CFN Enterprises Inc. - Quarter Report: 2020 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2020

 

☐	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

 

CFN ENTERPRISES 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.)

 

600 E. 8^TH STREET

WHITEFISH, MT 59937

 (Address of principal executive offices) (Zip code)

 

(833) 420-2636

 (Registrant’s Telephone Number, including Area Code)

 

 

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 ☒  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 ☒  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 ☒	Smaller reporting company ☒
	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 ☒

 

The number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, as of August 10, 2020, was 104,792,209.

 

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

 

 

CFN ENTERPRISES 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	17
Item 4. Controls and Procedures	24
PART II - OTHER INFORMATION:	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 5. Other Information	24
Item 6. Exhibits	24
SIGNATURES	25

 

		June 30,				December 31,
		2020				2019
		(Unaudited)
Assets
Current assets
Cash		$	315,668			$	107,727
Restricted cash			20,000				-
Accounts receivable, net			27,456				72,649
Prepaid expenses and other current assets			4,664				4,136
Total current assets			367,788				184,512
Other assets
Property and equipment			2,321				3,020
Total other assets			2,321				3,020
Total assets		$	370,109			$	187,532
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable and accrued expenses		$	832,562			$	261,539
Deferred revenues			47,112				15,734
Current portion of long-term debt			100,519				-
Current liabilities of discontinued operations			94,261				99,695
Total current liabilities			1,074,454				376,968
Long-term notes payable, net of current portion and discounts			799,584				484,177
Total liabilities			1,874,038				861,145
Commitments and contingencies
Stockholders' deficit
Series A Preferred stock, $0.001 par value, 500 shares authorized, 500 shares issued and outstanding as of June 30, 2020 and December 31, 2019			1				1
Series B Preferred stock, $0.001 par value, 3,000 shares authorized, 3,000 shares issued and outstanding as of June 30, 2020 and December 31, 2019			3				3
Common stock, $0.001 par value, 500,000,000 shares authorized, 99,929,709 and 99,679,709 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively			99,929				99,679
Additional paid-in capital			34,035,933				34,031,326
Accumulated deficit			(35,555,866	)			(34,721,149	)
Accumulated other comprehensive income			(83,929	)			(83,473	)
Total stockholders' deficit			(1,503,929	)			(673,613	)
Total liabilities and stockholders' deficit		$	370,109			$	187,532

 

 

		For the Three Months Ended								For the Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2020				2019				2020				2019
Net revenues		$	82,435			$	62,720			$	194,702			$	62,720
Cost of revenue			61,105				33,449				285,269				33,449
Gross profit (loss)			21,330				29,271				(90,567	)			29,271
Operating expenses:
Selling, general and administrative			404,689				605,828				599,670				894,829
Total operating expenses			404,689				605,828				599,670				894,829
Loss from operations			(383,359	)			(576,557	)			(690,237	)			(865,558	)
Other income (expense):
Interest expense			(13,032	)			-				(24,495	)			-
Interest income			5				56				15				112
Total other income (expense)			(13,027	)			56				(24,480	)			112
Net loss before provision for income taxes			(396,386	)			(576,501	)			(714,717	)			(865,446	)
Provision for income taxes			-				-				-				-
Net loss from continuing operations			(396,386	)			(576,501	)			(714,717	)			(865,446	)
Gain from discontinued operations, net of tax			-				15,194,741				-				14,470,049
Net income (loss)		$	(396,386	)		$	14,618,240			$	(714,717	)		$	13,604,603
Preferred stock interest			60,000				6,575				120,000				6,575
Net income (loss) available to common shareholders		$	(456,386	)		$	14,611,665			$	(834,717	)		$	13,598,028
Net loss from continuing operations per share, basic and diluted		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.01	)
Net loss from discontinued operations per share, basic and diluted		$	-			$	0.22			$	-			$	0.21
Weighted average number of common shares outstanding, basic and diluted			99,921,467				69,861,028				99,801,256				68,030,538

 

		For the Three Months Ended								For the Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2020				2019				2020				2019
Net income (loss)		$	(396,386	)		$	14,618,240			$	(714,717	)		$	13,604,603
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			-				551				(456	)			3,482
Total other comprehensive income (loss), net of tax			-				551				(456	)			3,482
Comprehensive income (loss)		$	(396,386	)		$	14,618,791			$	(715,173	)		$	13,608,085

 

