ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Current Status of the Company
In order to fund and conduct our business over the past few years, we have relied significantly on working capital obtained from private sales of our equity and convertible debt securities to various accredited investors. Due primarily to our continued substantial operating losses for several years, we recently have been unable to continue raising such working capital as needed to support our business plan for future growth. And unless we are able to raise critically needed substantial additional funding to achieve significant revenue growth, our current business model most likely will not succeed.
During the past twelve months ended March 31, 2020, our executive management consisted of two persons who are partners of our major affiliate and principal shareholder, Capital Markets Solutions, LLC (“CMS”), and who served us on an interim basis under the terms of a Consulting Agreement between us and CMS dated April 1, 2019. This Consulting Agreement is described in Note 6 of the financial statements included in this quarterly report. This CMS contract expired as of the end of March 2020, and the two CMS partners acting as our interim executive management resigned as executive officers and directors of the Company. As of April 1, 2020, our management consists of four directors, Michael Brown, John Bode (independent), William Gerhauser and Greg Nagel (independent). Michael Brown currently is acting as our principal executive officer and principal financial and accounting officer without compensation.
For the past eighteen months, we have been unable to conduct any material marketing or sales activities due to lack of working capital. Our primary business operations have been focused on providing adequate software services from our Fision software platform to our existing customer base. We now conduct our operational and technical functions and customer support activities through experienced independent contractors, and we believe that our outsourced independent contractors provide adequate services to our current customers.
Because of our recent inability to raise adequate additional capital, we have terminated employment of all our employees. We also no longer have a physical operational office facility in downtown Minneapolis, but rather we now conduct our operations and business from a “virtual” office location in Minneapolis.
Overview
We are an Internet platform technology company providing proprietary cloud-based software solutions to automate and improve the marketing and sales enablement functions and activities of our customers. Our focus is to provide software technology tools through our Fision platform to enable our customers to maximize their marketing assets and initiatives. Our development, management, marketing and other operations have been conducted through our wholly-owned Minnesota corporate subsidiary, Fision Holdings, Inc.
We have developed and commercialized a unique cloud-based software platform which automates and integrates all digital marketing assets and marketing communications of our customers, and thus “bridges the gap” between marketing and sales functions and personnel of an enterprise. Our Fision platform marketing software solutions to promote and improve sales enablement functions of any entity. This cloud-based software platform is readily scalable to adapt to fast business growth of any customer, regardless of size. Except for future customary periodic upgrades, the basic development of our Fision software marketing platform has been completed.
Our proprietary Fision platform enables every member of the marketing and sales teams of our customers, by having easy and automated access to all their digital marketing and media assets, to leverage the full power of their distinctive brands and digital marketing assets in every interaction with their consumers or buyers.
In May 2017, we acquired substantially all the assets of Volerro Corporation, a Delaware corporation based in Minneapolis and engaged in the development and marketing of proprietary cloud-based “content collaboration” software services. Since this acquisition, we have included these Volerro services with our Fision SaaS platform.
Our Business
Our Fision software platform enables our customers to easily and quickly create and implement marketing campaigns to support their sales personnel while still emphasizing, protecting and enhancing their valuable brand assets. Use of our software solutions by our customers reduces substantially the time and cost incurred by them to produce and present marketing and sales campaigns and presentations for specific products or services.
We believe that the agile marketing software solutions of our Fision platform provide three major benefits to our customers, which are (i) accelerating their revenues, (ii) improving their marketing and brand effectiveness, and (iii) significantly reducing their marketing and sales costs.
We derive our revenues primarily through recurring revenue payments from customers having software licensing contracts with terms of one to three years, and requiring monthly fees based on the customer’s number of users and locations where used. A substantial majority of our revenues are recurring, due to the nature of our licensing contracts. As of March 31, 2020 we have written license contracts with ten (10) customers actively using our Fision platform for their marketing and sales operations.
Our typical customer implementation process includes integrating our cloud-based Fision platform with the marketing infrastructure of the customer, initiating and conducting customer training, and providing marketing development support while our Fision platform is being actively launched by the customer. We also continue to offer technical and maintenance support after implementation.
Our current and targeted customer base ranges across diverse industries of all sizes, including banks and other financial enterprises, insurance companies, hotels and other hospitality businesses, healthcare and fitness companies, retailers, software and other technology companies, product manufacturers, telecommunications companies, and numerous other companies selling familiar branded products or services.
