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

 

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		March 31, 2019				December 31, 2018
		Unaudited
ASSETS
Current Assets:
Cash		$	544,346			$	27,295
Restricted cash			50,000				50,000
Accounts receivable, net of allowance for bad debt of $281,688 and $245,736, respectively			2,232,745				2,081,551
Prepaid expenses and other assets			165,658				254,760
Total current assets			2,992,749				2,413,606
Property and equipment, net of accumulated depreciation of $787,718 and $783,275, respectively			42,130				52,035
Operating lease right-of-use asset			1,503,669				-
Other assets			109,766				108,211
Total assets		$	4,648,314			$	2,573,852
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses		$	4,112,359			$	3,018,394
Deferred revenues			239,029				443,650
Credit facility, short term			2,902,259				3,399,240
Operating lease liability, short-term			296,461				-
Total current liabilities			7,550,108				6,861,284
Credit facility, net of unamortized deferred financing cost of $1,441,763 and $1,522,740, respectively			6,668,493				5,888,155
Other loan, related party net of unamortized deferred financing cost of $146,420 and $163,314, respectively			403,580				386,686
Other long-term loan, net of unamortized deferred financing cost of $608,991 and $676,598, respectively			2,341,009				2,273,402
Operating lease liability, long-term			1,362,750				-
Other liabilities			531,250				637,500
Total liabilities			18,857,190				16,047,027
Stockholders' Deficit:
Series A Preferred stock; $0.001 par value; 54,000 shares authorized; None issued and outstanding.			-				-
Series B Preferred stock; $0.001 par value; 1,946,000 shares authorized; None issued and outstanding.			-				-
Common stock; $0.001 par value; 500,000,000 shares authorized; 66,179,709 and 66,179,709 shares issued and outstanding, respectively			66,179				66,179
Additional paid-in capital			29,773,130				29,498,125
Accumulated deficit			(43,973,761	)			(42,960,124	)
Accumulated other comprehensive loss			(74,424	)			(77,355	)
Total stockholders’ deficit			(14,208,876	)			(13,473,175	)
Total liabilities and stockholders’ deficit		$	4,648,314			$	2,573,852

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		Three-month periods ended March 31,
		2019				2018
Revenues:		$	4,825,822			$	5,992,748
Cost of revenue			1,829,373				2,353,860
Gross profit			2,996,449				3,638,888
Operating expenses:
Research and development			779,248				1,122,623
Sales and marketing			856,439				1,170,484
General and administrative			1,649,282				1,999,886
Total operating expenses			3,284,969				4,292,993
Operating loss			(288,520	)			(654,105	)
Other income (expense):
Other income			56				761
Other expense			(725,173	)			(603,115	)
Total other expenses			(725,117	)			(602,354	)
Net loss		$	(1,013,637	)		$	(1,256,459	)
Net loss per share:
Basic		$	(0.02	)		$	(0.02	)
Diluted		$	(0.02	)		$	(0.02	)
Basic weighted average common shares outstanding			66,179,709				65,939,709
Diluted weighted average common shares outstanding			66,179,709				65,939,709

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		Three-month periods ended March 31,
		2019				2018
Net loss:		$	(1,013,637	)		$	(1,256,459	)
Foreign currency translation loss			2,931				17,630
Total other comprehensive loss			2,931				17,630
Comprehensive loss		$	(1,010,706	)		$	(1,238,829	)

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		Common Stock								Additional Paid-in				Accumulated				Accumulated Other Comprehensive				Total Stockholders'
		Shares				Amount				Capital				Deficit				Income				Deficit
Balance, December 31, 2017			65,939,709			$	65,938			$	26,301,747			$	(31,542,684	)		$	(41,540	)		$	(5,216,538	)
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 in connection 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	)

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 in connection with loan			-				-				44,670				-				-				44,670
Fair value of warrants 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	)