		Series A Preferred Stock								Series B Preferred Stock								Common Stock								Additional Paid-in				Accumulated				Accumulated Other Comprehensive				Total Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Income				Deficit
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 acquisition 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
Balance, December 31, 2019			500			$	1				3,000			$	3				99,679,709			$	99,679			$	34,031,326			$	(34,721,149	)		$	(83,473	)		$	(673,613	)
Preferred stock interest			-				-				-				-				-				-				-				(60,000	)			-				(60,000	)
Net loss			-				-				-				-				-				-				-				(318,331	)			-				(318,331	)
Foreign currency translation			-				-				-				-				-				-				-				-				(456	)			(456	)
Balance, March 31, 2020			500			$	1				3,000			$	3				99,679,709			$	99,679			$	34,031,326			$	(35,099,480	)		$	(83,929	)		$	(1,052,400	)
Share-based compensation			-				-				-				-				250,000				250				4,607				-				-				4,857
Preferred stock interest			-				-				-				-				-				-				-				(60,000	)			-				(60,000	)
Net loss			-				-				-				-				-				-				-				(396,386	)			-				(396,386	)
Foreign currency translation			-				-				-				-				-				-				-				-				-				-
Balance, June 30, 2020			500			$	1				3,000			$	3				99,929,709			$	99,929			$	34,035,933			$	(35,555,866	)		$	(83,929	)		$	(1,503,929	)

 

		For the Six Months Ended
		June 30,				June 30,
		2020				2019
Cash flows from operating activities
Net loss		$	(714,717	)		$	13,604,603
Loss from discontinued operations			-				14,470,049
Net loss from continuing operations			(714,717	)			(865,446	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Restricted stock awards			-				60,000
Depreciation and amortization			699				197
Share-based compensation			4,857				-
Amortization of deferred financing cost			2,926				-
Provision for bad debt			20,000				-
Changes in operating assets and liabilities:
Accounts receivable			25,193				(51,560	)
Prepaid expenses and other current assets			(528	)			(32,500	)
Accounts payable and accrued expenses			496,023				152,633
Deferred revenue			31,378				21,340
Net cash used in operating activities of continuing operations			(134,169	)			(715,336	)
Net cash used in operating activities of discontinued operations			(4,129	)			(4,660,470	)
Net cash used in operating activities			(138,298	)			(5,375,806	)
Cash flows from investing activities
Purchase of property and equipment			-				(1,751	)
Payments for acquisition of subsidiary			-				(420,000	)
Net cash used in investing activities of continuing operations			-				(421,751	)
Net cash provided by investing activities of discontinued operations			-				20,892,667
Net cash provided by investing activities			-				20,470,916
Cash flows from financing activities
Proceeds from notes payable			413,000				-
Payment of preferred stock interest			(45,000	)			-
Net cash used in financing activities of continuing operations			368,000				-
Net cash used in financing activities of discontinued operations			-				(13,872,514	)
Net cash (used in) provided by financing activities			368,000				(13,872,514	)
Effect of exchange rate fluctuations on cash			(1,761	)			1,196
Net change in cash and restricted cash			227,941				1,223,792
Cash and restricted cash, beginning of the period			107,727				77,295
Cash and restricted cash, end of the period		$	335,668			$	1,301,087
Supplemental disclosure of cash flow information:
Interest paid		$	-			$	946,691
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
Accrued payables and short-term note directly paid off by credit facility		$	-			$	62,379
Accrual of preferred stock interest		$	75,000			$	6,575
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

 

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

CFN Enterprises Inc., formerly known as Accelerize Inc., or the Company, is a Delaware corporation incorporated on November 22, 2005 which 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. Effective October 22, 2019, the Company filed a certificate of amendment to its certificate of incorporation with the Secretary of State of the State of Delaware to change its corporate name to CFN Enterprises Inc.

 

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 (the “Seller” or “Emerging Growth”), 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 deficit of $706,666 and an accumulated deficit of $35,555,866 as of June 30, 2020.  The Company also had a net loss from continuing operations of $714,717 during the six months ended June 30, 2020.

 

Management’s plan to continue as a going concern includes raising capital in the form of debt or equity, growing its existing business acquired under the Emerging Growth Agreement, managing and reducing operating and overhead costs and continuing to pursue strategic transactions and opportunities including launching an e-commerce network focused on the sale of general wellness CBD products.. On May 6, 2020, the Company received $263,000 in the form of a loan from the PPP, as well as $150,000 in proceeds from a loan with the SBA on June 24, 2020 (see Note 5).  However, 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.  

 

COVID-19

 

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including each of the areas in which the Company operates. While to date the Company has not been required to stop operating, COVID-19 has had and is expected to continue to have an adverse effect on the financial condition of the Company and its customers. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, it is expected to have a significant adverse impact to the Company’s revenue and ability to obtain financing.

 

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, 2019 and 2018, respectively, which are included in the Company’s December 31, 2019 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on June 15, 2020.  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, 2020 are not necessarily indicative of results for the entire year ending December 31, 2020.

 

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 and intangible 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 7).

