FISION Corp - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2018

Or

For the transition period from ________ to _________

Commission File No. 000-53929

(612) 927-3700

Registrant’s telephone number, including area code

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 period 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days x Yes     ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x Yes     ¨ No

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller reporting company:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). ¨ Yes     x No

Indicate the number of the registrant’s shares of common stock outstanding, as of the latest practicable date: 58,061,453 shares of common stock are outstanding as of November 14, 2018.

Table of Contents

Corporate Contact Information

Our executive, sales and marketing offices, as well as our software development spaces and equipment, are located at 100 N. Sixth Street, Suite 308 B, Minneapolis, MN 55403; our telephone number is (612) 927-3700; and we maintain a website at www.FisionOnline.com.

Significant Merger Development

On August 3, 2018 we entered into a definitive agreement to effect a merger between our company and Continuity Logic, LLC., a New Jersey limited liability company (the “Merger”). Under the terms of the Merger, Fision will acquire Continuity Logic which will then become a wholly owned subsidiary of Fision. The closing of the Merger will occur as soon as practicable after satisfaction or waiver of all conditions contained in the merger agreement. All of the conditions to close the merger have not yet been satisfied as of our filing of this quarterly report. Since the terms of the Merger provided that either Fision or Continuity Logic may terminate the Merger if not completed by September 30, 2018, either party now has the right to terminate the Merger.

Consideration to be paid by Fision to acquire Continuity Logic in the Merger will consist solely of our common stock issued to the holders of LLC membership units of Continuity Logic. These membership unit holders will receive a total of common shares of Fision equal to its pre-merger outstanding common stock on the closing date of the Merger, resulting in the pre-merger shareholders of Fision as a group and the holders of membership units of Continuity Logic as a group each owning 50% of the post-merger outstanding common stock of Fision.

Concurrent with the Merger becoming effective, management of Fision will consist of five directors, including Michael Brown and John Bode (both current Fision directors), and Peter Christensen, Tejas Katwala and Laurence Mascera (all three current Continuity Logic directors), with Mr. Christensen being Chairman of our Board of Directors. Further details regarding the Merger are contained in our Current Report on Form 8-K filed with the SEC on August 9, 2018, which includes the merger agreement as an exhibit.

Continuity Logic is headquartered in Tampa, Florida, and has developed and markets a comprehensive business continuity management (BCM) software platform. This cloud-based software platform automates many enterprise risk management and other key operational management tasks, and can be readily customized to suit any type or size of client or customer. During calendar year 2017, Continuity Logic realized revenues in excess of $2 million. As of the date of this filing, the merger transaction has not been completed.

FISION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

FISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

FISION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

FISION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018 AND 2017

(Unaudited)

NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

FISION Corporation, (formerly DE 6 Acquisition, Inc.), a Delaware corporation (the “Company”) was incorporated on February 24, 2010, and was inactive until December 2015 when it merged with Fision Holdings, Inc., an operating business based in Minneapolis, Minnesota. As a result of this reverse merger, Fision Holdings, Inc. became a wholly-owned subsidiary of the Company. Fision Holdings, Inc. was incorporated under the laws of the State of Minnesota in 2010, and has developed and successfully commercialized a proprietary cloud-based software platform which automates and integrates digital marketing assets and marketing communications to “bridge the gap” between marketing and sales of any enterprise. The Company generates its revenues primarily from software licensing contracts typically having terms of from one to three years and requiring monthly subscription fees based on the customer’s number of users and the locations where used. The Company’s business model provides it with a high percentage of recurring revenues.

The terms “Fision,” “we,” “us,” and “our,” refer to FISION Corporation, a Delaware corporation and its wholly-owned operating subsidiary Fision Holdings, Inc., a Minnesota corporation (including our Volerro software services).

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the SEC. Certain information and note disclosures which are included in annual financial statements have been omitted pursuant to these rules and regulations. We believe the disclosures made in these interim financial statements are adequate to make the information not misleading.

