CFN Enterprises Inc. - Quarter Report: 2019 June (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 

For the transition period from ________ to ________

 

Commission File Number: 000-52635

 

ACCELERIZE INC.

(Exact name of registrant as specified in its charter)

 

Delaware	20-3858769
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

2601 OCEAN PARK BOULEVARD, SUITE 310

SANTA MONICA,

CALIFORNIA 90405

 (Address of principal executive offices) (Zip code)

 

(310) 314-8804

 (Registrant’s Telephone Number, including Area Code)

 

20411 SW BIRCH STREET, SUITE 250

NEWPORT BEACH

CALIFORNIA 92660
(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [X]  No [  ]

 

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [X]	Smaller reporting company [X]
	Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No [X]

 

The number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, as of August 16, 2019, was 99,679,709.

 

When used in this quarterly report, the terms “Accelerize,” “the Company,” “we,” “our,” and “us” refer to Accelerize Inc., a Delaware corporation. 

 

 

 

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ACCELERIZE INC.

 

INDEX

 

	Page
PART I - FINANCIAL INFORMATION:	1
Item 1. Financial Statements (Unaudited)	1
Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations	21
Item 4. Controls and Procedures	28
PART II - OTHER INFORMATION:	28
Item 1A. Risk Factors	28
Item 6. Exhibits	30
SIGNATURES	31

 

 

 

		June 30,				December 31,
		2019				2018
		(Unaudited)
Assets
Current assets
Cash		$	1,251,087			$	27,295
Restricted cash			50,000				50,000
Accounts receivable, net			51,560				-
Prepaid expenses and other current assets			32,500				-
Current assets of discontinued operations			40,710				2,336,311
Total current assets			1,425,857				2,413,606
Other assets
Property and equipment			3,738				-
Goodwill			3,804,817
Noncurrent assets of discontinued operations			-				160,246
Total other assets			3,808,555				160,246
Total assets		$	5,234,412			$	2,573,852
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses		$	152,633			$	-
Deferred revenues			21,340				-
Current liabilities of discontinued operations			383,023				6,861,284
Total current liabilities			556,996				6,861,284
Noncurrent liabilities of discontinued operations			-				9,185,743
Total liabilities			556,996				16,047,027
Commitments and contingencies
Stockholders' equity (deficit)
Series A Preferred stock, $0.001 par value, 500 shares authorized, 500 and 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively			1				-
Series B Preferred stock, $0.001 par value, 3,000 shares authorized, 3,000 and 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively			3				-
Common stock, $0.001 par value, 500,000,000 shares authorized, 99,679,709 and 66,179,709 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively			99,679				66,179
Additional paid-in capital			34,013,702				29,498,125
Accumulated deficit			(29,362,096	)			(42,960,124	)
Accumulated other comprehensive income			(73,873	)			(77,355	)
Total stockholders' equity (deficit)			4,677,416				(13,473,175	)
Total liabilities and stockholders' equity (deficit)		$	5,234,412			$	2,573,852

 

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		For the Three Months Ended								For the Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2019				2018				2019				2018
Net revenues		$	62,720			$	-			$	62,720			$	-
Cost of revenue			33,449				-				33,449				-
Gross profit			29,271				-				29,271				-
Operating expenses:
Selling, general and administrative			605,828				245,125				894,829				702,832
Total operating expenses			605,828				245,125				894,829				702,832
Loss from operations			(576,557	)			(245,125	)			(865,558	)			(702,832	)
Other income (expense):
Interest income			56				25				112				36
Total other income (expense)			56				25				112				36
Net loss before provision for income taxes			(576,501	)			(245,100	)			(865,446	)			(702,796	)
Provision for (benefit from) income taxes			-				-				-				-
Net income (loss) from continuing operations			(576,501	)			(245,100	)			(865,446	)			(702,796	)
Gain (loss) from discontinued operations, net of tax			15,194,741				(1,318,944	)			14,470,049				(2,117,707	)
Net income (loss)		$	14,618,240			$	(1,564,044	)		$	13,604,603			$	(2,820,503	)
Preferred stock interest			6,575				-				6,575				-
Net income (loss) available to common shareholders		$	14,611,665			$	(1,564,044	)		$	13,598,028			$	(2,820,503	)
Net loss from continuing operations per share, basic and diluted		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Net income (loss) from discontinued operations per share, basic and diluted		$	0.22			$	(0.02	)		$	0.21			$	(0.03	)
Weighted average number of common shares outstanding, basic and diluted			69,861,028				65,939,709				68,030,538				65,939,709

 

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		For the Three Months Ended								For the Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2019				2018				2019				2018
Net income (loss)		$	14,618,240			$	(1,564,044	)		$	13,604,603			$	(2,820,503	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			551				(31,147	)			3,482				(13,517	)
Total other comprehensive income (loss), net of tax			551				(31,147	)			3,482				(13,517	)
Comprehensive income (loss)		$	14,618,791			$	(1,595,191	)		$	13,608,085			$	(2,834,020	)

 