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		Three-month periods ended March 31,
		2019				2018
Cash flows from operating activities:
Net loss		$	(1,013,637	)		$	(1,256,459	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			10,367				119,059
Amortization of deferred financing cost			314,787				202,898
Provision for bad debt			35,952				(235,441	)
Fair value of options and warrants			125,696				99,352
Changes in operating assets and liabilities:
Accounts receivable			(187,146	)			71,925
Prepaid expenses			89,102				32,894
Accounts payable and accrued expenses			1,049,631				(308,112	)
Deferred revenues			(204,621	)			176,894
Other liabilities			155,542				-
Other assets			(1,533	)			(2,783	)
Net cash provided by (used in) operating activities			374,140				(1,099,773	)
Cash flows from investing activities:
Capitalized software for internal use			-				(375,000	)
Capital expenditures			-				(13,402	)
Net cash used in investing activities			-				(388,402	)
Cash flows from financing activities:
Principal repayment of credit facility and loan			(360,000	)			(662,058	)
Proceeds from credit facility			499,980				3,771,600
Repayments of promissory notes			-				(1,000,000	)
Net cash provided by financing activities			139,980				2,109,542
Effect of exchange rate changes on cash			2,931				17,630
Net increase in cash, cash equivalents and restricted cash			517,051				638,997
Cash, cash equivalents and restricted cash, beginning of period			77,295				216,883
Cash, cash equivalents and restricted cash, end of period		$	594,346			$	855,880
Supplemental disclosures of cash flow information:
Cash paid for interest		$	407,074			$	373,257
Cash paid for income taxes		$	-			$	-
Non-cash investing and financing activities:
Fair value of warrants issued in connection with credit facility		$	44,670			$	1,156,695
Recorded lease right-of-use asset and related lease liability		$	155,542			$	-
Accrued interest reclassed to credit facility		$	62,379			$	-
Capital expenditure included in payables		$	-			$	6,622
Accrued payables and short-term loan directly paid off by credit facility		$	-			$	623,399
Prepaid expenses reclassed to deferred financing cost		$	-			$	70,000
Warrant repricing adjustment		$	104,638			$	-
Reconciliation of Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents at beginning of period		$	27,295			$	166,883
Restricted cash at beginning of period		$	50,000			$	50,000
Cash and cash equivalents and restricted cash at beginning of period		$	77,295			$	216,883
Cash and cash equivalents at end of period		$	544,346			$	805,880
Restricted cash at end of period		$	50,000			$	50,000
Cash and cash equivalents and restricted cash at end of period		$	594,346			$	855,880

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NOTE 1: ORGANIZATION, DESCRIPTION OF BUSINESS, AND BASIS OF PRESENTATION

 

Accelerize Inc., a Delaware corporation, incorporated on November 22, 2005, owns and operates CAKE, a Software-as-a-Service, or SaaS, platform providing online tracking and analytics solutions for advertisers and online marketers.

 

The Company provides software solutions for businesses interested in expanding their online advertising spend.

 

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 three-month period ended March 31, 2019 are not necessarily indicative of results for the entire year ending December 31, 2019.

 

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 a working capital deficit of $4,557,359 and an accumulated deficit of $43,973,761 as of March 31, 2019.  The Company also had a net loss of $1,013,637 and cash provided by operating activities of $374,140 during the three months ended March 31, 2019.

 

Management’s plan to continue as a going concern includes raising capital in the form of debt or equity, increased gross profit from revenue growth and managing and reducing operating and overhead costs.  During the second quarter of 2018, the Company engaged a nationally recognized investment bank to assist management in pursuing strategic transactions including acquisitions, dispositions, capital raising and debt restructuring. On May 15, 2019, the Company entered into an asset purchase agreement to sell substantially all of the Company’s assets. This agreement is subject to stockholder approval (see Note 10, Subsequent Events). However, management cannot provide any assurances that the Company will be successful in accomplishing its plans. Management also 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.  

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the results of operations of Cake Marketing UK Ltd., or the Subsidiary. All material intercompany accounts and transactions between the Company and its Subsidiary have been eliminated in consolidation.

 

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-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

 

 

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 March 31, 2019 and December 31, 2018.

 

Accounts Receivable

 

The Company’s accounts receivable are due primarily from advertisers and marketers. 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.

 

    

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. During the three-month period ended March 31, 2019, the Company has reached bank balances exceeding 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's accounts receivable are due from customers, generally located in the United States, Europe, Asia, and Canada. The Company had a customer who accounted for 17% of its accounts receivable at March 31, 2019 and none at December 31, 2018.  The Company does not require any collateral from its customers.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with 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.

 

The Company’s SaaS revenues are 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 is generally one year with one of two general cancellation policies. Each party may cancel the contract within the initial period or after the initial period, with 30-days’ prior notice. The Company does not provide any general right of return for its delivered items. Services associated with the implementation and training fees have standalone value to the Company’s customers, as there are third-party vendors who offer similar services to the Company’s services. Accordingly, they qualify as separate units of accounting. The Company allocates a fair value to each element deliverable at the recognition date and recognizes 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 are 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 are recognized in the corresponding period.

 

 

Product Concentration

 

The Company generates its revenues from software licensing, usage, and related transaction fees.

 

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.

 

 

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 is 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 during the three-month period ended March 31, 2018. The Company amortized such costs once the new software products and significant upgrades and enhancements were completed. The unamortized internal-use software development costs amounted to approximately $4,196,000 at March 31, 2018. The Company’s amortization expenses associated with capitalized software development costs amounted to approximately $105,000 during the three-month period ended March 31, 2018 and was reflected in cost of revenues. There were no expenses associated with capitalized software development costs during the three-month period ended March 31, 2019.

 

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 BSM 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.

 

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 update to this standard has no impact in the Company’s Condensed Consolidated Financial Statements.

 

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, whichever is more reliably measurable. The fair value measurement date of these awards is generally the date the performance of services is complete. 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 6, Stockholders’ Deficit.  

 

Segment Reporting

 

The Company generated revenues from one source, its SaaS business, during the three-month periods ended March 31, 2019 and 2018. The Company's chief operating decision maker evaluates the performance of the Company based upon revenues and expenses by functional areas as disclosed in the Company's statements of operations.

 

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 has recognized assts 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 update to this standard has 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. 