Although these interim financial statements for the three and nine month periods ended September 30, 2018 and 2017 are unaudited, in the opinion of our management, such statements include all adjustments, consisting of normal and recurring accruals, necessary to present fairly our financial position, results of operations and cash flows for the periods presented. The results for this 2018 interim period are not necessarily indicative of the results to be expected for the year ended December 31, 2018 or for any future period.

These interim financial statements should be read and considered in conjunction with our audited financial statements and the notes thereto for the year ended December 31, 2017, included in our annual report on Form 10-K filed with the SEC on April 2, 2018.

Principles of Consolidation

These condensed consolidated interim financial statements include the accounts of FISION Corporation, a Delaware corporation, and its wholly-owned Minnesota subsidiary Fision Holdings, Inc. All material intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

GAAP accounting principles require our management to make estimates and assumptions in the preparation of these interim financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates and assumptions.

The most significant areas requiring management judgment and which are susceptible to possible later change include our revenue recognition, cost of revenue, allowance for doubtful accounts, valuations of property and equipment and intangible assets, stock-based compensation, fair value of financial instruments, derivative securities, research and development, impairment of long-lived assets, and income taxes.

Cash and Cash Equivalents

We consider all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. At September 30, 2018 and December 31, 2017, we had no cash equivalents.

Concentration of Credit Risk and Customers

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. During the quarter ended September 30, 2018, we may have had cash deposits in our bank that exceeded FDIC insurance limits. We maintain our bank accounts at high quality institutions and in demand accounts to mitigate this risk. Regarding our customers, we perform ongoing credit evaluations of them, and generally we do not require collateral from them to do business with us.

For the nine months ended September 30, 2018, three customers each exceeded 10% of our revenues, including one for 18% of revenues, one for 16% of revenues, and one for 13% of revenues. We do not believe that we face any material customer concentration risks currently, although a significant reduction for any reason in the use of our software solutions by one or more of our major customers could harm our business materially.

Revenue recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 606, Revenue From Contracts With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016. On August 12, 2015, the FASB issued an Accounting Standards Update (“ASU”), Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This new revenue recognition standard (new guidance) has a five-step process: a) Determine whether a contract exists; b) Identify the performance obligations; c) Determine the transaction price; d) Allocate the transaction price; and e) Recognize revenue when (or as) performance obligations are satisfied. The Company has already implemented the five-step process in determining revenue recognition from contracts with customers, in accordance with ASC 606.

Revenue is recognized in the period the services are provided over the contract period, normally one (1) to three (3) years. We invoice one-time startup and implementation costs, such as consolidating and uploading digital assets of the customer, upon completion of those services as one performance obligation and recorded as revenue when completed. Monthly services, such as internet access to software as a service (SaaS), hosting and weekly backups are invoiced monthly as another performance obligation and recorded as revenue over time.

Company Recognizes Contract Liability for Its Performance Obligation

Upon receipt of a prepayment from a customer, the Company recognizes a contract liability in the amount of the prepayment for its performance obligation to transfer goods and services in the future. When the Company transfers those goods and services and, therefore, satisfies its performance obligation to the customer, the Company will then recognize the revenue.

Lease Accounting

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding and potential common shares under the treasury stock method. Diluted net loss per common share is not shown, since the assumed exercise of stock options and warrants using the treasury stock method are anti-dilutive. For the period ending September 30, 2018 and December 31, 2017, there were 9,914,069 and 9,988,069 respectively, potentially dilutive securities not included in the calculation of weighted-average common shares outstanding since they would be anti-dilutive.

Property and Equipment

Property and equipment are capitalized and stated at cost, and any additions, renewals or betterments are also capitalized. Expenditures for maintenance and repairs are charged to earnings as incurred. If property or equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from our accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method with estimated lives as follows:

Stock-Based Compensation

We record stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, which requires us to measure the cost for any stock-based employee compensation at fair value and recognize the expense over the related service period. We recognize the fair value of stock options, warrants and any other equity-based compensation issued to employees and non-employees as of the grant date. We use the Black-Scholes model to measure the fair value of options and warrants.

Reclassifications

Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact of ASU 2016-02 to our future consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, the AICPA (“American Institute of Certified Public Accountants”), and the Securities and Exchange Commission did not or are not believed by management to have a material impact on our present or future financial statements.