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																																		Accumulated
																										Additional								Other
		Series A Preferred Stock								Series B Preferred Stock								Common Stock								Paid-in				Accumulated				Comprehensive
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Income				Total
Balance, December 31, 2017			-			$	-				-			$	-				65,939,709			$	65,938			$	26,301,747			$	(31,542,684	)		$	(41,540	)		$	(5,216,539	)
Fair value of options and restricted stock awards			-				-				-				-				-				-				38,303				-				-				38,303
Fair value of warrants			-				-				-				-				-				-				61,050				-				-				61,050
Fair value of warrants issued with promissory notes			-				-				-				-				-				-				1,156,695				-				-				1,156,695
Net loss			-				-				-				-				-				-				-				(1,256,459	)			-				(1,256,459	)
Foreign currency translation			-				-				-				-				-				-				-				-				17,630				17,630
Balance, March 31, 2018			-				-				-				-				65,939,709				65,938				27,557,795				(32,799,143	)			(23,910	)			(5,199,320	)
Fair value of options and restricted stock awards			-				-				-				-				-				-				37,619				-				-				37,619
Fair value of warrants			-				-				-				-				-				-				66,515				-				-				66,515
Fair value of warrants issued with promissory notes			-				-				-				-				-				-				881,600				-				-				881,600
Net loss			-				-				-				-				-				-				-				(1,564,044	)			-				(1,564,044	)
Foreign currency translation			-				-				-				-				-				-				-				-				(31,147	)			(31,147	)
Balance, June 30, 2018			-			$	-				-			$	-				65,939,709			$	65,938			$	28,543,529			$	(34,363,187	)		$	(55,057	)		$	(5,808,777	)
Balance, December 31, 2018			-			$	-				-			$	-				66,179,709			$	66,179			$	29,498,125			$	(42,960,124	)		$	(77,355	)		$	(13,473,175	)
Fair value of options and restricted stock awards			-				-				-				-				-				-				36,578				-				-				36,578
Fair value of warrants			-				-				-				-				-				-				89,119				-				-				89,119
Fair value of warrants issued with promissory notes			-				-				-				-				-				-				44,670				-				-				44,670
Fair value of repricing adjustment			-				-				-				-				-				-				104,638				-				-				104,638
Net loss			-				-				-				-				-				-				-				(1,013,637	)			-				(1,013,637	)
Foreign currency translation			-				-				-				-				-				-				-				-				2,931				2,931
Balance, March 31, 2019			-				-				-				-				66,179,709				66,179				29,773,130				(43,973,761	)			(74,424	)			(14,208,876	)
Conversion of debt into Series A Preferred Stock			500				1				-				-				-				-				499,999				-				-				500,000
Issuance of Series B Preferred Stock for acquisition of CFN			-				-				3,000				3				-				-				686,997				-				-				687,000
Issuance of common stock for acquistion of CFN			-				-				-				-				30,000,000				30,000				2,670,000				-				-				2,700,000
Issuance of common stock as payment of interest			-				-				-				-				3,500,000				3,500				311,500				-				-				315,000
Fair value of options and restricted stock awards			-				-				-				-				-				-				34,385				-				-				34,385
Fair value of warrants			-				-				-				-				-				-				37,691				-				-				37,691
Preferred stock interest			-				-				-				-				-				-				-				(6,575	)			-				(6,575	)
Net income			-				-				-				-				-				-				-				14,618,240				-				14,618,240
Foreign currency translation			-				-				-				-				-				-				-				-				551				551
Balance, June 30, 2019			500			$	1				3,000			$	3				99,679,709			$	99,679			$	34,013,702			$	(29,362,096	)		$	(73,873	)		$	4,677,416

 

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		For the Six Months Ended
		June 30,				June 30,
		2019				2018
Cash flows from operating activities
Net income (loss)		$	13,604,603			$	(2,820,503	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			31,563				346,858
Gain on sale of CAKE Business			(19,473,080	)			-
Amortization of deferred financing cost			2,511,960				384,407
Provision for bad debt			54,264				(335,801	)
Fair value of options and warrants			197,773				203,486
Issuance of common stock as payment of interest			315,000				-
Changes in operating assets and liabilities:
Accounts receivable			(3,615	)			129,609
Prepaid expenses and other current assets			172,155				(40,214	)
Other assets			28,095				12,388
Accounts payable and accrued expenses			(1,928,243	)			(188,443	)
Deferred revenue			(284,198	)			-
Other liabilities			(602,083	)			416,393
Net cash (used in) operating activities		$	(5,375,806	)		$	(1,891,820	)
Cash flows from investing activities
Capitalized software for internal use			-				(750,000	)
Purchase of property and equipment			(1,751	)			(28,698	)
Proceeds from sale of CAKE Business			20,892,667				-
Payments for acquisition of subsidiary			(420,000	)			-
Net cash provided by (used in) investing activities		$	20,470,916			$	(778,698	)
Cash flows from financing activities
Principal repayments of credit facility and loan			(11,772,514	)			(2,163,212	)
Proceeds from credit facility			900,000				4,702,197
Proceeds from promissory notes			-				1,000,000
Repayment of related party notes			(300,000	)
Repayment of promissory notes			(2,700,000	)			-
Net cash (used in) provided by financing activities		$	(13,872,514	)		$	3,538,985
Effect of exchange rate fluctuations on cash			1,196				(13,517	)
Net change in cash and restricted cash			1,223,792				854,950
Cash and restricted cash, beginning of the period			77,295				216,883
Cash and restricted cash, end of the period		$	1,301,087			$	1,071,833
Supplemental disclosure of cash flow information:
Interest paid		$	946,691			$	711,627
Income taxes paid		$	-			$	-
Supplemental disclosure of non-cash investing and financing information:
Fair value of warrants issued in connection with line of credit and promissory notes		$	44,670			$	2,038,296
Capital expenditure included in accounts payable		$	-			$	1,299
Accrued payables and short-term note directly paid off by credit facility		$	-			$	623,399
Prepaid expenses reclassified to deferred financing costs		$	-			$	70,000
Accrual of preferred stock interest		$	6,575			$	-
Accrued interest reclassed to credit facility		$	62,379			$	-
Warrant repricing adjustment		$	104,638			$	-
Conversion of notes payable to Series A Preferred Stock		$	500,000			$	-
Issuance of Series B Preferred Stock for acquisition of subsidiary		$	687,000			$	-
Issuance of common stock for acquisition of subsidiary		$	2,700,000			$	-