  

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 had restricted cash as a result of its corporate card program through its bank, which requires collateral placed in a money market account. During the six months ended June 30, 2020 and 2019, the Company had restricted cash balances of $20,000 and $50,000, respectively, included as a component of total cash and restricted cash as presented on the accompanying unaudited condensed consolidated statement of cash flows. The Company had restricted cash balances at June 30, 2020 and December 31, 2019 of $20,000 and $0, respectively.

 

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. The allowance for doubtful accounts as of June 30, 2020 and December 31, 2019 amounted to $183,750 and $163,750, respectively.

 

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's accounts receivable are due from customers located in the United States and Canada. The Company had three customers which accounted for 36.4%, 32.8% and 30.8%, respectively, of its net accounts receivable at June 30, 2020. The Company had five customers who each accounted for 32.3%, 13.8%, 13.8%, 13.8% and 10.3%, respectively, of its net accounts receivable at December 31, 2019. 

 

 

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.

 

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 relating to continuing operations amounted to $21,349 and $0 for the three months ended June 30, 2020 and 2019, respectively. Advertising expenses related to continuing operations amounted to $69,315 and $0 for the six months ended June 30, 2020 and 2019, respectively.

 

 

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.

 

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. 

 

Long-Lived Assets

 

In accordance with ASC 360-10, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. There was no impairment of long-lived assets identified during the six months ended June 30, 2020 or 2019.

 

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, 2020, the Company had 3,160,000 outstanding stock options and 7,543,944 outstanding warrants which were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. 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 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.

 

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 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.  

  

Recent Accounting Pronouncements

 

In December 2019, the FASB issued Accounting Standards Update, or ASU, 2019-12, Simplifying the Accounting for Income Taxes which amends ASC 740 Income Taxes, or ASC 740. This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning after December 15, 2021.  The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted.  The Company is currently evaluating the effect of this ASU on the Company’s financial statements and related disclosures.

 

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, 2020 and December 31, 2019.

 

 

Depreciation expense from continuing operations for the three months ended June 30, 2020 and 2019 amounted to $349 and $197, respectively. Depreciation expense from continuing operations for the six months ended June 30, 2020 and 2019 amounted to $699 and $197, respectively.

 

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 intangible assets and goodwill acquired in this transaction were fully impaired at the end of 2019.

 

The following are the unaudited pro forma results of operations for the three and six months ended June 30, 2019 as if the assets purchased in the Emerging Growth Agreement had been acquired on January 1, 2019.  The amounts presented on the accompanying unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2020 already reflect the impact of the acquisition for the full period. 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: NOTES PAYABLE

 

On September 10, 2019, the Company entered into a promissory note payable whereby the Company borrowed $500,000 bearing interest at 8% per annum. Interest on the note is payable quarterly on the first business day of December, March, June and September commencing December 1, 2019. Outstanding principal on the note is due in full on September 30, 2022.

 

In connection with the promissory note on September 10, 2019, the Company issued warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The warrants expire on September 10, 2024 and are fully vested upon issuance. The note was discounted by $17,624 allocated from the valuation of the warrants issued. The discount recorded on the note is being amortized as interest expense through the maturity date, which amounted to $1,463 and $2,926 for the three and six months ended June 30, 2020. As of June 30, 2020, the net book value of the promissory note amounted to $487,103 including the principal amount outstanding of $500,000 net of the remaining discount of $12,897.

 

The warrants issued with the promissory note were valued using the Black-Scholes pricing method using the following assumptions below. 

 

 

On May 6, 2020, the Company entered into a promissory note, or the Note, with Pacific Western Bank, evidencing an unsecured loan, or the Loan, in the amount of $263,000 made to the Company under the Paycheck Protection Program, or the PPP. The PPP is a program of the U.S. Small Business Administration, or SBA, established under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. Under the PPP, the proceeds of the Loan may be used to pay payroll and make certain covered interest payments, lease payments and utility payments, or the Qualifying Expenses. The Company intends to use the entire Loan amount for Qualifying Expenses under the PPP. Under the terms of the CARES Act, PPP loan recipients can be granted forgiveness for all or a portion of the loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of Qualifying Expenses and the Company maintaining its payroll levels over certain required thresholds under the PPP. The terms of any forgiveness also may be subject to further requirements in any regulations and guidelines the SBA may adopt. No assurance can be provided that the Company will obtain forgiveness of the Note in whole or in part.

 

The interest rate on the Loan is 1.0% per annum. The Note matures on May 6, 2022. On December 1, 2020 and on the first day of each month thereafter until May 1, 2022, the Company must make monthly payments of $14,727 under the Loan that is not forgiven in accordance with the terms of the PPP and related accrued interest thereon. The Note contains events of default and other conditions customary for a Note of this type. As of June 30, 2020, the current portion of the Loan due within the next 12 months amounted to $100,519.