 

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).  

 

 

 

Property and Equipment

 

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

 

Property and equipment consist of the following at:

 

 

 

During the three-month period ended March 31, 2019, the Company disposed of approximately $9,000 in computer equipment with a net book value of approximately $1,400. There were no such disposals in 2018.

 

Leases

 

The Company has identified all leases and reviewed the leases to determine the impact of ASC 842 on its consolidated financial statements. The Company has elected to apply the practical expedient to certain classes of leases, whereby the separation of components of leases into lease and non-lease components is not required and all of the practical expedients to all leases, which include not reassessing (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The adoption of the new standard resulted in the recording of a right-of-use asset at January 1, 2019 of $1,569,100 and a lease liability at January 1, 2019 of $1,725,375 and the subsequent amortization of the asset of $65,431 and the lease liability of $66,164. The adoption of ASU 2016-02, as amended, has had no impact on the unaudited condensed consolidated statements of operations or unaudited condensed consolidated statements of cash flows.

 

 

(1)   Includes short-term portion of $296,461 and long-term portion of $1,362,750.

 

 

Amount of future annual minimum payments under operating lease obligations at March 31, 2019 are as follows:

 

 

NOTE 3: PREPAID EXPENSES

 

At March 31, 2019 and December 31, 2018, the Company’s prepaid expenses consisted primarily of prepaid insurance and tradeshow costs.

 

 

NOTE 4: DEFERRED REVENUES

 

The Company’s deferred revenues consist of prepayments made by certain of the Company’s customers and undelivered implementation and training fees.  The Company decreases the deferred revenues by the amount of the services it renders to such clients when provided.

 

 

NOTE 5: CREDIT FACILITY AND LOAN

 

Agility Loan 

 

 

On March 11, 2016, the Company entered into a subordinated loan, or the Agility Loan with Agility Capital II, LLC, or Agility, which provided for total availability of $625,000 and was to originally mature, prior to amendment, on March 31, 2017. The Agility Loan had a fixed interest rate of 12% per year and required $25,000 monthly amortization payments beginning on June 1, 2016. The Agility Loan also required fees of approximately $130,000 over the life of the loan and is subject to a total aggregate minimum interest of $50,000 in the event of a prepayment. The Agility Loan contained covenants to achieve specified Adjusted EBITDA levels, as defined, limiting capital expenditures, restricting our ability to pay dividends, purchase and sell assets outside the ordinary course and incur additional indebtedness. At the time of repayment of the Agility Loan, in January 2018, the Company was in compliance with these covenants.

  

 

In connection with the Agility Loan, on June 30, 2016, as a result of outstanding amounts under the Agility Loan, the Company issued to Agility Capital a warrant to purchase up to 69,444 shares of the Company’s Common Stock at an exercise price of $0.45 per share. This warrant expires on March 11, 2021. The fair value of the warrant amounted to $15,880 and was capitalized as deferred financing costs, the entirety of which was expensed prior to 2018.

 

On November 29, 2016, the Company entered into an amendment of the Agility Loan which waived any event of default and the breach of any covenant, representation, warranty, and any other agreement contained in the Agility Loan as a result of the entering into of the Settlement Agreement. On the date of the amendment, a loan modification fee in the amount of $100,000, fully earned and non-refundable, was added to the outstanding loan balance and shall accrue interest, expensed in the statement of operations. Additionally, the maturity date was extended to December 31, 2017. On November 29, 2016, the Company issued to Agility Capital a warrant to purchase up to 187,500 shares of the Company’s Common Stock at an exercise price of $0.40 per share. This warrant expires on November 29, 2021. The fair value of the warrant amounted to $42,427 and was capitalized as deferred financing costs, the entirety of which was expensed prior to 2018.

 

On August 14, 2017, the Company entered into a consent to waiver of the Agility Loan, to permit the issuance of promissory notes to lenders, as further described below.

 

On November 8, 2017, the Company entered into the third amendment of the Agility Loan whereby Agility Capital agreed to loan an additional $300,000 to the Company, such that the aggregate principal amount owing to Agility Capital as of November 9, 2017 was $625,000. The Third Amendment extended the maturity date of the Agility Loan from December 31, 2017 to December 31, 2018. A loan modification fee of $125,000 was deducted from the Additional Loan amount. This arrangement was treated as a substantial modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”). Because the net present value of the modified notes was greater than 10% of the present value of the remaining cash flows under the old debt, the transaction was treated as a debt extinguishment and reissuance of a new debt instrument, with the fair value of $606,034 and therefore recorded $106,034 as a loss on debt extinguishment.  The carrying value of the $625,000 did not change as a result of the extinguishment since the discounts recognized at inception of these new notes were fully amortized at the time of the issuance. 

 

On January 26, 2018, the Company repaid the Agility Loan by paying Agility Capital approximately $581,000 which terminated the loan agreement between the Company and Agility Capital and released Agility Capital’s security interest in Company assets. The Company owed $0 under the Agility Loan at March 31, 2019 and December 31, 2018.