Our market and potential customer base are global and virtually unlimited, since our Fision platform software solutions provide significant benefits to the marketing and sales departments and personnel of any commercial enterprise, regardless of size and widespread locations. We receive substantial recurring revenues, and certain customers have maintained written contracts with us for years. We regard our high percentage of recurring revenues to be particularly significant to our business strategy which emphasizes long-term relationships with our customers under written contracts. We believe that our ability to realize such recurring revenues is a keystone feature of our business model.
We have marketed and licensed our proprietary software platform both through direct sales obtained by our management and in-house sales personnel, and through utilizing experienced independent national technology sales agencies.
Our Fision Platform - Our Fision marketing software centrally collects, stores, prioritizes, organizes, streamlines, integrates and distributes the numerous digital marketing assets of our customers including videos, images, logos and other brand materials, presentations, social media content and any other digital marketing assets. Using Fision’s automated software technology, these digital assets become readily available for user access as determined by each of our customers. Our Fision platform is designed to provide any corporate marketing department with the ability to instantly and seamlessly update its sales force and other users with the latest digital marketing content and materials, while providing them with a simple, intuitive software interface to quickly find what they need on any digital device, anytime and anywhere. Large enterprise customers with extensive global sales networks have the ability to quickly and efficiently create and deliver customized sales campaigns or presentations to selectively targeted consumer audiences while conveying a positive, personalized and consistent brand experience. We believe that the use of our software marketing solutions by our customers results in a substantial increase in their return on investment (ROI) and their profitability.
Cloud-Based Platform - Storage and operation of our Fision software solutions platform along with the digital marketing and sales assets and related data of our customers are outsourced by us to reside and take place in the digital “cloud.” Providers of cloud services are typically referred to as “virtual servers” since they provide all digital data storage and related software application services to their clients. Our cloud service provider is Microsoft’s Azure Cloud, which leading provider offers readily scalable, high quality and secure cloud services capable of satisfying any increasing demand or changing circumstances in the needs of our customers or us.
We regard the hosting of our software applications, the ready digital interface with our customers, and the storage of unlimited customer data with our premier cloud provider as being crucial to our operating strategy. Our major savings in expensive computer equipment, high salaried technology personnel, and costly security measures through our use of Microsoft’s cloud is vital to our cost of doing business. Moreover, we believe that our experienced and leading cloud provider is more effective in delivering our Fision software solutions to our customers than we could perform in any event.
Strategic Marketing Change
During the years prior to 2017 while our Fision software platform was being designed and developed, our marketing and sales efforts were directed toward local or regional small-to-medium sized companies whose operational, management and commercial activities are conducted from one local or a couple regional facilities. Since our Fision platform and its cloud-based marketing software were designed and developed to be readily adaptable to and scalable for any size company, however, in 2017 we revised our marketing strategy and activities to target and sell our software products primarily to large global enterprise corporations having many and widespread national and international branches and operations.
We believe that our past marketing focus toward large enterprises was relatively effective, since during 2018-2019 we closed and implemented material contracts with, and are receiving recurring revenues from, several large enterprise companies. Unfortunately, the increased length of time of our sales cycle necessary to sell to large enterprises has been substantially more expensive and much longer than we earlier incurred while selling primarily to local and regional sized companies. This substantial increase in our sales cycle to negotiate and close contracts with new large enterprise customers resulted in a material decline in our revenues during the past couple years. Accordingly, we failed to raise enough working capital to support and continue the substantial marketing resources and time necessary to secure enough large enterprise customers to achieve material increased revenues. We currently are attempting to raise the substantial capital necessary to launch an effective marketing campaign including whatever personnel and other resources are needed to properly address and sell our software services to additional targeted large enterprise customers. There is no assurance that such funds will be available to us in the future.
Contemplated Business Combination
Along with our current efforts to raise significant working capital, we are seeking a merger or other business combination with a private software services company which could be complementary with our Fision business structure. We believe our Company would be beneficial to join with such a targeted private entity due to our public status, our large tax loss position, our commercially developed unique software platform, and other benefits.
2017 Asset Acquisition
In May 2017 we acquired substantially all the assets of Volerro Corporation (“Volerro”), a Minneapolis-based company, including its unique cloud-based proprietary software and development technology and its customer base. Volerro has developed and marketed “content collaboration” software services to enhance and improve the overall sales and marketing activities of its clients. Volerro software enables the marketing, sales and brand personnel of its clients to collaborate in real time in the creation, refinement, and distribution of all types of their strategic content including print, packaging, high quality image and video content. For example, Volerro’s primary application allows all product, brand, marketing and creative teams of a business enterprise the ability to work on and create a document in real-time with integrated chat and voice conferencing. Marketing of Volerro cloud-based software solutions has been primarily focused on large financial and retail enterprises.