NOTE 2 -- GOING CONCERN

Our financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our future ability to achieve and maintain profitable operations, and to raise substantial additional capital as required until we attain profitable operations.

At September 30, 2018 we had a working capital deficiency of approximately $3.7 million and an accumulated deficit of approximately $21.1 million. These conditions raise substantial doubt about our ability to continue as a going concern. These unaudited interim financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

We are in the process of raising funds, increasing our marketing and sales activities to obtain materially increased revenues, and otherwise addressing our ability to continue as a going concern, and our management believes that our actions being taken to raise needed capital and implement our business plan for increased revenues will enable us to continue as a going concern.

NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 820 requires disclosure of and defines fair value of financial instruments, and also establishes a three-level valuation hierarchy for these disclosures. The carrying amounts reported in a balance sheet for receivables and current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between their origination and their expected realization and their current market rate of interest. The three levels of valuation hierarchy for fair value determinations are defined as follows:

Level 1 inputs include quoted prices for identical assets or liabilities in active markets.

Level 2 inputs include observable quoted prices for similar assets and liabilities in active markets, and quoted prices for identical assets or liabilities in inactive markets.

Level 3 inputs include one or more unobservable inputs which we have assessed and assumed that market participants would use in pricing the asset or liability.

The following table represents the Company’s assets and liabilities by level measured at fair value on a recurring basis at September 30, 2018:

The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following table provide a reconciliation of the beginning and ending balances of the liabilities:

All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy are recognized in other interest income and expense in these financial statements.

The significant unobservable inputs used in the fair value measurement of the liabilities described above are as follows;

Derivative Instruments

The Company accounts for derivative instruments in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

NOTE 4 -- NOTES PAYABLE

At September 30, 2018 we were indebted under various Notes Payable in the total amount of $3,642,175 including accrued interest. Following is a summary of our outstanding Notes Payable indebtedness as of September 30, 2018:

_____________

* Includes accrued interest

NOTE 5 -- CONVERTIBLE NOTES

The Company has entered into various convertible notes at face value less debt discounts relating to fees and certain expenses paid in connection with the convertible debt transactions. The conversion provisions are a derivative that qualifies for an exemption from bifurcation and liability accounting as provided for in ASC 815, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815”).

During the first nine months of 2018, the Company issued convertible notes in the total amount of $2,518,500 (excluding $119,500 of Original Issue Discounts and $65,900 legal fees and broker-dealer commissions) including $1,592,625 of short-term debt and $872,000 of long-term debt as follows:

Short-Term Convertible Notes 

In January 2018 we issued a $50,000 Convertible Note to an accredited investor bearing interest at 12% per annum, maturing on December 31, 2018, and convertible into our common stock at a conversion price of $.15 per share.

In February 2018 we issued a total of $250,000 of Convertible Notes to accredited investors convertible into our common stock at conversion prices varying from 50-55% of the average of the lowest trading prices for the 10 trading days prior to conversion, including (i) $150,000 of Convertible Notes bearing interest at 11% per annum and maturing on August 28, 2018, and (ii) a $100,000 Convertible Note bearing interest at 11% per annum and maturing on November 16, 2018. We paid a $3,000 legal fee for this note.

In April 2018 we issued a $75,000 Convertible Note to an accredited investor bearing interest at 12% per annum, maturing on April 11, 2019, and convertible into our common stock at a conversion price equal to 42.5% of the lowest trading price for the 10 trading days prior to conversion. We paid a $2,000 legal fee for this note.

In May 2018 we issued a total of $135,000 of Convertible Notes to accredited investors convertible into our common stock at conversion prices at 55% of the lowest trading price for the 10 trading days prior to conversion, including (i) $75,000 of Convertible Notes bearing interest at 12% per annum and maturing on May 9, 2019, and (ii) a $60,000 Convertible Note bearing interest at 10% per annum and maturing on May 21, 2019. We paid a $3,000 legal fee for this note.

