
|
450,180
|
|
Goodwill
|
|
|
7,210,420
|
|
|
|
—
|
|
|
|
7,210,420
|
|
Total
|
|
$
|
13,716,305
|
|
|
$
|
(699,536
|
)
|
|
$
|
13,016,769
|
|
Total
amortization expense charged to operations for the quarter ended September 30, 2017 and 2016 was
$261,591 and $54,188, respectively.
The following table reflects the remaining amortization of finite life intangible assets, for
the years ended June 30:
|
2018
|
|
|
$
|
1,007,935
|
|
|
2019
|
|
|
|
1,232,120
|
|
|
2020
|
|
|
|
1,194,856
|
|
|
2021
|
|
|
|
100,203
|
|
|
2022 and thereafter
|
|
|
|
6,033
|
|
|
Total
|
|
|
$
|
3,541,147
|
|
6. CREDIT FACILITIES
Secured
Borrowing
On
November 30, 2016, the Company entered into a 12 month agreement with a third party to sell the rights to amounts due from our
customers to Indaba, 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. The proceeds from the facility
are determined by the amounts we invoice our customers. The Company evalutated this facility in accordance with ASC 860, classifying
it as a secured borrowing arrangement. As such, we record the amounts due from customers in accounts receivable and the amount
due to the third party as a liability, presented as a “line of credit” on the Balance Sheet. The principal borrowed
through this facility is secured by the accounts receivable balances, in addition to the other assets of the Company. During the
term of this facility, the third party lender has a first priority security interest in the Company, and will, therefore, we will
require such third party lender’s written consent to obligate the Company further or pledge our assets against additional
borrowing facilities. Because of this position, it may be difficult for the Company to secure additional secured borrowing facilities.
The cost of this secured borrowing facility is 0.05% of the daily balance. During the three months ended September 30, 2017, the
Company included $12,807 in interest expense, related to the secured borrowing facility, and as of September 30, 2017 and June
30, 2017, the outstanding balance was $282,175 and $205,368, respectively.
7. NOTES PAYABLE
During the
quarter ended December 31, 2015, the Company signed addenda to each of its outstanding convertible notes, fixing the conversion
price at $0.004. Before the addenda, the conversion price for each of the notes was tied to the trading price of the Company’s
common stock. Because of that fluctuation, the Company was required to report derivative gains and losses each quarter, which was
included in earnings, and an overall derivative liability balance on the balance sheet. Since the addenda, the Company has eliminated
the derivative liability balance on the balance sheet and discontinued the gain/loss reporting on the income statement.
On March
25, 2013, the Company issued a convertible promissory note (the “March 2013 Note”) in the amount of up to $100,000,
at which time an initial advance of $50,000 was received to cover operational expenses. The lender advanced an additional $20,000
on April 16, 2013, $15,000 on May 1, 2013 and $15,000 on May 16, 2013, for a total draw of $100,000. The terms of the March 2013
Note, as amended, allow the lender to convert all or part of the outstanding balance plus accrued interest, at any time after the
effective date, at a conversion price of $0.004 per share. The March 2013 Note bears interest at a rate of 10% per year and matures
on March 25, 2018. On May 23, 2014, the lender converted $17,000 of the $100,000 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 $100,000 outstanding balance and
accrued interest of $2,645 into 4,911,370 shares of common stock. The balance of the March 2013 Note, as of September 30, 2017
is $95,349, which includes $29,349 of accrued interest.
On January
12, 2016, the Company borrowed $100,000 from Bountiful Capital, LLC to cover operating costs. The loan was offered interest free
on a short term basis, and was due February 12, 2016. On July 31, 2017, the principal balance of $100,000 was exchanged for Series
C Preferred stock, leaving a balance of zero as of September 30, 2017. The other notes exchanged with Bountiful Capital, LLC, are
noted below.