 

Credit Facility - 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 will accrue 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 is payable monthly for the first six months and thereafter 36 equal monthly payments of principal and interest is payable. Prepayments will be 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. Advances may be requested until May 5, 2018. The initial minimum advance amount of $5,000,000, on May 5, 2016, was used to repay the outstanding Line of Credit balance of $4,572,223. A facility fee of $80,000 was paid by the Company in connection with the initial advance and an additional $80,000 was paid on May 2017. Additionally, the Company incurred initial financing costs of $160,000 which were capitalized as deferred financing costs, of which $13,333 was expensed at March 31, 2019 and 2018.

  

The SaaS Capital Loan contains customary covenants including, but not limited to, covenants to achieve specified Adjusted EBITDA levels and revenue renewal levels, limiting capital expenditures and restricting the Company's ability to pay dividends, purchase and sell assets outside the ordinary course and incur additional indebtedness. As of March 31, 2019, the Company was in compliance with such covenants, except for the minimum liquidity and secured debt covenants, defaults relating to which have been waived by SaaS Capital. The occurrence of a material adverse change will be an event of default under the SaaS Capital Loan, in addition to other customary events of default. The Company granted SaaS Capital a security interest in all of the Company's personal property and intellectual property through the SaaS Capital Loan and the Patent, Trademark and Copyright Security Agreement between the Company and SaaS Capital.

 

 

On May 5, 2016, in connection with the SaaS Capital Loan, the Company issued to SaaS Capital Partners II, LP, an affiliate of SaaS Capital, a warrant to purchase up to 1,333,333 shares of the Company's common stock at an exercise price of $0.45 per share subject to certain adjustments for dividends, splits or reclassifications. The warrant is exercisable until the earlier of May 5, 2026, or the date that is 5 years from the date the Company’s equity securities are first listed for trading on NASDAQ. The Company paid approximately $169,000 in financing costs and $9,430 was capitalized as deferred financing costs, of which $786 was expensed during the three-month periods ended March 31, 2019 and 2018. The fair value of the warrant amounted to $383,128 and was capitalized as deferred financing costs, of which $31,927 was expensed during the three-month periods ended March 31, 2019 and 2018.

 

On November 29, 2016, the Company entered into an amendment of the SaaS Capital Loan to receive consent from SaaS Capital to enter into a litigation settlement agreement with a former officer, or the Settlement Agreement. The amendment required a loan modification fee of $120,000, payable at $10,000 a month for one year, expensed in the statement of operations. In connection with this amendment, the Company agreed to issue SaaS Capital a warrant to purchase up to 200,000 shares of the Company’s Common Stock at an exercise price of $0.36 per share. This warrant expires on November 29, 2026. The fair value of the warrant amounted to $60,185 which was fully expensed at December 31, 2016.

 

On May 10, 2017, the Company entered into a second amendment of the SaaS Capital Loan, or the Second Amendment, which adjusted the Minimum Adjusted EBITDA covenant of the SaaS Capital Loan from $0 to ($150,000) until August 31, 2017 to give the Company added flexibility in completing our hosting migration to a new platform and to allow for potentially augmented marketing and sales efforts.

 

On June 16, 2017, the Company entered into a third amendment of the SaaS Capital Loan, or the Third Amendment, to provide that any advance made within 6 months of the final advance date will be for a 36-month period with interest only payments due from the date of advance until the final advance date.

 

On August 14, 2017, the Company entered into a fourth amendment of the SaaS Capital Loan, or the Fourth Amendment, to permit the issuance of the 2017 Promissory Notes, further described below.

 

On November 8, 2017, the Company entered into a fifth amendment of the SaaS Capital Loan, or the Fifth Amendment, which adjusted the Minimum Adjusted EBITDA covenant of the SaaS Capital Loan from $0 to ($170,000) until October 31, 2017, to ($150,000) from November 1, 2017 to December 31, 2017, to ($100,000) from January 1, 2018 to May 31, 2018, to ($50,000) from June 1, 2018 to August 31, 2018, and to $0 thereafter. The Fifth Amendment added a new minimum liquidity covenant for a cash balance of $600,000 effective January 31, 2018. The Fifth Amendment also memorialized SaaS Capital’s waiver of the Minimum Adjusted EBITDA covenant for September 2017. In connection with the Fifth Amendment, the Company agreed to pay to SaaS Capital a fee of $375,000 upon the payment in full of all outstanding advances. 

 

On January 25, 2018, the Company entered into a sixth amendment of the SaaS Capital Loan, or the Sixth Amendment, to permit the Company to enter into the Beedie Credit Agreement, further described below, and to permit the repayment of Agility Capital and of the 2017 Promissory Notes. The Sixth Amendment also amended the Company’s adjusted EBITDA covenant and added covenants requiring a minimum gross margin and specified debt to monthly recurring revenue ratios. This arrangement was treated as a normal modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (“ASC 470-50”). Because the net present value of the modified notes was lesser than 10% of the present value of the remaining cash flows under the old debt, the transaction was treated as a debt modification. In connection with the Sixth Amendment, the Company agreed to issue SaaS Capital a warrant to purchase up to 200,000 shares of its Common Stock at an exercise price of $0.35 per share, subject to certain adjustments for dividends, splits or reclassifications. The fair value of the warrant amounted to $56,834 and was capitalized as deferred financing costs, of which $4,736 and $3,157 was expensed during the three-month period ended March 31, 2019 and 2018, respectively.