In June 2018 we issued a total of $200,000 of Convertible Notes to accredited investors convertible into our common stock at conversion prices at $0.16 per share and after six months, 55% of the lowest trading price for the 10 trading days prior to conversion, including: (i) $100,000 of Convertible Notes bearing interest at 10% per annum and maturing on June 25, 2019, and (ii) a $100,000 Convertible Note bearing interest at 10% per annum and maturing on June 27, 2019. We paid $10,000 legal fees for these two notes.

In June 2018 we issued a total of $176,000 of Convertible Notes to accredited investors convertible into our common stock at conversion prices at $0.10 per share, along with 480,000 warrants to purchase common stock at $0.20 per share for three years.

In July 2018 we issued a total of $275,000 of Convertible Notes to three accredited investors convertible into our common stock at conversion prices at 50% of the lowest trading prices for the 10 trading days prior to conversion, bearing interest at 8% per annum and maturing on April 19, 2019. No legal or due diligence fees were paid on these notes.

In August 2018 we issued a total of $160,000 of Convertible Notes to two accredited investors convertible into our common stock at conversion prices at 50% of the lowest trading prices for the 10 trading days prior to conversion, bearing interest at 8% per annum and maturing on May 14, 2019. No legal or due diligence fees were paid on these notes.

In September 2018 we issued a total of $25,000 of Convertible Notes to an accredited investor convertible into our common stock at conversion prices at 50% of the lowest trading prices for the 10 trading days prior to conversion, bearing interest at 8% per annum and maturing on June 23, 2019. No legal or due diligence fees were paid on these notes.

In September 2018 we issued a total of $60,000 of Convertible Notes to an accredited investor convertible into our common stock at conversion prices at 55% of the lowest trading price for the 10 trading days prior to conversion. We paid a $2,000 legal fee for this note.

In September 2018 we issued a total of $200,000 of Convertible Notes to accredited investors convertible into our common stock at conversion prices at $0.16 per share and after six months, 55% of the lowest trading price for the 10 trading days prior to conversion, including: (i) $100,000 of Convertible Notes bearing interest at 10% per annum and maturing on September 12, 2019, and (ii) a $100,000 Convertible Note bearing interest at 10% per annum and maturing on September 21, 2019. We paid $10,000 legal and due diligence fees for these two notes.

Long-Term Convertible Notes

In January 2018 we issued a $63,000 Convertible Note to an accredited investor bearing interest at 12% per annum, maturing on December 31, 2018, and convertible into our common stock at a conversion price equal to 42% of the average of the lowest trading prices for the 10 trading days prior to conversion. We paid a $3,000 legal fee for this note.

During January-February 2018 we issued a total of $150,000 of Convertible Notes to accredited investors, bearing interest at 12% per annum, maturing two years after their respective purchase dates, and convertible into our common stock at a conversion price equal to the lower of $.20 per share or the Volume Weighted Average Price (VWAP) for the 10 trading days prior to conversion. We paid $18,000 commissions on these long term notes.

In March 2018 we issued a $63,000 Convertible Note to an accredited investor, bearing interest at 12% per annum, maturing on June 26, 2019, and convertible into our common stock at a conversion price equal to 42% of the average of the lowest trading prices for the 10 trading days prior to conversion. We paid a $3,000 legal fee for this note.

In April and May 2018 we issued a total of $53,000 in Long Term Convertible Notes as follows: Company issued a total of $53,000 in Convertible Notes sold to four accredited individual investors who purchased these notes from our 2018 private placement of $25,000 Notes bearing interest at 12% per annum and maturing two years from their purchase with the noteholders having the right to convert the notes into our common stock at a conversion price equal to the lower of $.20 per share or the Volume Weighted Average Price (VWAP) of our common shares for the ten days prior to conversion. Incident thereto, we also issued 53,000 warrants to purchase our common stock at $0.01 per share for three years to the purchaser of this Note and 53,000 warrants to purchase our common stock at $0.01 per share for three years to the broker-dealer placement agent of this Note.

In June 2018 we issued a $75,000 Convertible Note to an accredited investor, bearing interest at 0% per annum, maturing on June 5, 2021, and convertible into our common stock at a conversion price equal to 55% of the lowest trading prices for the 10 trading days prior to conversion.