On April
18, 2016, the Company issued a promissory note (the “April 2016 Note”) in the amount of up to $500,000, at which time
an initial advance of $35,500 was received to cover operational expenses. The lender advanced an additional $41,000 on May 2, 2016,
$35,000 on May 17, 2016, $160,000 on May 19, 2016, $34,000 on June 1, 2016, $21,000 on June 21, 2016, $33,500 on June 30, 2016,
$10,000 on July 15, 2016, $33,000 on July 29, 2016, $35,500 on August 16, 2016, $28,000 on August 31, 2016, $33,500 on September
14, 2016, for a total draw of $500,000. The April 2016 Note bears interest at a rate of 5% per year and is payable upon demand,
but in no event later than 60 months from the effective date of each tranche. On July 31, 2017, the principal balance of $500,000
was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September 30,
2017. We included $2,123 in interest expense for the quarter, related to the April 2016 Note.
On October
3, 2016, the Company issued a promissory note (the “October 2016 Note”) in the amount of up to $500,000, at which time
an initial advance of $36,000 was received to cover operational expenses. The lender advanced an additional $48,000 on October
17, 2016, $34,000 on October 31, 2016, $27,000 on November 15, 2016, $34,000 on November 30, 2016, $28,500 on December 16, 2016,
$21,000 on January 3, 2017, $50,000 on January 17, 2017, $29,000 on January 31, 2017, $15,000 on February 2, 2017, $30,000 on February
16, 2017, $29,000 on March 1, 2017, $28,000 on March 16, 2017, $46,500 on April 3, 2017, $23,500 on April 17, 2017, and $20,500
on May 2, 2017, for a total draw of $500,000. The October 2016 Note bears interest at a rate of 5% per year and is payable upon
demand, but in no event later than 60 months from the effective date of each tranche. On July 31, 2017, the principal balance of
$500,000 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September
30, 2017. We included $2,123 in interest expense for the quarter, related to the October 2016 Note.
On May 16,
2017, the Company issued a promissory note (the “May 16, 2017 Note”) in the amount of $38,000, at which time the entire
balance of $38,000 was received to cover operational expenses. The May 16, 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. On July 31, 2017, the principal balance of
$38,000 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September
30, 2017. We included $161 in interest expense for the quarter, related to the May 16, 2017 Note.
On May 30,
2017, the Company issued a promissory note (the “May 30, 2017 Note”) in the amount of $46,000, at which time the entire
balance of $46,000 was received to cover operational expenses. The May 30, 2017 Note bears interest at a rate of 5% per year and
is payable upon demand, but in no event later than 36 months from the effective date. On July 31, 2017, the principal balance of
$46,000 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September
30, 2017. We included $195 in interest expense for the quarter, related to the May 30, 2017 Note.
On June 14,
2017, the Company issued a promissory note (the “June 14, 2017 Note”) in the amount of $26,000, at which time the entire
balance of $26,000 was received to cover operational expenses. The June 14, 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. On July 31, 2017, the principal balance of
$26,000 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September
30, 2017. We included $110 in interest expense for the quarter, related to the June 14, 2017 Note.
On June 29,
2017, the Company issued a promissory note (the “June 29, 2017 Note”) in the amount of $23,500, at which time the entire
balance of $23,500 was received to cover operational expenses. The June 29, 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. On July 31, 2017, the principal balance of
$23,500 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September
30, 2017. We included $100 in interest expense for the quarter, related to the June 29, 2017 Note.
On July 10,
2017, the Company issued a promissory note (the “July 10, 2017 Note”) in the amount of $105,000, at which time the
entire balance of $105,000 was received to cover operational expenses. The July 10, 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. On July 31, 2017, the principal
balance of $105,000 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero
as of September 30, 2017. We included $302 in interest expense for the quarter, related to the July 10, 2017 Note.
On July 14,
2017, the Company issued a promissory note (the “July 14, 2017 Note”) in the amount of $50,500, at which time the entire
balance of $50,500 was received to cover operational expenses. The July 14, 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. On July 31, 2017, the principal balance of
$50,500 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September
30, 2017. We included $118 in interest expense for the quarter, related to the July 14, 2017 Note.
On July 30,
2017, the Company issued a promissory note (the “July 30, 2017 Note”) in the amount of $53,500, at which time the entire
balance of $53,500 was received to cover operational expenses. The July 30, 2017 Note bears interest at a rate of 5% per year and
is payable upon demand, but in no event later than 36 months from the effective date. On July 31, 2017, the principal balance of
$53,500 was exchanged for Series C Preferred stock, and all accrued interest was forgiven, leaving a balance of zero as of September
30, 2017. We included $7 in interest expense for the quarter, related to the July 30, 2017 Note.
On July
31, 2017, the Company signed an exchange agreement with the holder of our notes, which exchanged ten convertible notes,
totaling $1,485,914 per equity schedule, for 14,425 shares of Series C Preferred stock. Each share of Series C Preferred stock has
a face value of $100 and is convertible into common stock at a price of $0.01 per share. At the time of the exchange,
all accrued interest was forgiven.