 

On May 31, 2018, the Company entered into a seventh amendment of the SaaS Capital Loan, or the Seventh Amendment, to permit the issuance of the 2018 Promissory Notes, as further described below, to amend the Company’s adjusted EBITDA, revenue renewal and total debt to monthly recurring revenue covenants, to increase the success fee payable upon repayment of the facility by $120,000 to $495,000, and to fix prepayment penalties until October 31, 2018.

 

On June 13, 2018, the Company entered into an eighth amendment of the SaaS Capital Loan, or the Eighth Amendment, to issue additional 2018 Promissory Notes.

 

On August 31, 2018, the Company entered into a ninth amendment of the SaaS Capital Loan, or the Ninth Amendment, to permit the issuance of the August 2018 Promissory Notes, as further described below, to amend the Company’s minimum adjusted EBITDA, revenue renewal, total debt to monthly recurring revenue and secured debt to monthly recurring revenue covenants, to increase the success fee payable upon repayment of the facility to $555,000 and to provide for twice monthly reporting of the Company’s projected cash flows.

 

 

On January 23, 2019, the Company entered into a tenth amendment of the SaaS Capital Loan, or the Tenth Amendment, to, among other things, defer the Company’s January 15, 2019 principal payment until the earlier of March 15, 2019 or payment of the SaaS Capital Loan in full, amend the Company’s minimum adjusted EBITDA, revenue renewal, and secured debt to monthly recurring revenue covenants, to increase the success fee payable upon repayment of the SaaS Capital Loan to $605,000 and to provide for weekly reporting of the Company’s projected cash flows.

 

On March 1, 2019, the Company entered into a payment deferral agreement with respect to the SaaS Capital Loan to, among other things, defer a portion of the Company’s January, February and March 2019 principal payments until the earlier of May 15, 2019 or payment of the SaaS Capital Loan in full.

 

During the three months ended March 31, 2019, the Company borrowed $0 from the SaaS Capital Loan, and made principal payments of $360,000.

  

The Company owed $4,450,135 and $4,810,135 under the SaaS Capital Loan at March 31, 2019 and December 31, 2018, respectively.

 

2017 Promissory Notes

 

 

On August 14, 2017, the Company borrowed an aggregate of $1,000,000 from seven lenders, or the 2017 Lenders, and issued promissory notes, or the 2017 Promissory Notes, for the repayment of the amounts borrowed. The 2017 Lenders are all accredited investors, certain of the 2017 Lenders are shareholders of the Company, one of the 2017 Lenders is an affiliate of the Company’s director, Greg Akselrud, and two of the 2017 Lenders are each affiliated with a partner of Mr. Akselrud’s in the law firm of Stubbs Alderton and Markiles, LLP. The 2017 Promissory Notes are unsecured, have a maturity date of August 14, 2019 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 2017 Lenders three-year warrants to purchase an aggregate of 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.35 per share. The fair value of the warrant amounted to $104,676 and was capitalized as deferred financing costs, of which $0 and $82,868 was expensed during the three-month period ended March 31, 2019 and 2018, respectively.

 

On January 26, 2018, the Company paid approximately $1,074,000 to repay the 2017 Promissory Notes issued to the 2017 Lenders, which includes approximately $65,000 in additional interest expenses due to the repayment date which was prior to the maturity date. The Company owed $0 under the 2017 Promissory Notes at March 31, 2019 and December 31, 2018. 

 

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 is payable monthly in arrears. The Company paid Beedie a commitment fee of $175,000 and will pay to Beedie a monthly standby fee of 0.325% on the unadvanced and available amount. Advances may be requested until July 25, 2020 and outstanding principal must be paid in full on January 25, 2021. Prepayment, which if at the Company’s option must be made in full and is otherwise required following certain asset dispositions, will be subject to a fee of 24 months accrued interest less all interest previously paid by the Company on the outstanding principal amount if paid prior to January 25, 2020. The initial minimum advance amount of $4,500,000 was advanced on January 26, 2018. Approximately $581,000 of the initial advance was used to repay Agility Capital to terminate the loan agreement between the Company and Agility dated March 11, 2016, as amended, and to release Agility Capital’s security interest in Company assets. Approximately $1,074,000 of the initial advance was used to repay the 2017 Promissory Notes issued to the 2017 Lenders on August 14, 2017. The $175,000 commitment fee was capitalized as deferred financing costs, of which $14,583 and $9,722 was expensed during the three-month period ended March 31, 2019 and 2018, respectively.