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NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Accelerize Inc., a Delaware corporation, incorporated on November 22, 2005, or the Company, owned and operated CAKE, a Software-as-a-Service platform providing online tracking and analytics solutions for advertisers and online marketers. The Company provided software solutions for businesses interested in expanding their online advertising spend.

 

On May 15, 2019, the Company entered into an asset purchase agreement, or the Asset Purchase Agreement, with CAKE Software, Inc., a Delaware corporation and a subsidiary of Constellation Software Inc., an Ontario, Canada corporation (TSX: CSU), or Constellation, pursuant to which the Company agreed to sell substantially all of the assets associated with its CAKE and Journey by CAKE business, or the CAKE Business, to Constellation for a base purchase price of $19,400,000 plus or minus an estimated closing date adjustment based on the net tangible assets of the CAKE Business at the closing, a holdback of $500,000 adjusted pursuant to the terms of the Asset Purchase Agreement and payable on the first anniversary of the closing date, and a three year earnout equal to 30% of the amount that the annual net revenue of the CAKE Business exceeds $13,750,000 and payable within 120 days on each of the first, second and third end of month anniversaries of the closing date. The sale of the assets of the CAKE Business pursuant to the Asset Purchase Agreement closed on June 18, 2019, and the Company received proceeds of $20,892,667, net of the estimated closing date adjustment.

 

As of the closing date, Constellation acquired all of the assets used by the Company in the CAKE Business and assumed the Company’s post-closing obligations under certain vendor, customer and other commercial contracts related to the CAKE Business, including the Company’s lease for its headquarters in Newport Beach, California. The Company’s cash and cash equivalents, and the assets associated with its Accelerize trademark, are excluded from the sale of the CAKE Business. Constellation offered employment to certain of the Company’s employees following the closing date.

 

On May 15, 2019, the Company entered into the Emerging Growth Agreement with Emerging Growth, LLC, or the Seller, pursuant to which the Company acquired certain assets from the Seller related to its sponsored content and marketing business for a purchase price consideration consisting of $420,000 in cash, 30,000,000 shares of the Company’s common stock, and 3,000 shares of Series B preferred stock with a total stated value of $3,000,000 which bears interest at 6% per annum and is convertible into the Company’s common stock at a conversion price to be mutually agreed in the future, without voting rights or a liquidation preference except with respect to default interest. The securities were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended. The closing of the purchase of the assets pursuant to the Emerging Growth Agreement occurred on June 20, 2019.

 

Subsequent to the closing of the Asset Purchase Agreement on June 18, 2018, the Company’s continuing operations consist of the sponsored content and marketing business from the assets acquired pursuant to the Emerging Growth Agreement.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis which implies the Company will continue to meet its obligations for the next 12 months as of the date these financial statements are issued.  

 

The Company had working capital of $868,861 and an accumulated deficit of $29,362,096 as of June 30, 2019.  The Company also had a net loss from continuing operations of $865,446 during the six months ended June 30, 2019.

 

 

As discussed above, on May 15, 2019, the Company entered into the Asset Purchase Agreement with Constellation under which all the net assets associated with the CAKE Business were sold. The proceeds from the Asset Purchase Agreement were used to pay off the Company’s existing debt, as well as to acquire certain assets in the Emerging Growth Agreement from the Seller related to its sponsored content and marketing business. Management’s plan to continue as a going concern includes raising capital in the form of debt or equity, growing the business acquired under the Emerging Growth Agreement and managing and reducing operating and overhead costs. The Company cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for the Company to raise additional capital on an immediate basis.

 

These matters, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.  

  

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the results of operations of the Company and Cake Marketing UK Ltd., or the Subsidiary. The Company discontinued its operations associated with its CAKE Business and the operations of its Subsidiary in May 2019. These accounts have been presented as discontinued operations in the accompanying unaudited condensed consolidated financial statements. Continuing operations presented in periods prior reflect administrative expenses associated with business insurance, legal and accounting fees that the Company will continue to incur. All material intercompany accounts and transactions between the Company and its Subsidiary have been eliminated in consolidation.

 

These unaudited condensed consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 2018 and 2017, respectively, which are included in the Company’s December 31, 2018 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on April 16, 2019.  The Company assumes that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation of these may be determined in that context. The results of operations for the period ended June 30, 2019 are not necessarily indicative of results for the entire year ending December 31, 2019.