On August
3, 2017, the Company issued a promissory note (the “August 3, 2017 Note”) in the amount of $25,000, at which time the
entire balance of $25,000 was received to cover operational expenses. The August 3, 2017 Note bears interest at a rate of 5% per
year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the August 3, 2017
Note, as of September 30, 2017 is $25,199, which includes $199 of accrued interest.
On August
15, 2017, the Company issued a promissory note (the “August 15, 2017 Note”) in the amount of $34,000, at which time
the entire balance of $34,000 was received to cover operational expenses. The August 15, 2017 Note bears interest at a rate of
5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the August
15, 2017 Note, as of September 30, 2017 is $34,214, which includes $214 of accrued interest.
On August
28, 2017, the Company issued a promissory note (the “August 28, 2017 Note”) in the amount of $92,000, at which time
the entire balance of $92,000 was received to cover operational expenses. The August 28, 2017 Note bears interest at a rate of
5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the August
28, 2017 Note, as of September 30, 2017 is $92,416, which includes $416 of accrued interest.
On September
28, 2017, the Company issued a promissory note (the “September 28, 2017 Note”) in the amount of $63,600, at which time
the entire balance of $63,600 was received to cover operational expenses. The September 28, 2017 Note bears interest at a rate
of 5% per year and is payable upon demand, but in no event later than 36 months from the effective date. The balance of the September
28, 2017 Note, as of September 30, 2017 is $63,617, which includes $17 of accrued interest.
Following is the
five year maturity schedule for our notes payable, including accrued interest:
Year ended June 30,
|
|
Amount Due
|
|
2018
|
|
|
$
|
|
$310,795
|
8. CAPITAL STOCK
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. As of September
30, 2017, the Company’s Board of Directors has designated the rights, preferences and limitations of a portion of its preferred
stock as follows:
Series A Preferred
The Company
has designated 10,000 shares of its preferred stock as Series A Preferred Stock. Each share of Series A Preferred Stock is convertible
into 10,000 shares of the Company’s common stock. The holders of outstanding shares of Series A Preferred Stock shall be
entitled to receive dividends, payable quarterly, out of any assets of the Corporation legally available therefor, at the rate
of $8 per share per annum, payable in preference and priority to any payment of any dividend on the common stock. As of September
30, 2017, the Company has 10,000 shares of Series A Preferred Stock outstanding.
Series B Preferred
The Company
has designated 25,000 shares of its preferred stock as Series B Preferred Stock. Each share of Series B Preferred Stock shall have
a stated value of $100. The Series B Preferred Stock is convertible into shares of fully paid and non-assessable shares of the
Company's common stock by dividing the stated value by a conversion price of $0.004 per share. Series B Preferred Stock shall not
be entitled to vote, as a separate class or otherwise, on any matter presented to the
stockholders of the Company for
their action or consideration at any meeting of stockholders of the Company. As of September 30, 2017, the Company has 18,025 shares
of Series B Preferred Stock outstanding.
Series C Preferred
The Company
has designated 25,000 shares of its preferred stock as Series C Preferred Stock. Each share of Series C Preferred Stock shall have
a stated value of $100. The Series C Preferred Stock is convertible into shares of fully paid and non-assessable shares of the
Company's common stock by dividing the stated value by a conversion price of $0.01 per share. Series C Preferred Stock shall not
be entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action
or consideration at any meeting of stockholders of the Company. As of September 30, 2017, the Company has 14,425 shares of Series
C Preferred Stock outstanding.
Series D Preferred
The Company
has designated 90,000 shares of its preferred stock as Series D Preferred Stock. Each share of Series D Preferred Stock shall have
a stated value of $100. The holders of outstanding shares of Series D Preferred Stock shall be entitled to receive dividends, payable
quarterly, out of any assets of the Corporation legally available therefore, at the rate of 5% of adjusted revenue of Parscale
Digital. Adjusted revenue is defined as total revenue, minus digital marketing media buys. The Series D Preferred Stock is convertible
into shares of fully paid and non-assessable shares of the Company's common stock by multiplying the stated number of shares by
2,500. Series D Preferred Stock shall not be entitled to vote, as a separate class or otherwise, on any matter presented to the
stockholders of the Company for their action or consideration at any meeting of stockholders of the Company. As of September 30,
2017, the Company has 90,000 shares of Series D Preferred Stock outstanding.