 

 

The Beedie Credit Agreement contains customary covenants including, but not limited to, covenants to achieve specified adjusted EBITDA levels, to maintain minimum revenue renewal and liquidity levels, to maintain minimum gross margins, to maintain specified debt to monthly recurring revenue ratios, that limit capital expenditures and restrict the Company's ability to pay dividends, purchase and sell assets outside the ordinary course, and that limit the Company’s ability to incur additional indebtedness. As of March 31, 2019, the Company was in compliance with such covenants, except for the minimum liquidity and secured debt covenants, defaults relating to which have been waived by Beedie. The occurrence of a material adverse change will be an event of default under the Beedie Credit Agreement, in addition to other customary events of default. Default interest will be charged at 18% per annum. The Company granted Beedie a security interest, subordinated to the security interest of SaaS Capital, in all of the Company's assets through a pledge and security agreement, patent security agreement and trademark security agreement, each between the Company and Beedie. As additional security, the Company’s Subsidiary issued an unlimited guarantee to Beedie. Beedie is entitled to board of director observation rights during the term of the Beedie Credit Agreement. 

 

In connection with the Beedie Credit Agreement, the Company issued to Beedie a warrant, or the Beedie Warrant, to purchase up to 4,500,000 shares of the Company's common stock at an exercise price of $0.35 per share subject to certain adjustments for dividends, splits or reclassifications, and a weighted average adjustment for certain issuances of common stock below the exercise price prior to January 26, 2019. Up to 2,500,000 additional shares of common stock under the Beedie Warrant will be exercisable on a pro rata basis to additional amounts borrowed if and when advanced under the Beedie Credit Agreement. The Company adopted ASU 2017-11 which revises ASC 815-10-15-74 to allow instruments with a down round features to qualify for equity classification. Under the new guidance, the issuer would recognize the value of the feature only when it is activated and there is an actual reduction of the strike price or conversion feature.  The value of the adjustment is then to be recorded as deemed dividend and a reduction of income available to common stockholders. The fair value of the warrant amounted to $1,099,861 and was capitalized as deferred financing costs, of which $91,655 and $61,103 was expensed during the three-month period ended March 31, 2019 and 2018, respectively.

 

On May 31, 2018, the Company entered into a first amendment, or the First Beedie Amendment, of the Beedie Credit Agreement to permit the issuance of the 2018 Promissory Notes, as further described below, to amend the Company’s adjusted EBITDA, revenue renewal and total debt to monthly recurring revenue covenants, and to add a secured debt to monthly recurring revenue covenant. In addition, the Company issued to Beedie a warrant to purchase up to 500,000 shares of the Company's common stock at an exercise price of $0.35 per share subject to certain adjustments for dividends, splits or reclassifications, and a weighted average adjustment for certain issuances of common stock below the exercise price prior to January 25, 2019. This arrangement was treated as a normal modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (ASC 470-50). Because the net present value of the modified notes was lesser than 10% of the present value of the remaining cash flows under the old debt, the transaction was treated as a debt modification. The fair value of the warrant amounted to $120,330 and was capitalized as deferred financing costs, of which $10,027 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively.

 

On June 13, 2018, the Company entered into a second amendment, or the Second Beedie Amendment, of the Beedie Credit Agreement to issue additional 2018 Promissory Notes, as further described below. In addition, the Company issued to Beedie a warrant to purchase up to 100,000 shares of the Company's common stock at an exercise price of $0.35 per share subject to certain adjustments for dividends, splits or reclassifications, and a weighted average adjustment for certain issuances of common stock below the exercise price prior to January 25, 2019. This arrangement was treated as a normal modification of existing debt pursuant to the guidance of ASC 470-50 “Debt – Modifications and Extinguishments” (ASC 470-50). Because the net present value of the modified notes was lesser than 10% of the present value of the remaining cash flows under the old debt, the transaction was treated as a debt modification. The fair value of the warrant amounted to $24,053 and was capitalized as deferred financing costs, of which $2,004 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively.

 

On August 31, 2018, the Company entered into a third amendment, or the Third Beedie Amendment, of the Beedie Credit Agreement to borrow the second tranche of the term loan facility in the amount of $1,500,000, to permit the issuance of the August 2018 Promissory Notes, as further described below, to amend the commitment fee, to amend the Company’s minimum adjusted EBITDA, revenue renewal, total debt to monthly recurring revenue and secured debt to monthly recurring revenue covenants and to provide for twice monthly reporting of the Company’s projected cash flows. In connection with the Third Beedie Amendment, the Company issued to Beedie a warrant to purchase up to 1,500,000 shares of the Company's common stock and a warrant to purchase up to an additional 835,000 shares of the Company’s common stock at an exercise price of $0.35 per share subject to certain adjustments for dividends, splits or reclassifications, and a weighted average adjustment for certain issuances of common stock below the exercise price prior to January 25, 2019. The fair value of these warrants amounted to $412,484 and was capitalized as deferred financing costs, of which $42,671 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively. A commitment fee of $75,000 was capitalized as deferred financing costs, of which $7,759 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively.

 

On January 23, 2019, the Company entered into a fourth amendment, or the Fourth Beedie Amendment, of the Beedie Credit Agreement to, among other things, defer the Company’s January 31, 2019 interest payment to Beedie and add it to the amount due at maturity, amend the Company’s minimum adjusted EBITDA, revenue renewal, and secured debt to monthly recurring revenue covenants and to provide for weekly reporting of the Company’s projected cash flows. The Company will pay to Beedie a fee of $50,000 for the Fourth Beedie Amendment to be paid on or before the maturity date of the Beedie Credit Agreement.