Our Employees and Properties
We currently have no employees, and will only be able to hire future employees if we succeed in raising substantial working capital for future operations. We have hired independent contractors, advisors and third-parties for customer support, accounting and development activities.
We no longer lease any facilities at Butler Square, our former offices in downtown Minneapolis, Minnesota. Rather we now conduct our current business and operations under a short-term lease from a temporary “virtual” office in Minneapolis which provides us with telephone, mail and basic conference facilities adequate for our current activities, as well as storage of certain computers, hardware servers, software assets and other technology development and office equipment, furniture and supplies owned by us. We do not own any real estate.
Revenue and Marketing Models
Revenue Model -- Our revenue model is primarily based on prescribed software licensing fees received by us on a regular monthly basis from customers which are under written licensing agreements with us. Over the past several years, we consistently committed substantial expenses and sales personnel toward targeting, negotiating and procuring significant licensing agreements with large enterprise customers. Because of the long-term nature and the substantial expense commitment required by each new customer to enter into a binding licensing agreement with us, the sales cycle involved in our revenue model is quite lengthy. Accordingly, the unpredictable and different timing involved from customer to customer to procure our licensing contracts has prevented us from receiving overall consistent revenues or accurately forecasting our future revenue stream.
We generate our revenues primarily from payments from customers having a license from one to three years to access and use our proprietary agile marketing software platform, which payments include monthly fees based on actual usage of the Fision platform, and a prescribed substantial one-time set-up and integration fee payable to us at the outset of the license. We also receive certain secondary fees from time to time for customized software development projects ordered from us, and for processing emails for certain customers.
Marketing Model – In past years, we have marketed, sold and licensed our proprietary software products through a direct sales force including management, and also through independent national sales agencies who sell (license) our branded software products as agents being paid commissions based on their actual sales.
We market and sell our products and services in the agile marketing software segment of the broad software-as-a-service (SaaS) industry, with virtually all our revenues derived from our proprietary cloud-based Fision marketing software platform.
Intellectual Property (IP) Protection
We have committed substantial attention and resources toward obtaining patent and trademark rights and otherwise protecting our trade secrets, development know-how technology, trademarks, trade names, patent rights and other proprietary intellectual property (IP). Our IP protection includes written provisions relating to non-compete, non-recruit, confidentiality, and invention assignments as applicable with employees, vendors, sales agents, consultants and others.
In 2017 we were granted Patent No. US 9,639,551 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations.” In 2018 we were granted another Patent No. US 9,984,094 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations”. And in 2019 we were granted another Patent No. US 10,235,380 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations”.
Inflation and Seasonality
We do not consider our operations and business to be materially affected by either inflation or seasonality.
Litigation
From time to time, we have been subject to legal proceedings, claims and litigation arising in the ordinary course of business. We currently are not a party to any material legal proceedings, nor are we aware of any material pending or threatened litigation against or involving us. We are involved in a dispute with our former landlord relating to claimed rental payments owed by us, but we do not regard it as material regardless of its outcome.
Significant Accounting Policies
Stock-Based Compensation Valuations - Our estimated valuations for stock-based compensation grants are based primarily on the quoted prices for our common stock in the public trading market.
Accounts Receivable -- We maintain allowances for potential credit losses on accounts receivable. In connection with the preparation of our financial statements, management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, changes in customer payment patterns, and current economic trends in order to evaluate the adequacy of these allowances. Accounts determined to be uncollectible are charged to operations when that determination is made.
Research and Development -- We expense all our research and development operations and activities as they occur. Our development activities have been conducted externally from outsourced contracts with experienced independent software development companies and individuals.
Derivative Instrument Liabilities – We evaluate all of our agreements and financial instruments to determine if they contain features that qualify as embedded derivatives. For any derivative financial instruments accounted for as liabilities, they initially will be accounted for at fair value and if necessary revalued at each reporting date, with any changes in fair value reported in our statements of operations. For any stock-based derivative financial instruments or securities, we use a binomial pricing model to value them at inception and on any subsequent valuation dates. The classification of derivative instruments, including whether they should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in our 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.