In July 2018, we issued a $103,000 convertible promissory note bearing an interest rate of 12% per annum to an accredited investor, payable on October 12, 2019 plus accrued interest, and convertible into our common stock at a conversion price equal to 42% of the lowest trading price during the 10-day trading period prior to conversion. We paid a $3,000 legal and due diligence fee for this note.

In September 2018 we issued a total of $365,000 Convertible Notes to seven accredited investors, bearing interest at 6% per annum, maturing on September 20, 2020, and convertible into our common stock at a conversion price equal to $0.20 per share. We paid no legal fee for these notes.

In September 2018 we issued a $68,000 Convertible Note to an accredited investor bearing interest at 12% per annum, maturing on December 20, 2019, and convertible into our common stock at a conversion price equal to 42% of the lowest trading price for the 10 trading days prior to conversion. We paid a $3,000 legal and due diligence fee for this note.

We evaluated the terms of the convertible notes in accordance with ASC 815-40, Contracts in Entity’s Own Equity, and concluded that the Convertible Notes resulted in a derivative with a beneficial conversion feature since the convertible notes were convertible into shares of common stock at a discount to the market value of the common stock. The discount related to the beneficial conversion feature on the notes was based on the Black-Scholes Model, and is being amortized over the term of the debt. For the nine months ended September 30, 2018, we recognized interest expense of $826,534 related to the amortization of the debt discount.

The derivative liability relating to the beneficial conversion rights was $2,572,376 at September 30, 2018 and was computed using the following variables:

Short-Term Non-Convertible Note

From January through September 2018, we issued a $26,125 notes to our CEO, a related party, bearing interest at 6% per annum, due on demand.

NOTE 6 -- STOCKHOLDERS’ EQUITY

The Company is authorized to issue 500,000,000 shares of common stock and 20,000,000 shares of preferred stock, both having $.0001 par value per share. At September 30, 2018 there were 57,661,453 outstanding shares of common stock and no outstanding shares of preferred stock.

Common Shares Issued

In January--February 2018 we issued a total of 800,000 unregistered common shares valued at $134,000 to two consultants for investor relations and shareholder communications services.

During January- March 2018 we issued a total of 2,012,957 unregistered common shares to three holders of Convertible Notes who converted their Notes to $130,433 of common stock, which conversion prices were based on specific provisions contained in their Convertible Notes.

In February 2018 we granted 250,000 unvested shares of our common stock to John Bode in consideration for his agreement to serve for a year as an independent director on our Board of Directors, of which 62,500 shares vest quarterly on May 31, 2018, August 31, 2018, November 30, 2018 and February 28, 2019 provided he continues to serve as a director.

In April 2018 we issued 660,000 unregistered common shares to a holder of a Convertible Note who converted $47,248 of the Note into common stock with the conversion price based on specific provisions in the Note.

During April-May 2018 we issued a total of 779,960 unregistered common shares valued at $109,770 to three consultants for investor relations and shareholder communications services.

During April-June 2018 we issued a total of 3,861,843 unregistered common shares to three holders of Convertible Notes who converted their Notes to $256,086 of common stock, which conversion prices were based on specific provisions contained in these Notes.

During June 2018, we issued 500,000 shares of restricted common stock, valued at $80,000 to our former Chief Technology Officer.

During July-August, 2018, we issued 712,500 shares of restricted common stock valued at $102,500 to two consultants and a Noteholder for investor relations and shareholder communications services.

During July-September 2018, we issued a total of 2,765,491 unregistered shares of our common stock valued at $228,191 for debt conversions from four noteholders, which conversion prices were based on specific provisions contained in their convertible Notes

During September 2018, we issued 93,333 shares of unregistered common stock valued at $14,000 to an accredited investor for exercise of a warrant with a cashless exercise provision.

During September 2018 we issued 200,000 shares of unregistered common stock valued at $31,800 to Volerro Corporation as bonus shares pursuant to terms of the 2017 acquisition agreement.

 Stock Options and Warrants

No stock options were granted by us during the nine-month period ended September 30, 2018.