 

On March 1, 2019, the Company entered into a fifth amendment, or the Fifth Beedie Amendment, of the Beedie Credit Agreement to borrow the third tranche of the term loan facility in the amount of $500,000. In connection with the Fifth Beedie Amendment, the Company issued to Beedie a warrant to purchase up to 500,000 shares of the Company's common stock at an exercise price of $0.15 per share subject to certain adjustments for dividends, splits or reclassifications. The fair value of these warrants amounted to $44,670 and was capitalized as deferred financing costs, of which $1,942 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively. Additionally, per the down round feature of the Beedie Warrants, 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 fair value of the reduction in income of all previously issued warrants to Beedie amounted to $104,638 and was capitalized as deferred financing costs, of which $8,861 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively.

 

The Company owed $6,562,379 and $6,000,000 under the Beedie Loan at March 31, 2019 and December 31, 2018, respectively

 

 

2018 Promissory Notes

 

On May 31, 2018, and June 15, 2018, the Company borrowed an aggregate of $1,500,000 and $500,000, 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. The fair value of the warrants amounted to $737,218 and was capitalized as deferred financing costs, of which $61,435 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively.

 

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. The fair value of the warrants amounted to $276,798 and was capitalized as deferred financing costs, of which $23,066 and $0 was expensed during the three-month periods ended March 31, 2019 and 2018, respectively.

 

The Company recognized amortization and interest expenses in connection with the above credit facility and loans as follows. 

 

 

NOTE 6: STOCKHOLDERS’ DEFICIT

 

Common Stock

 

There were no exercises of options during the three-month periods ended March 31, 2019 or 2018.

 

As of March 31, 2019, and December 31, 2018, there were 66,179,709 shares of Common Stock issued and outstanding.

 

Restricted Stock

 

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 March 31, 2019 and 2018, these restricted shares were fully issued. The Company recorded expenses of $30,000 during the three-month periods ended March 31, 2019 and 2018. $30,000 remained unvested as of March 31, 2019 and 2018.

 

Warrants

 

There were no exercises of warrants during the three-month period ended March 31, 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 the Beedie Warrants, 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 all previously issued warrants to Beedie 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. 

 

As of March 31, 2019, and December 31, 2018, there were 25,545,517 and 16,110,517 warrants issued and outstanding, respectively, with a weighted average price $0.53 and $0.62, respectively.

 

 

The Company recorded expenses of $89,119 and $61,050 during the three months ended March 31, 2019 and 2018, respectively, related to warrants granted.

 

Options

 

The Company generally recognizes its share-based payment over the vesting terms of the underlying options.

 

 

As of March 31, 2019 and December 31, 2018, there were 7,130,000 and 8,257,500 options, respectively, issued and outstanding with a weighted average price of $0.39.

 

The total compensation cost related to non-vested awards not yet recognized amounted to $2,095 at March 31, 2019 and the Company expects that it will be recognized over the following 18 months.

 

NOTE 7: COMPREHENSIVE LOSS

 

Comprehensive loss includes changes in equity related to foreign currency translation adjustments. The following table sets forth the reconciliation from net loss to comprehensive loss for the three-month periods ended March 31, 2019 and 2018:

 

 

The following table sets forth the balance in accumulated other comprehensive loss as of March 31, 2019 and December 31, 2018, respectively:

 

 

 

NOTE 8: SEGMENTS

 

The Company operates in one business segment. Percentages of sales by geographic region for the three-month periods ended March 31, 2019 and 2018 were approximately as follows:

 

 

NOTE 9: COMMITMENTS AND CONTINGENCIES

 

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.

 

 

During October 2016, the Company amended its original May 2014 sublease and entered into a 21-month sublease in Newport Beach, effective June 1, 2016. The monthly base rent was approximately $4,100 through the end of the sublease term, in February 2018. As of March 31, 2019, this sublease has expired.

 

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 during 2019 and thus is not affected by ASC 842.

 

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.

 

NOTE 10: SUBSEQUENT EVENTS  

 

On May 1, 2019, the Company entered into a sixth amendment of the Beedie Credit Agreement to, among other things, borrow the fourth tranche of the term loan facility in the amount of $400,000 and to grant a waiver of two events of default relating to breaches of the Company’s minimum liquidity and secured debt covenants under the Beedie Credit Agreement.

 

On May 2, 2019, the Company entered into a payment deferral agreement with respect to the SaaS Capital Loan to, among other things, defer a portion of the Company’s January, February, March, April and May 2019 principal payments until the earlier of May 30, 2019 or payment of the SaaS Capital Loan in full and to grant a waiver of two events of default relating to breaches of the Company’s minimum liquidity and secured debt covenants under the SaaS Capital Loan. 

 

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 has agreed to sell substantially all of the assets associated with its CAKE and Journey by CAKE business, or the 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 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 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.