 

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, useful life of fixed assets, borrowing rate considered for operating lease right-of-use asset and related operating lease liability, and assumptions used in Black-Scholes valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

 

Financial Statement Reclassification

 

Certain account balances from prior periods have been reclassified in these unaudited condensed consolidated financial statements to conform to current period classifications. The prior year amounts have also been reclassified in these financial statements to properly report amounts under current operations and discontinued operations (see note 6).

  

 

Cash and Cash Equivalents

 

The Company considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be cash equivalents. The Company has restricted cash as a result of its corporate card program through its bank. The bank requires a collateral which is placed in a money market account and can be increased or decreased at any time at the discretion of the Company.  The Company’s restricted cash amounted to $50,000 at June 30, 2019 and December 31, 2018.  The restricted cash balance of $50,000 is included as a component of total cash and restricted cash in the beginning and ending balances as presented on the accompanying unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2019 and 2018.

 

Accounts Receivable

 

The Company’s account receivables are due from customers relating to contracts to provide investor relation services. Collateral is currently not required. The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these estimated allowances, including an analysis of the customers’ payment history and creditworthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments as well as historical collection trends for its customers as a whole. Based on this review, the Company specifically reserves for those accounts deemed uncollectible or likely to become uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance. There was no allowance for doubtful accounts as of June 30, 2019 or December 31, 2018.

 

Concentration of Credit Risks

 

The Company is subject to concentrations of credit risk primarily from cash and cash equivalents and accounts receivable.

 

The Company’s cash and cash equivalents accounts are held at a financial institution and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. From time-to-time, the Company’s bank balances exceed the FDIC insurance limit. To reduce its risk associated with the failure of such financial institutions, the Company periodically evaluates the credit quality of the financial institution in which it holds deposits. The Company had cash balances of approximately $1,034,000 at June 30, 2019 that exceeded the FDIC insurance limit.

 

The Company's accounts receivable are due from customers located in the United States. The Company had two customers who each accounted for 11.4% of its accounts receivable at June 30, 2019 and none at December 31, 2018. 

 

Revenue Recognition

 

The Company recognizes revenue in accordance with Accounting Standards Codification, or ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

 

The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.

 

 

Prior to the Company discontinuing the operations of its CAKE Business in May 2019, the Company’s SaaS revenues were generated from implementation and training fees and a monthly license fee, supplemented by per transaction fees paid by customers for monthly platform usage. The initial term of the customer contract were generally one year with one of two general cancellation policies. Each party could cancel the contract within the initial period or after the initial period, with 30-days’ prior notice. The Company did not provide any general right of return for its delivered items. Services associated with the implementation and training fees had standalone value to the Company’s customers, as there are third-party vendors who offer similar services to the Company’s services. Accordingly, they qualified as separate units of accounting. The Company allocated a fair value to each element deliverable at the recognition date and recognized such value when the services are provided. The Company bases the fair value of the implementation and training fees on third-party evidence and the monthly license fee on vendor-specific objective evidence. Fees charged by third-party vendors for implementation and training services do not vary significantly from the fees charged by the Company. Services associated with implementation and training fees were generally rendered within a month from the initial contract date. The value attributed to the monthly license fees as well as the fees associated with monthly transaction-based platform usage were recognized in the corresponding period.

 

Subsequent to the closing of the Emerging Growth Agreement on June 20, 2019, the Company’s revenue is generated from the sale of promotional service packages to its customers ranging from 3 to 6 months. The Company offers different packages tailored to the type and stage of the potential customer, such as public companies looking to increase their shareholder base, as well as private companies potentially looking to go public and attract capital and publicity. The services provided by the Company include advertising, publishing of interviews and articles across its network and featuring of client content on its newsletters and social media. The packages all have fixed prices that are billed monthly over the terms of the agreement in even amounts. The Company recognizes revenue for its performance obligation associated with its contracts with customers over time as work is performed, which is deemed to occur evenly throughout the duration of the contract. This also reflects the pattern in which costs are incurred on performing the contracts. To the extent revenue recognized on contracts at each period end exceeds collections, the amounts are reflected as accounts receivable. To the extent collections on contracts at each period end exceeds revenue recognized, the amounts are reflected as deferred revenue.

 

Fair Value of Financial Instruments

 

The Company accounts for assets and liabilities measured at fair value on a recurring basis in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.

 

ASC 820 defines fair value 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. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

  

Level 2:

Observable market-based inputs or unobservable inputs that are corroborated by market data.

  

Level 3:

Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

 

Additional Disclosures Regarding Fair Value Measurements

 

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and lines of credit approximate their fair value due to the short-term maturity of these items.

 

Advertising

 

The Company expenses advertising costs as incurred. Advertising expenses amounted to $60,698 and $142,449 for the three months ended June 30, 2019 and 2018, respectively. Advertising expenses amounted to $159,665 and $276,107 for the six months ended June 30, 2019 and 2018, respectively. These advertising expenses are all reported as a component of discontinued operations for the three and six months ended June 30, 2019 and 2018.

 

 

Income Taxes

 

Income taxes are accounted for in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.