During the three-month period ended March 31, 2018, we granted warrants to purchase a total of 450,000 shares of our common stock, valued at $84,875 using Black-Scholes, as follows:

(i) warrants for 100,000 shares granted to a Noteholder incident to the purchase of a $100,000 Convertible Note, fully vested, and exercisable at $.30 per share anytime during a five-year term;

(ii) warrants for 150,000 shares granted to a Noteholder incident to purchase of a $150,000 Convertible Note, fully vested, and exercisable at $.01 per share anytime during a three-year term; and

(iii) warrants for 200,000 shares granted incident to the purchase of $100,000 of convertible debt in our private placement, fully vested, and exercisable at $.01 per share anytime during a three-year term, and which included warrants for 100,000 shares issued to the Noteholders and warrants for 100,000 shares issued to the placement agent.

During the three-month period ended June 30, 2018, we granted warrants to purchase a total of 686,000 shares of our common stock, valued at $82,407 using Black-Scholes, as follows:

(i) warrants for 100,000 shares granted to a Noteholder incident to the purchase of a $75,000 Convertible Note, fully vested, and exercisable at $.135 per share anytime during a two-year term;

(ii) warrants for 480,000 shares granted to a Noteholder incident to purchase of a $176,000 Convertible Note, fully vested, and exercisable at $.20 per share anytime during a three-year term; and

(iii) warrants for 106,000 shares granted incident to the purchase of $53,000 of convertible debt in our private placement, fully vested, and exercisable at $.01 per share anytime during a three-year term, including warrants for 53,000 shares issued to the Noteholders and warrants for 53,000 shares issued to the placement agent

During the three-month period ended September 30, 2018, we granted warrants to purchase a total of 540,000 shares of our common stock, valued at $33,656 using Black-Scholes , as follows:

(i) warrants for 100,000 shares granted to two Noteholders incident to their purchase of $100,000 Convertible Notes, fully vested, and exercisable at $.01 per share anytime during a two-year term;

(ii) warrants for 50,000 shares vested to two consultants incident to a Consulting Agreement, vesting at 25,000 warrants each, per year, vested during the period, with a strike price of $0.25 per share, exercisable over a two year term; and

(iii) warrants for 390,000 shares granted to Noteholders incident to their purchase of $390,000 Convertible Notes, fully vested, and exercisable at $.01 per share anytime during a two-year term.

NOTE 7 -- RELATED PARTY TRANSACTIONS

From January through September 2018, we issued $26,125 notes to our CEO, a related party, bearing interest at 6% per annum, due on demand, with no conversion provision.

Our Notes Payable as of September 30, 2018 include $89,521 owed to our CEO, Michael Brown, and $133,843 owed to our CFO, Garry Lowenthal, for unpaid past salary compensation, payable on demand with an interest rate of 6% per annum. Messrs. Brown and Lowenthal each have the option to convert their respective outstanding Notes any time over a four-year period into unregistered common shares at a conversion rate of $.30 per share.

In February 2018 we granted 250,000 common shares, vesting quarterly, to a new director for agreeing to serve on our Board of Directors for one year. The foregoing Note 6 further describes this transaction.

NOTE 8 -- SUBSEQUENT EVENTS

In October 2018, the company issued a $53,000 convertible promissory note bearing an interest rate of 12% per annum to an accredited investor, payable on January 10, 2020 plus accrued interest. The noteholder has the right to convert the note into common stock of the Company at a conversion price equal to 58% of the average of the lowest trading price during the 10-day period ending on the latest complete trading day prior to the conversion date.

In October 2018, the company issued a $108,000 convertible promissory note bearing an interest rate of 8% per annum to two accredited investors, payable on July 5, 2019 plus accrued interest. The noteholders have the right to convert the note into common stock of the Company at a conversion price equal to 50% of the lowest trading price during the 10-day period ending on the latest complete trading day prior to the conversion date.

In October 2018, the company issued an $82,500 promissory note bearing an interest rate of 8% per year to an accredited investor, payable on November 26, 2018 with no conversion rights.