 

Under the Asset Purchase Agreement, Constellation will acquire all of the assets used by the Company in the Business and will assume the Company’s post-closing obligations under certain vendor, customer and other commercial contracts related to the Business, including the Company’s lease for its headquarters in Newport Beach, California and its Subsidiary’s office in the United Kingdom. The Company’s cash and cash equivalents, and the assets associated with its Accelerize trademark, are excluded from the sale of the Business. Constellation will offer employment to certain of the Company’s employees following the closing date.

 

Under the Asset Purchase Agreement, the consummation of the sale of the Business is subject to satisfaction or waiver of certain closing conditions, including the approval of the sale of the Business by the Company’s stockholders, the payment of the outstanding principal amount of indebtedness due to Beedie and SaaS Capital and the release of their security interest in the assets related to the Business, the accuracy in material respects of the parties’ representations and warranties and material compliance with covenants, the absence of any legal process that prevents or adversely affects the sale of the Business and the delivery of certain other agreements and consents.  The Company and its Chief Executive Officer have agreed not to compete with the Business for a period of five years from the closing date and not to solicit from the Business employees, customers, vendors and others with a business relationship with the Business for a period of two years.

 

 

The Asset Purchase Agreement prohibits the Company and its directors, officers, employees and other representatives from soliciting or facilitating an alternative proposal for the acquisition of the Business, however, such parties may engage in discussions pursuant to unsolicited third party offers to the extent necessary to satisfy their fiduciary obligations to the Company’s stockholders, subject to notice to Constellation of such discussions. The Asset Purchase Agreement may be terminated under certain circumstances including mutual agreement of the parties, the material breach of the agreement by a party, or to the extent the closing has not occurred by June 30, 2019, subject to extension related to the approval of the sale of the Business by the Company’s stockholders. In the event that the Asset Purchase Agreement is terminated as a result of a superior offer, or the breach of certain closing conditions, the party responsible for the termination will be required to pay damages in the amount of $1,000,000 to the other. In the event that the Asset Purchase Agreement is terminated as a result of the failure of the Company’s stockholders to approve the sale of the Business, the Company will pay to Constellation damages in the amount of $194,000.

 

The Company intends to use the proceeds from the sale of the Business to pay the outstanding principal amount of indebtedness due to Beedie and SaaS Capital, to repay the outstanding principal amount of indebtedness due to certain of the 2018 Lenders and August 2018 Lenders, to pay transaction expenses, and for general corporate purposes.

 

On May 15, 2019, the Company entered into an asset purchase agreement, or the Emerging Growth Agreement, with Emerging Growth LLC, or the Seller, pursuant to which the Company will acquire 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 preferred stock of a class to be created, with an aggregate stated value of $3,000,000, which will bear interest at 6% per annum and be 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 to be issued will be issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, or the Securities Act. The Emerging Growth Agreement is subject to satisfaction or waiver of certain closing conditions, including the closing of the sale of the Business under the Asset Purchase Agreement with Constellation and the delivery of certain other agreements and consents. The closing of the Emerging Growth Agreement is expected to occur contemporaneously with the closing of the Asset Purchase Agreement with Constellation.

 

On May 15, 2019, the Company entered into amendments of the 2018 Promissory Notes and the August 2018 Promissory Notes with 13 of the 2018 Lenders and the August 2018 Lenders, respectively, holding an aggregate principal balance of $2,450,000 to revise the terms of prepayment of the 2018 Promissory Notes and the August 2018 Promissory Notes such that upon prepayment in full, instead of paying two years of accrued but unpaid interest, the Company shall issue to each such 2018 Lender or August 2018 Lender one share of the Company’s common stock for each dollar of original principal under its 2018 Promissory Note or August 2018 Promissory Note.  In addition, on May 15, 2019 the Company entered into an exchange agreement with the remaining 2018 Lenders and August 2018 Lenders, whereby an aggregate of $500,000 of principal under the 2018 Promissory Notes and the August 2018 Promissory Notes will be cancelled and exchanged for 50,000 shares of preferred stock of a class to be created, with a stated value per share of $1,000 which will bear interest at 12% per annum, be convertible into the Company’s common stock at the election of the holder at a conversion price per share of common stock equal to the ten day volume weighted average price per share immediately prior to conversion, and be redeemable at the Company’s option following the third year after issuance, without voting rights or a liquidation preference.  The 2018 Lenders and August 2018 Lenders holding the remaining aggregate principal balance of $550,000 of 2018 Promissory Notes and the August 2018 Promissory Notes will cancel their existing notes and be issued new promissory notes substantially similar to the 2018 Promissory Notes and the August 2018 Promissory Notes but with the amended prepayment provision described above.  The securities to be issued will be issued pursuant to an exemption under Section 4(a)(2) of the Securities Act. The foregoing amendments and exchanges are expected to occur contemporaneously with the closing of the Asset Purchase Agreement with Constellation.

 

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 Business, 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 $1,015,861.69 will be payable to Beedie from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement.

 

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 Business, 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 $495,185.84 will be payable to SaaS Capital from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement.

 

 

 

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