 

Foreign Currency Translation

 

The Company’s reporting currency is U.S. Dollars. The functional currency of the Company’s Subsidiary in the United Kingdom was British Pounds. The translation from British Pounds to U.S. dollars is performed for asset and liability accounts using exchange rates in effect at the balance sheet date, equity accounts using historical exchange rates or rates in effect at the balance sheet date, and for revenue and expense accounts using the average exchange rate in effect during the period. The resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive Income (Loss). Foreign currency translation gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated statements of operations.

 

Software Development Costs

 

At December 31, 2018, the Company impaired the entire balance of unamortized internal-use software development costs which amounted to approximately $4,725,000 and did not capitalize internal-use software development costs in 2019. Costs incurred in the research and development of software products and significant upgrades and enhancements thereto during the preliminary project stage and the post-implementation operation stage are expensed as incurred. Costs incurred for maintenance and relatively minor upgrades and enhancements are expensed as incurred. Prior to the December 31, 2018 impairment, costs associated with the application development stage of new software products and significant upgrades and enhancements thereto were capitalized when 1) management implicitly or explicitly authorized and committed to funding a software project and 2) it was probable that the project would be completed and the software would be used to perform the function intended. The Company capitalized internal-use software development costs of $375,000 and $750,000 during the three and six-month periods ended June 30, 2018. The Company amortized such costs once the new software products and significant upgrades and enhancements were completed. The Company’s amortization expenses associated with capitalized software development costs amounted to $216,146 and $321,146 during the three and six-month periods ended June 30, 2018 and was reflected in cost of revenues. There were no expenses associated with capitalized software development costs during the three or six-month periods ended June 30, 2019. The amortization expenses above are reported as a component of discontinued operations.

 

Property and Equipment

 

Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of five years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. 

 

Basic and Diluted Earnings Per Share

 

Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method). As of June 30, 2019, the Company had 7,130,000 outstanding stock options and 12,627,109 outstanding warrants which were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. As of June 30, 2018, the Company had 7,245,000 outstanding stock options and 11,469,341 outstanding warrants which were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. As a result, the basic and diluted earnings per share are the same for each of the periods presented.

 

 

Share-Based Payment

 

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.

 

The Company has elected to use the Black-Scholes option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Common stock awards

 

The Company has granted common stock awards to non-employees in exchange for services provided. The Company measures the fair value of these awards using the fair value of the services provided or the fair value of the awards granted. The fair value of the awards is recognized on a straight-line basis as services are rendered. The share-based payments related to common stock awards for the settlement of services provided by non-employees is recorded on the consolidated statement of comprehensive loss in the same manner and charged to the same account as if such settlements had been made in cash.

 

Warrants

 

In connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants are recorded at fair value as expense over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements are more fully described in Note 5, Stockholders’ Deficit.  

  

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842).  This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less.  All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. The Company has adopted this standard on January 1, 2019 and recognized assets and liabilities arising from any leases that meet the requirements under this standard on the adoption date and included qualitative and quantitative disclosures in the Company’s notes to the condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the goodwill impairment test. The effective date for ASU 2017-04 is for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This standard has no impact on the Company’s financial statements.

 

 

 In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. This standard has no impact on the Company’s financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The objective of this ASU is to eliminate the diversity in practice related to the classification of restricted cash or restricted cash equivalents in the statement of cash flows. For public business entities, this ASU is effective for annual and interim reporting periods beginning after December 15, 2017. The Company has adopted this standard on January 1, 2018, and it has had no material impact on its financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2016-09), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The Company has adopted this standard on January 1, 2018 and it has had no material impact on its financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. This Company has adopted this standard on January 1, 2019 and it has had no impact in the Company’s condensed consolidated financial statements.

 

Other accounting pronouncements have been issued but deemed by management to be outside the scope of relevance to the Company. 

 

 

 

NOTE 3: PROPERTY AND EQUIPMENT

 

The Company’s property and equipment relating to continuing operations consisted of the following at June 30, 2019 and December 31, 2018.

 

 

Depreciation expense from continuing operations amounted to $197 for the three and six months ended June 30, 2019. There was no depreciation expense from continuing operations during 2018.  

 

 

 

NOTE 4: ACQUISITONS

 

On May 15, 2019, the Company entered into the Emerging Growth Agreement with Emerging Growth, LLC (see Note 1), which closed on June 20, 2019. Pursuant to the terms of the Emerging Growth Agreement, the Company acquired certain assets from the Seller related to its sponsored content and marketing business for a purchase price consideration consisting of $420,000 in cash, 30,000,000 shares of the Company’s common stock valued at $2,700,000, and 3,000 shares of Series B preferred stock valued at $687,000. As a result, the total purchase price amounted to $3,807,000.

 

A summary of the purchase price allocation at fair value is below.  The business combination accounting is not yet complete and the amounts assigned to the net assets acquired are provisional.  Therefore, this may result in future adjustments to the provisional amounts as new information is obtained about facts and circumstances that existed at the acquisition date.

 

 

 

The following are the unaudited pro forma results of operations for the three and six months ended June 30, 2019 and 2018, as if the assets purchased in the Emerging Growth Agreement had been acquired on January 1, 2018.  The pro forma results include estimates and assumptions which management believes are reasonable.  However, pro forma results do include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated.

 

 

 

 

 

NOTE 5: STOCKHOLDERS’ DEFICIT

 

Common Stock

  

On June 20, 2019, the Company issued an aggregate of 3,500,000 restricted shares of common stock to certain promissory note holders as consideration for early payment of the promissory notes. The value of the shares issued amounted to $315,000 and was recorded as interest expense during the three and six months ended June 30, 2019.