Fair Value of Financial Instruments -- FASB ASC Topic 820 requires disclosure of and defines fair value of financial instruments, and also establishes a three-level valuation hierarchy for these disclosures. The carrying amounts reported in a balance sheet for receivables and current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between their origination and their expected realization and their current market rate of interest. The three levels of valuation hierarchy for fair value determinations are defined as follows:
Level 1 inputs include quoted prices for identical assets or liabilities in active markets.
Level 2 inputs include observable quoted prices for similar assets and liabilities in active markets, and quoted prices for identical assets or liabilities in inactive markets.
Level 3 inputs include one or more unobservable inputs which we have assessed and assumed that market participants would use in pricing the asset or liability.
Revenue Recognition -- Revenue is recognized in the period the services are provided over the license contract period, normally one (1) to three (3) years. We invoice onetime startup and implementation costs, such as consolidating and uploading digital assets of the customer, upon completion of those services. Monthly services, such as internet access to software as a service (SaaS), hosting and weekly backups are invoiced monthly.
The Company recognizes contract liability for its performance obligation upon receipt of a prepayment from a customer for its performance obligation to transfer goods and services in the future. When the Company transfers those goods and services and, therefore, satisfies its performance obligation to the customer, the Company will then recognize the revenue.
Cost of Sales -- Cost of sales primarily represents third-party hosting, data storage and other services provided by Microsoft’s Azure Cloud service, as well as certain other expenses directly related to customer access and use of our marketing software platform. Cost of sales relating to our cloud services is recognized monthly.
Income Taxes -- We account for income taxes in accordance with the asset and liability method of accounting for income taxes, whereby any deferred tax assets are recognized for deductible temporary differences and any deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of our management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Long-lived Assets -- We evaluate the recoverability of our identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds their fair value.
Recently Issued Accounting Pronouncements
See Note 1 to the interim financial statements included in this quarterly report on Form 10-Q.
Results of Operations for the Three Months Ended March 31, 2020 and 2019
Revenue -- Revenue was $104,044 for the quarter ended March 31, 2020 compared to revenue of $133,153 for the quarter ended March 31, 2019, which decrease in revenue in the 2020 first quarter was primarily because of our inability to obtain new customers due to lack of marketing/sales personnel in the 2020 first quarter.
Cost of Sales – Cost of sales for the quarter ended March 31, 2020 was $28,732 (27.6% of revenue) compared to cost of sales of $20,977 (15.8% of revenue) for the quarter ended March 31, 2019. The increase in cost of sales for the 2020 first quarter was due to increased platform deployment costs.
Gross Margin – Gross margin for the quarter ended March 31, 2020 was $75,312 compared to $112,176 for the quarter ended March 31, 2019. Gross margin as a percentage of revenue was 72.4% for the first quarter of 2020 compared to 84.2% of revenue for the first quarter of 2019.
Operating Expenses – Operating expenses for the first quarter of 2020 were $920,957 compared to those of $631,800 for the first quarter of 2019. Sales and marketing expenses for the quarter ended March 31, 2020 were $1,949 compared to $166,965 for the quarter ended March 31, 2019, which substantial decrease in the first quarter of 2020 was primarily due to having no marketing/sales activities or personnel in the 2020 first quarter. Development and support expenses for the quarter ended March 31, 2020 were $108,394 compared to $148,638 for the quarter ended March 31, 2019, which decrease in the first quarter of 2020 was due primarily to our having no technical employees during the 2020 first quarter whereby we outsourced our development activities. General and administrative expenses for the quarter ended March 31, 2020 were $810,614 compared to $316,197 for the quarter ended March 31, 2019, which substantial increase of $494,417 in the 2020 first quarter was primarily due to increased management consulting and advisory services related to our Consulting Agreement with affiliate Capital Market Solutions LLC (CMS).
Operating Loss -- Operating loss for the quarter ended March 31, 2020 was $845,645 compared to $519,624 for the quarter ended March 31, 2019, which substantially increased net loss for the first quarter of 2020 was primarily due to the substantially increased general and administrative expenses disclosed in the foregoing paragraph.
Other Income / Expenses – Other income/expenses for the first quarter ended March 31, 2020 were other income of $924,198 (consisting of $390,737 of interest and debt discount expenses, $53,168 of amortization of debt discount, $28,595 of loss on settlement of debt, $12,065 bad debt expense, offset by $1,396,698 gain on fair value of derivatives and $12,065 of other interest income) compared to other expenses of $465,231 for the first quarter ended March 31, 2019 (consisting of interest and debt discount expenses of $289,957, amortization of debt discount of $217,966, and a loss on fair value of derivatives of $228,339, offset by a gain of $264,591 from extinguishment of debt and $6,440 of other interest income). The increase in the 2020 first quarter was due primarily to other income on the changes in the fair value of derivatives in 2020 first quarter.