In October 2018 we issued a total of $50,000 Convertible Note to an accredited investor, bearing interest at 6% per annum, maturing on September 20, 2020, and convertible into our common stock at a conversion price equal to $0.20 per share. We paid no legal fee for these notes. We also issued warrants for 50,000 shares granted to this Noteholder incident to their purchase of $50,000 Convertible Note, fully vested, and exercisable at $.01 per share anytime during a two-year term.

In October 2018 we issued a total of $50,000 Convertible Note to an accredited investor, bearing interest at 6% per annum, maturing on September 20, 2020, and convertible into our common stock at a conversion price equal to $0.15 per share. We paid no legal fee for these notes.

In October 2018, we issued a total of 400,000 unregistered shares of our common stock valued at $62,000 to two consultants and a noteholder for investor relations and shareholder communications services.

In November 2018, we issued 2,250,000 unregistered shares in a private placement with five accredited investors for proceeds of $450,000 ($.20 per share), which proceeds were used for working capital purposes and certain debt retirement, along with 225,000 unregistered advisory shares. The Company also granted these five accredited investors a vested three-year warrant to purchase 4,500,000 common shares at $.20 per share along with the rights to purchase an additional 2,250,000 shares for an additional $450,000 ($.20 per share), which proceeds will be used for working capital purposes and certain debt retirement.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

There are certain statements in this Quarterly Report on Form 10-Q that are not historical facts. These “forward-looking statements” can be identified by terminology such as “believe,” “may,” “intend,” “plan,” “will,” “could,” “expect,” estimate,” “strategy,” and similar expressions. These forward-looking statements are subject to material risks and uncertainties that are beyond our control. Although our management believes that the assumptions underlying these forward-looking statements are reasonable, they do not assure or guarantee our future performance. Our actual results could differ materially from those contemplated by these forward-looking statements. The assumptions used for these forward-looking statements require considerable exercise of judgment, since they represent estimates of future events and are thus subject to material uncertainties involving possible changes in economic, governmental, industry, marketplace, and other circumstances. To the extent any assumed events do not occur, the outcome may vary materially and worse from our anticipated or projected results. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by these forward-looking statements will in fact transpire. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements. Before determining to make an investment in any of our securities, you should read and consider the specific Risk Factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are an Internet platform technology company providing proprietary cloud-based software solutions to automate and improve the marketing and sales enablement functions and activities of our customers. Our focus is to develop and offer software technology tools through our Fision platform to enable our customers to maximize their marketing assets and initiatives. Our development, management, marketing and other operations are conducted from Minneapolis through our wholly owned Minnesota subsidiary, Fision Holdings, Inc.

We have developed and successfully commercialized a unique cloud-based software platform which automates and integrates all digital marketing assets and marketing communications of our customers, and thus “bridges the gap” between marketing and sales functions and personnel of an enterprise. We believe that our innovative Fision platform, proprietary technology, forward-looking strategy, and experienced management have now positioned us to become a leader in the rapidly growing software agile marketing/sales enablement segment of the broad software-as-a-service (SaaS) industry.

We are a global software development and licensing company offering our Fision platform marketing software solutions to promote and improve sales enablement functions of any entity. Our innovative cloud-based software platform is readily scalable to adapt to fast business growth of any customer, regardless of size. Except for future customary software enhancements and periodic upgrades, the primary development of our Fision software marketing platform has been completed.

Our proprietary Fision platform enables every member of the marketing and sales teams of our customers, by having easy and automated access to all their digital marketing and media assets, to leverage the full power of their distinctive brands and digital marketing assets in every interaction with their consumers or buyers.

Our Business

Our Fision software platform enables our customers to easily and quickly create and implement marketing campaigns to support their sales personnel while still emphasizing, protecting and enhancing their valuable brand assets. Use of our software solutions by our customers reduces substantially the time and cost incurred by them to produce and present marketing and sales campaigns and presentations for specific products or services.

We believe that the agile marketing software solutions of our Fision platform provide three major benefits to our customers, which are (i) accelerating their revenues, (ii) improving their marketing and brand effectiveness, and (iii) significantly reducing their marketing and sales costs.