9. STOCK OPTIONS
AND WARRANTS
Stock Options
On
July 10, 2003, the Company adopted the Warp 9, Inc. Stock Option Plan for directors, executive officers, and employees of and key
consultants to the Company. Pursuant to the now terminated plan, the Company was authorized to issue 5,000,000 shares of common
stock. The plan was administered by the Company’s Board of Directors (the “Board”), and options granted under
the plan could be either incentive options or nonqualified options. Each option was exercisable in full or in installment and at
such time as designated by the Board. Notwithstanding any other provision of the plan or of any option agreement, each option expired
on the date specified in the option agreement, which date was to be no later than the tenth anniversary of the date on which the
option was granted (fifth anniversary in the case of an incentive option granted to a greater-than-10% stockholder). The purchase
price per share of the common stock under each incentive option was to be no less than the fair market value of the common stock
on the date the option was granted (110% of the fair market value in the case of a greater-than-10% stockholder). The purchase
price per share of the common stock under each nonqualified option was to be specified by the Board at the time the option is granted,
and could be less than, equal to or greater than the fair market value of the shares of common stock on the date such nonqualified
option was granted, but was to be no less than the par value of shares of common stock. The plan provided specific language as
to the termination of options granted thereunder.
The 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. During the three months ended
September 30, 2017, the Company
issued options to purchase 11,800,000 shares of common stock
. The fair value of options granted during the quarter ended
September 30, 2017, was determined using the Black Scholes method with the following assumptions:
|
|
Quarter Ended
|
|
|
September 30, 2017
|
Risk free interest rate
|
|
|
5.00
|
%
|
Stock volatility factor
|
|
|
397
|
%
|
Weighted average expected option life
|
|
|
5 years
|
|
Expected dividend yield
|
|
|
none
|
|
A summary of the Company’s stock option activity
and related information follows:
|
|
Three Months ended
September 30, 2017
|
|
Three Months ended
September 30, 2016
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
average
|
|
|
|
average
|
|
|
|
|
exercise
|
|
|
|
exercise
|
|
|
Options
|
|
price
|
|
Options
|
|
price
|
Outstanding -beginning of period
|
|
|
123,000,000
|
|
|
$
|
0.013
|
|
|
|
123,000,000
|
|
|
$
|
0.013
|
|
Granted
|
|
|
11,800,000
|
|
|
$
|
0.016
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding - end of period
|
|
|
134,800,000
|
|
|
$
|
0.013
|
|
|
|
123,000,000
|
|
|
$
|
0.013
|
|
Exercisable at the end of the period
|
|
|
103,905,571
|
|
|
$
|
0.013
|
|
|
|
66,671,233
|
|
|
$
|
0.012
|
|
Weighted average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options granted during the year
|
|
|
|
|
|
$
|
190,000
|
|
|
|
|
|
|
$
|
—
|
|
As of
September
30, 2017
, the intrinsic value of the stock options was $5,582,350, and stock option expense for the three months ended
September
30, 2017
was $132,824.
The Black
Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair
value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The weighted average remaining
contractual life of options outstanding, as of
September 30, 2017
was as follows:
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
remaining
|
Exercise
|
|
options
|
|
contractual
|
prices
|
|
outstanding
|
|
life (years)
|
$
|
0.050
|
|
|
|
1,800,000
|
|
|
|
4.97
|
|
$
|
0.015
|
|
|
|
35,000,000
|
|
|
|
4.90
|
|
$
|
0.013
|
|
|
|
60,000,000
|
|
|
|
4.35
|
|
$
|
0.013
|
|
|
|
15,000,000
|
|
|
|
4.47
|
|
$
|
0.010
|
|
|
|
10,000,000
|
|
|
|
4.84
|
|
$
|
0.053
|
|
|
|
12,500,000
|
|
|
|
1.87
|
|
$
|
0.004
|
|
|
|
500,000
|
|
|
|
4.04
|
|
|
|
|
|
|
134,800,000
|
|
|
|
|
|
Warrants
During the periods ended
September
30, 2017
and 2016, the Company issued no warrants for services, and no warrants were outstanding.
10.
RELATED
PARTIES
On July
31, 2017, the Company signed an exchange agreement with Bountiful Capital, LLC, the holder of our notes, which exchanged ten
convertible notes, totaling $1,485,914 per equity schedule, for 14,425 shares of Series C Preferred stock, the details of which
are included in footnote 7 “Notes Payable”. The Chief Financial Officer of the Company, Gregory Boden, is also
the President of Bountiful Capital, LLC. Therefore, this loan transaction was with a related party.