 

On June 20, 2019, the Company issued 30,000,000 restricted shares of common stock to Emerging Growth, LLC as part of the acquisition under the Emerging Growth Agreement (see Note 4). The value of the stock amounted to $2,700,000 and was recorded as part of the acquisition price of the net assets acquired under the Emerging Growth Agreement.

 

Restricted Stock Issued as Compensation

 

During 2018 and 2017, the Company issued 120,000 restricted shares of its common stock, at a value of $0.50 per share, vesting in 4 equal quarterly increments commencing on July 1, 2018 and July 1, 2017, to each of its non-employee directors as partial annual compensation for services as a director. As of June 30, 2019 and 2018, these restricted shares were fully issued. The Company recorded expenses of $30,000 during the three month periods ended June 30, 2019 and 2018 and $60,000 during the six months ended June 30, 2019 and 2018.

 

Preferred Stock

 

The Company is authorized to issue 2,000,000 shares of preferred stock with a par value of $0.001 per share, of which 500 have been authorized as Series A Preferred Stock and 3,000 have been authorized as Series B Preferred Stock.

 

On June 20, 2019, the Company issued to certain of its promissory noteholders an aggregate of 500 shares of Series A Preferred Stock, each with a stated value per share of $1,000, as conversion of $500,000 worth of outstanding promissory notes. The Series A Preferred Stock bears interest at 12% per annum, and is convertible into the Company’s common stock at the election of the holder at a conversion price per share to be mutually agreed between the Company and the holder in the future, and be redeemable at the Company’s option following the third year after issuance, without voting rights or a liquidation preference.

 

On June 20, 2019, the Company issued 3,000 shares of Series B Preferred Stock to Emerging Growth, LLC, each with a stated value of $1,000 per share, as part of the Emerging Growth Agreement. The aggregate fair value of $687,000 was recorded as part of the acquisition price of the net assets acquired from Emerging Growth, LLC (see Note 4). The Series B Preferred Stock bears interest at 6% per annum and is convertible into the Company’s common stock at the election of Emerging Growth, LLC at a conversion price per share to be mutually agreed between the Company and Emerging Growth, LLC in the future, without voting rights or a liquidation preference, except with respect to accrued penalty interest.

 

For the three and six months ended June 30, 2019, the Company incurred $6,575 of interest from the outstanding preferred stock.

 

Warrants

 

There were no exercises of warrants during the six months ended June 30, 2019 or 2018.

 

During the three months ended March 31, 2019, the Company issued 500,000 warrants exercisable at a price of $0.15 per share which expire on January 25, 2024. The fair value of these warrants amounted to $44,670, and was recognized as deferred financing costs using the effective interest method during the three-month period ended March 31, 2019. Additionally, per the down round feature of 7,935,000 warrants issued in connection with the Beedie Credit Agreement (see Note 6), pursuant to ASU 2017-11 which allows instruments with a down round feature to qualify for equity classification, the Company recognized the value of the feature when it was activated and there was an actual reduction of the strike price or conversion feature. The reduction in income of such 7,935,000 warrants amounted to $104,638 and was capitalized as deferred financing costs during the three-month period ended March 31, 2019.

 

 

During the three months ended March 31, 2018, the Company issued 200,000 and 4,500,000 warrants exercisable at a price of $0.35 per share and which expire on January 25, 2028 and January 25, 2024, respectively. The fair value of these warrants amounted to $56,834 and $1,099,861, respectively, and were recognized as deferred financing costs and amortized using the effective interest method over the terms of the associated loan. During this same period, 58,824 warrants expired. 

 

There were no warrants granted during the three months ended June 30, 2019. In connection with the closing of the Asset Purchase Agreement for the sale of the CAKE Business, warrants to purchase an aggregate of 9,668,333 shares of the Company’s common stock were cancelled. In addition, 3,250,075 of previously granted warrants to employees were forfeited during the three months ended June 30, 2019.

 

As of June 30, 2019, and December 31, 2018, there were 12,627,109 and 16,110,517 warrants issued and outstanding, respectively, with a weighted average exercise price $0.66 and $0.62, respectively.

 

The Company recorded expenses of $37,691 and $66,515 during the three months ended June 30, 2019 and 2018, respectively, related to warrants granted. The Company recorded expenses of $126,810 and $127,565 during the six months ended June 30, 2019 and 2018, respectively, related to warrants granted. As of June 30, 2019, there is no remaining unrecorded compensation expense relating to warrants granted.

 

 

Options

 

The following summarizes the Company’s stock option activity for the six months ended June 30, 2019.

 

 

As of June 30, 2019, and December 31, 2018, there were 7,130,000 and 7,232,500 options, respectively, issued and outstanding with a weighted average exercise price of $0.39 and $0.40, respectively.

 

The Company recorded expenses of $4,385 and $7,619 during the three months ended June 30, 2019 and 2018, respectively, related to stock options. The Company recorded expenses of $10,963 and $15,922 during the six months ended June 30, 2019 and 2018, respectively, related to stock options. Employees with unvested stock options all left the Company in connection with the closing of the Asset Purchase Agreement for the sale of the CAKE Business on June 18, 2019. As a result, no further options are expected to vest, and the total compensation cost related to non-vested awards not yet recognized amounted to $0 at June 30, 2019.