 

On June 24, 2020, the Company entered into a Loan Authorization and Agreement with the SBA under which the Company borrowed $150,000, and issued to the SBA a note and security agreement for the amount borrowed. Outstanding borrowings accrue interest at a rate of 3.75% per annum, and installment payments, including principal and interest, of $731 are due monthly and begin 12 months from the date of the loan agreement. The balance of any remaining principal and interest is due 30 years from the date of the loan agreement. As collateral for the borrowing, the Company granted the SBA a security interest in substantially all assets of the Company.

 

 

Future scheduled maturities of long-term debt are as follows.

 

 

The aggregate current portion of long-term debt as of June 30, 2020 amounted to $100,519, which represents the contractual principal payments due in the next 12 months period.

 

NOTE 6: STOCKHOLDERS’ DEFICIT

  

Restricted Stock Issued as Compensation

 

During 2018, the Company issued an aggregate total of 240,000 restricted shares of its common stock to its non-employee directors as partial director compensation, at a value of $0.50 per share, vesting in 4 equal quarterly increments commencing on July 1, 2018 and ending June 30, 2019. During the three and six months ended June 30, 2019, the Company recorded expenses of $30,000 and $60,000, respectively. There was no remaining expense related to this restricted stock recorded during 2020.

 

Effective April 3, 2020, the Company granted 500,000 of restricted shares of its common stock to a consultant for services as an advisory board member, with 250,000 shares vesting immediately and the remainder vesting in four equal quarterly installments commencing on July 1, 2020. During the three and six months ended June 30, 2020, the Company recorded $4,632 of share-based compensation expense. The arrangement was terminated on July 17, 2020, and the unvested portion of the restricted stock grant of 187,500 shares were forfeited.

 

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. 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. 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 months ended June 30, 2020 and 2019, the Company incurred interest from the outstanding preferred stock of $60,000 and $6,575, respectively. For the six months ended June 30, 2020 and 2019, the Company incurred interest from the outstanding preferred stock of $120,000 and $6,575, respectively.

 

 

Warrants

 

The following summarizes the Company’s warrant activity for the six months ended June 30, 2020.

 

 

During the six months ended June 30, 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 six months ended June 30, 2019. Additionally, per the down round feature of 7,935,000 warrants issued in connection with a prior credit agreement, 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. In connection with the closing of the Asset Purchase Agreement for the sale of the CAKE Business on June 18, 2019, the above warrants were cancelled.

 

The Company recorded expenses of $0 and $37,691 during the three months ended June 30, 2020 and 2019, respectively, related to warrants granted for compensation. The Company recorded expenses of $0 and $126,810 during the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, all outstanding warrants were fully vested and there was no remaining unrecorded compensation expense.

 

Options

 

The following summarizes the Company’s stock option activity for the six months ended June 30, 2020.

 

 

The Company recorded expenses of $0 and $4,385 during the three months ended June 30, 2020 and 2019, respectively, related to stock options. The Company recorded expenses of $0 and $10,963 during the six months ended June 30, 2020 and 2019, respectively, related to stock options. As of June 30, 2020, all outstanding options were fully vested and there was no remaining unrecorded compensation expense.

 

NOTE 7: 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, and consist of the following as of June 30, 2020 and December 31, 2019.

 

 

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, 2020 have been reflected as discontinued operations in the consolidated statements of operations, and consist of the following:

 

 

 

NOTE 8: COMMITMENTS AND CONTINGENCIES

 

Leases

 

On June 20, 2019, the Company entered into a Lease Agreement with Emerging Growth 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.  Effective August 5, 2020, the Company has entered into a revised lease agreement with Emerging Growth replacing this existing lease (see Note 9). 

 

The Company leased office space in Santa Monica, California under a short-term lease at $1,000 per month. The lease was terminated in March 2020 and the Company has no further obligations under this lease.

 

Term Sheet

 

On April 3, 2020, the Company entered into a term sheet, or the Term Sheet, for a joint venture and marketing agreement with BlockCerts Blockchain Limited BVI for the development of proprietary websites, an ecommerce platform and market place dedicated to CBD products, services and lifestyle. On July 17, 2020, the Company terminated the Term Sheet.

 

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 9: SUBSEQUENT EVENTS

 

On August 5, 2020, the Company entered into a lease agreement with Emerging Growth for additional office space in Whitefish, Montana, replacing its previous lease (see Note 8). The term of the lease will commence on September 1, 2020 for a period of one year at a rate of $4,500 per month.  The lease contains an option for the Company to renew the lease for a period of one additional year at a monthly rent subject to a 3% increase. 

 

Effective August 6, 2020, the Company and Emerging Growth reached an agreement whereby the Company issued 4.8 million shares of the its common stock to Emerging Growth as payment for outstanding liabilities due to Emerging Growth totaling $209,931.  The outstanding liabilities due to Emerging Growth include $104,931 in outstanding accrued interest on the Series B Preferred Stock through August 31, 2020, as well as $105,000 of outstanding payables.