Net Income (Loss) – Our net income for the first quarter ended March 31, 2020 was $78,553 compared to a net loss of $984,855 for the first quarter ended March 31, 2019, which increase in net income for the 2020 first quarter was primarily due to other income on the gain from fair value of derivatives in 2020 first quarter.
Liquidity and Capital Resources
Our revenues have not increased over the past few years, and accordingly our financial condition and future prospects critically depend on our access to financing in order to continue our operations. Much of our cost structure is based on costs related to personnel and facilities and our cloud-based service provider, and not subject to material variability. We will need to raise substantial additional capital through private or public offerings of equity or debt securities, or a combination thereof, and we may have to use a material portion of the capital raised to repay certain past due debt obligations. To the extent any capital raised is insufficient to satisfy operational working capital needs and meet any required debt payments, we will need to either extend, refinance or convert to equity our past or soon due indebtedness, which there is no assurance we can accomplish.
As of March 31, 2020, we had total current liabilities of $5,924,269 including accounts payable and accrued expenses of $2,286,448, short-term Notes Payable of $1,128,111, customer advances of $23,500 and $2,486,210 of derivative liabilities. We also had long-term liabilities of $748,143 (net of $500,230 debt discount) as of March 31, 2020, consisting of Convertible Notes Payable having varying maturity dates.
Currently, as of the date of this filing, we have minimal cash, which we believe along with our projected receipt of accounts receivable and customer revenues will last only until sometime in July, 2020. Accordingly, we need to continue raising substantial capital to support our operations. Our management estimates that based on our current monthly expenses net of expected revenue, we will require at least $500,000 in additional financing to fund our operational working capital needs for the next 12 months. Financing may be sought from a number of sources such as sales of equity or debt (including convertible debt) securities, and loans from affiliates, banks or other financial institutions. We may not be able to sell any such securities or otherwise obtain such financing when needed on terms acceptable to us, if at all. If further financing is not available as needed, our business would suffer substantially or could even fail.
Liquidity represents the ability of a company to generate sufficient cash to provide for its immediate needs for cash, which our continued losses have made it difficult for us to accomplish. Over the past few years, we have continued to incur substantial losses without any material increase in revenues or liquid assets, which has caused a serious and harmful effect to our liquidity and a substantial strain on our ongoing business operations.
Along with our revenues, we have financed our operations to date through various means including loans from management, affiliates, and other private lenders; stock-based compensation issued to employees, outsourced software developers, consultants and professionals; common stock issued to satisfy outstanding loans and accounts payable/accrued expenses; and sales of our common stock and convertible Notes.
Net Cash Used in Operating Activities – We used $87,410 of net cash in operating activities for the three months ended March 31, 2020 compared to $661,134 of net cash used in operating activities for the three months ended March 31, 2019. This decrease of $573,724 of net cash used in operating activities in the 2020 first quarter was primarily due to the substantial decrease in net loss, as we had a small net income for the 2020 first quarter compared to the 2019 first quarter.
Net Cash Used in Investing Activities – There were no investing activities in either of the three-month periods ended March 31, 2020 and March 31, 2019.
Net Cash Provided By Financing Activities -- During the three months ended March 31, 2020, we were provided net cash by financing activities of $72,900 including proceeds from issuance of a note payable of $75,000 offset by repayments to a line of credit of $2,100. In comparison, during the three months ended March 31, 2019, we were provided net cash by financing activities of $587,083 including proceeds of $350,000 from sale and issuance of common stock and proceeds of $674,083 from issuance of notes payable, offset by $431,000 used for repayments on notes payable and $6,000 paid on a line of credit.
Convertible Note Financing
A substantial majority of our financing during the past couple years has consisted of Convertible Notes sold to various accredited investors. We raised a total of $2,959,500 from such convertible debt financing in 2018; and we raised a total of $964,000 from convertible debt financing in 2019.
Going Concern
Our financial statements contained in this quarterly report have been prepared on a going concern basis, which contemplates and implies that we will continue to realize our assets and satisfy our liabilities and commitments in the normal course of business. For the three months ended March 31, 2020, we had a marginal net income of $78,553 and our accumulated deficit as of March 31, 2020 is $31,733,239. These adverse financial conditions raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary if we are unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no off-balance sheet items as of March 31, 2020, or as of the date of this report.