 

 

 

NOTE 6: DISCONTINUED OPERATIONS

 

During May 2019, the Company decided to discontinue most of its operating activities pursuant to the Asset Purchase Agreement entered into with CAKE Software, Inc. (see Note 1).

 

In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the unaudited condensed consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the consolidated balance sheets as of June 30, 2019 and December 31, 2018, and consist of the following:

 

 

[1]

The Company’s accounts receivable was due primarily from advertisers and marketers. Collateral was not required. The Company also maintained allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviewed these estimated allowances, including an analysis of the customers’ payment history and creditworthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments as well as historical collection trends for its customers as a whole. Based on this review, the Company specifically reserved for those accounts deemed uncollectible or likely to become uncollectible. When receivables were determined to be uncollectible, principal amounts of such receivables outstanding were deducted from the allowance. The allowance for doubtful accounts amounted to $300,000 and $245,736 at June 30, 2019 and December 31, 2018, respectively.

 

 

[2]	The Company’s property and equipment consisted of the following.

 

 

Depreciation expense from discontinued operations amounted to $20,998 and $11,653 for the three-months ended June 30, 2019 and 2018, respectively. Depreciation expense amounted to $31,366 and $25,712 for the six-months ended June 30, 2019 and 2018, respectively. The deprecation expense for each period is reflected as a component of discontinued operations.

 

[3]	The Company’s deferred revenue represented prepayments made by certain customers and undelivered implementation and training fees.  The Company decreased the deferred revenues by the amount of the services it rendered to such clients when provided.

 

 

[4]	A summary of the amounts previously outstanding under the Company’s credit facilities are as follows:

 

 

 

SAAS Capital Loan

 

On May 5, 2016, the Company entered into a loan and security agreement, or the SaaS Capital Loan, with SaaS Capital Funding II, LLC, or SaaS Capital, to borrow up to a maximum of $8,000,000. Initial amounts borrowed accrued interest at the rate of 10.25% per annum with future amounts borrowed bearing interest at the greater of 10.25% or 9.21% plus the three-year treasury rate at the time of advance. Accrued interest on amounts borrowed was payable monthly for the first six months and thereafter 36 equal monthly payments of principal and interest is payable. Prepayments were subject to a 10%, 6% or 3% of principal premium if prepaid prior to 12 months, between 12 and 24 months, or between 24 months and maturity, respectively.

 

The fair value of the warrants previously issued in connection with the SaaS Capital Loan were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended June 30, 2019 and 2018, $50,085 and $49,997, respectively, of debt discount was amortized into interest expense. During the six months ended June 30, 2019 and 2018, $100,867 and $98,414, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.

 

On May 15, 2019, the Company entered into a consent letter, agreement and waiver of the SaaS Capital Loan to, among other things, provide that upon the closing of the Asset Purchase Agreement with Constellation, the Company will pay to SaaS Capital the outstanding principal balance and accrued but unpaid interest due under the SaaS Capital Loan plus $250,000 in fees, SaaS Capital will release its liens related to the Company’s CAKE Business assets , SaaS Capital’s warrants to purchase an aggregate of 1,733,333 shares of the Company’s common stock will be cancelled, and fees payable under the terms of the SaaS Capital Loan in the aggregate amount of $495,186 will be payable to SaaS Capital from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement in which the Company granted to SaaS Capital a security interest.

 

All amounts outstanding under the SaaS Capital Loan were paid in full on June 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation. The total amount paid to satisfy the remaining obligation under the SaaS Capital Loan as of the closing date amounted to $4,576,123, consisting of the remaining principal balance outstanding of $4,252,209, as well as interest and fees of $323,914.

 

Beedie Credit Agreement

 

On January 25, 2018, the Company entered into a non-revolving term credit agreement, or the Beedie Credit Agreement, with Beedie Investments Limited, or Beedie, to borrow up to a maximum of $7,000,000. Outstanding principal will accrue interest at the rate of 12% per annum increasing to 14% per annum if the Company’s gross margins fall below amounts specified in the Beedie Credit Agreement. Accrued interest on outstanding principal was payable monthly in arrears. The Company paid Beedie a commitment fee of $175,000 and paid to Beedie a monthly standby fee of 0.325% on the unadvanced and available amount.

 

The fair value of the warrants previously issued in connection with the Beedie Credit Agreement were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended June 30, 2019 and 2018, $1,391,678 and $110,249, respectively, of debt discount was amortized into interest expense. During the six months ended June 30, 2019 and 2018, $1,571,181 and $181,074, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.

 

On May 15, 2019, the Company entered into a seventh amendment of the Beedie Credit Agreement to, among other things, provide that upon the closing of the Asset Purchase Agreement with Constellation, the Company will pay to Beedie the outstanding principal balance and accrued but unpaid interest due under the Beedie Credit Agreement, Beedie will release its liens related to the Company’s CAKE Business assets, Beedie’s warrants to purchase an aggregate of 7,935,000 shares of the Company’s common stock will be cancelled, and fees payable under the terms of the Beedie Credit Agreement in the aggregate amount of $1,015,862 will be payable to Beedie from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement in which the Company granted to Beedie a security interest.