Bountiful
Capital, LLC, loaned the Company $25,000 on August 3, 2017, $34,000 on August 15, 2017, $92,000 on August 28, 2017, and $63,600
on September 28, 2017, as unsecured promissory notes. The terms of the notes include interest of 5% and are due and payable upon
demand, but in no case later than 36 months after the effective date.
Parscale
Digital provides services to Parscale Strategy, which is owned by Brad Parscale. Mr. Parscale serves as a director of the Company.
During the quarter ended September 30, 2017, the Company included $754,379 in revenue from providing services to Parscale Strategy,
and as of September 30, 2017, Parscale Strategy had an account receivable balance of $202,606.
On
August 1, 2017, the Company signed a lease for office space with Giles-Parscale, Inc., which is owned by Jill Giles. Ms. Giles
is an employee of the Company and she owns the building which serves as the primary premises and headquarters of Parscale Digital,
in San Antonio, Texas.
11. CONCENTRATIONS
For the three
months ended September 30
, 2017
, the Company had one major customer (a related party) who represented
approximately 32% of total revenue. For the three months ended
September 30, 2016
, the Company
had one major customers who represented 67% of total revenue. At
September 30, 2017
and June
30, 2017, accounts receivable from three and two customers, respectively, represented approximately 44% and 52% 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.
12. COMMITMENTS
Operating Leases
On August
1, 2017, the management of Parscale Digital signed a lease with Giles-Parscale, Inc., which commenced on August 1, 2017, for approximately
8,290 square feet, at 321 6th 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.
On March 1,
2016, the Company moved into office space located at 1933 Cliff Drive, Suite 1, Santa Barbara, CA 93109, on a month-to-month arrangement,
for approximately $3,000 per month.
On December
10, 2012, the management of Indaba signed a lease which commenced on January 16, 2013 for approximately 3,300 square feet at 2854
Larimer Street, Denver, CO 80205, for approximately $3,500 per month. The original lease term expired on February 28, 2016, but
was extended until February 28, 2018, at a rate of $5,850 per month.
The following
is a schedule, by years, of future minimum rental payments required under the operating lease.
Years Ending
June 30,
|
|
Rent Payment
|
|
2018
|
|
|
$
|
132,843
|
|
|
2019
|
|
|
$
|
138,100
|
|
|
2020
|
|
|
$
|
138,100
|
|
|
2021
|
|
|
$
|
138,100
|
|
|
2022
|
|
|
$
|
80,573
|
|
Total
lease expense for the three months ended
September 30, 2017
and 2016 was $43,540 and $26,296,
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, to make monthly payments
on past due rent totaling $227,052. Under the terms of the agreement, the Company will make monthly payments of $350 on a reduced
balance of $40,250. Upon payment of $40,250, the Company will record a gain on extinguishment of debt of $186,802. As of
September
30, 2017
, the Company recorded the outstanding balance under this settlement agreement as a long term notes payable, with
the current portion of the debt recorded in accrued expenses. As of
September 30, 2017
, the
Company owed $26,250 on the outstanding reduced payment terms.
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.
13. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
During
the three months ended
September 30, 2017,
there were non-cash financing activities as follows:
|
|
2017
|
|
2016
|
Preferred stock issued for acquisition
|
|
$
|
9,000,000
|
|
|
|
—
|
|
Preferred stock issued in exchange for debt
|
|
$
|
1,485,914
|
|
|
|
—
|
|
Purchase price contingency
|
|
$
|
928,745
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
During
the three months ended September 30, 2016
, there were no non-cash financing activities.
14. SUBSEQUENT EVENTS
Management
has evaluated subsequent events according to ASC TOPIC 855 as of the date of the financial statements and has determined that the
following subsequent events are reportable.
The Company received the following advances under promissory
notes:
Date of funding
|
|
Amount of funding
|
|
October 11, 2017
|
|
|
$
|
103,500
|
|
|
October 27, 2017
|
|
|
$
|
106,000
|
|
On
October 19, 2017, the Company entered into an agreement with a third party to sell the rights, with recourse, to accounts receivable
amounts due from our customers to Parscale Digital. 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 amounts due from customers as a secured borrowing arrangement, with 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. The cost of this secured borrowing facility is 0.056% of the daily balance.