 

All amounts outstanding under the Beedie Credit Agreement were paid in full on June 18, 2019 upon the closing date of the Asset Purchase Agreement with Constellation. The total amount paid to satisfy the remaining obligation under the Beedie Credit Agreement as of the closing date amounted to $7,033,208, consisting of the remaining principal balance outstanding of $6,962,379, as well as interest and fees of $70,829.

 

 

[5]	A summary of the amounts previously outstanding under the Company’s other long-term loans were as follows:

 

 

2018 Promissory Notes

 

On May 31, 2018, and June 15, 2018, the Company borrowed an aggregate of $2,000,000, respectively, from thirteen lenders, or the 2018 Lenders, and issued promissory notes, or the 2018 Promissory Notes, for the repayment of the amounts borrowed. The 2018 Lenders are all accredited investors, one of the 2018 Lenders is an affiliate of the Company’s director, Greg Akselrud, two of the 2018 Lenders are related to the Company’s Chairman and Chief Executive Officer, Brian Ross, and two of the 2018 Lenders are the Company’s employees. The 2018 Promissory Notes are unsecured, have a maturity date of May 30, 2021 and all principal is due upon maturity. Amounts borrowed accrue interest at 12% per annum and accrued interest is payable monthly. The Company also issued to the 2018 Lenders six-year warrants to purchase an aggregate of 3,000,000 shares of the Company’s Common Stock at an exercise price of $0.35 per share.

 

All amounts outstanding under the 2018 Promissory Notes were paid in full or settled through the exchange of outstanding amounts into Series A Preferred Stock on June 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation. There was no gain or loss associated with this transaction.

 

August 2018 Promissory Notes

 

On August 31, 2018, the Company borrowed an aggregate of $1,500,000 from ten lenders, or the August 2018 Lenders and issued promissory notes, or the August 2018 Promissory Notes, for the repayment of the amounts borrowed. The August 2018 Lenders are all accredited investors. The August 2018 Promissory Notes are unsecured, have a maturity date of August 30, 2021 and all principal is due upon maturity. Amounts borrowed accrue interest at 12% per annum and accrued interest is payable monthly. The Company also issued to the August 2018 Lenders six-year warrants to purchase an aggregate of 1,500,000 shares of the Company’s common stock exercisable for cash at an exercise price of $0.35 per share.

 

All amounts outstanding under the August 2018 Promissory Notes were paid in full or settled through the exchange of outstanding amounts into Series A Preferred Stock on June 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation. There was no gain or loss associated with this transaction.   

 

 

The fair value of the warrants previously issued in connection with the 2018 Promissory Notes and the August 2018 Promissory Notes were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended June 30, 2019 and 2018, $755,411 and $20,478, respectively, of debt discount was amortized into interest expense. During the six months ended June 30, 2019 and 2018, $839,912 and $20,478, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.

 

In accordance with the provisions of ASC 205-20, the Company has excluded the results of discontinued operations from its results of continuing operations in the accompanying unaudited condensed consolidated statements of operations. The results of the discontinued operations of the CAKE Business for the three and six months ended June 30, 2019 and 2018 have been reflected as discontinued operations in the consolidated statements of operations, and consist of the following:

 

 

The following is a summary of the gain on sale of discontinued operations of the CAKE Business reflected above during the three and six months ended June 30, 2019. 

 

 

 

 

NOTE 7: COMMITMENTS AND CONTINGENCIES

 

On June 20, 2019, the Company entered into a Lease Agreement with Emerging Growth, LLC for the lease of office space in Whitefish, Montana, for a period of one year at a rate of $1,500 per month. Management has elected a policy to exclude leases with an initial term of 12 months or less from the balance sheet presentation required under ASC 842. As a result, the office lease has been excluded from balance sheet presentation as it has an original term of 12 months or less.   

 

The Company leases office space in Santa Monica, California, under a short-term lease expiring on July 31, 2019 for $1,000 per month. Subsequent to the quarter ended June 30, 2019, the Company has renewed the terms of the lease for a period of one year through July 31, 2020.    

 

During August 2017, the Company entered into an amendment to its original January 2014 lease for certain office space in Newport Beach.  Pursuant to the lease amendment, effective March 1, 2018, the premises shall be expanded to include an additional 1,332 usable square feet such that the premises shall consist of 11,728 usable square feet in the aggregate. In addition, pursuant to the terms of the lease amendment, the Company extended the term of the lease agreement until June 30, 2023. Commencing on March 1, 2018, the initial base rent for the premises will be $38,702 per month for the first year and increasing to $44,566 per month by the end of the term. This lease was transferred to Constellation upon the sale of the CAKE Business that closed on June 18, 2019. The Company has no further obligations under this lease.

 

 

During July 2014, the Company entered into a five-year lease for certain office space in a business center in London, England, which commenced on July 30, 2014. The base rent is GBP 89,667 (approximately $115,000) per year and the estimated service charges for the lease are GBP 45,658 (approximately $56,000) per year. This lease expires on July 30, 2019 and thus is not affected by ASC 842. The Company has discontinued its operations associated with the CAKE Business it conducted at the Subsidiary in London and will be vacating the office when the lease expires.

 

Legal Proceedings

 

From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any legal proceedings that it currently believes, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.

  

 

 

 

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