We derive our revenues primarily through recurring revenue payments from customers having software licensing contracts with terms of one to three years, and requiring monthly fees based on the customer’s number of users and locations where used. A substantial majority of our revenues are recurring, due to the nature of our licensing contracts. As of September 30, 2018, we have written license contracts with fourteen (14) customers actively using our Fision platform for their marketing and sales operations. And currently we are engaged in negotiations with or procurement of several additional material customers.

Our typical customer implementation process includes integrating our cloud-based Fision platform with the marketing infrastructure of the customer, initiating and conducting customer training, and providing marketing development support while our Fision platform is being actively launched by the customer. We also continue to offer technical and maintenance support after implementation.

Our current and targeted customer base ranges across diverse industries of all sizes, including banks and other financial enterprises, insurance companies, hotels and other hospitality businesses, healthcare and fitness companies, retailers, software and other technology companies, product manufacturers, telecommunications companies, and numerous other companies selling familiar branded products or services.

Our market and potential customer base are global and virtually unlimited, since our Fision platform software solutions provide significant benefits to the marketing and sales departments and personnel of any commercial enterprise, regardless of size and widespread locations. Our customers typically “stick” with us and our Fision platform, and accordingly we receive substantial recurring revenues from them. Certain customers have maintained written contracts with us for years. We regard our high percentage of recurring revenues to be particularly significant to our marketing strategy which emphasizes long-term relationships with our customers under written contracts. We believe that our ability to realize such recurring revenues is a keystone feature of our business model.

We market and license our proprietary software platform both through direct sales obtained by our management and in-house sales personnel, and through utilizing experienced independent national technology sales agencies which we refer to as our “channel partners.” We have entered into three significant channel partnership arrangements, and we have realized material revenues from the sales efforts of our channel partners.

Our Fision Platform - Our Fision marketing software centrally collects, stores, prioritizes, organizes, streamlines, integrates and distributes the numerous digital marketing assets of our customers including videos, images, logos and other brand materials, presentations, social media content and any other digital marketing assets. Using Fision’s automated software technology, these digital assets become readily available for user access as determined by each of our customers. Our Fision platform is designed to provide any corporate marketing department with the ability to instantly and seamlessly update its sales force and other users with the latest digital marketing content and materials, while providing them with a simple, intuitive software interface to quickly find what they need on any digital device, anytime and anywhere. Large enterprise customers with extensive global sales networks have the ability to quickly and efficiently create and deliver customized sales campaigns or presentations to selectively targeted consumer audiences while conveying a positive, personalized and consistent brand experience. We believe that the use of our software marketing solutions by our customers results in a substantial increase in their return on investment (ROI) and their profitability.

Cloud-Based Platform - Storage and operation of our Fision software solutions platform along with the digital marketing and sales assets and related data of our customers are outsourced by us to reside and take place in the digital “cloud.” Providers of cloud services are typically referred to as “virtual servers” since they provide all digital data storage and related software application services to their clients. Our cloud service provider is Microsoft’s Azure Cloud, which leading provider offers readily scalable, high quality and secure cloud services capable of satisfying any increasing demand or changing circumstances in the needs of our customers or us.

We regard the hosting of our software applications, the ready digital interface with our customers, the storage of unlimited customer data with our premier cloud provider, and the overall flexibility of the cloud model as being crucial to our operating strategy. Our major savings in expensive computer equipment, high salaried technology personnel, and costly security measures through our use of Microsoft’s cloud is vital to our cost of doing business. Moreover, we believe that our experienced and leading cloud provider is more effective in delivering our Fision software solutions to our customers than we could perform in any event.

Strategic Marketing Change

During the years prior to 2017 while our Fision software platform was being designed and developed, our marketing and sales efforts were directed toward local or regional small-to-medium sized companies whose operational, management and commercial activities are conducted from one local or a couple regional facilities. Since our Fision platform and its cloud-based marketing software were designed and developed to be readily adaptable to and scalable for any size company, however, during 2016-2017 we revised our marketing strategy and activities to target and sell our software products primarily to large global enterprise corporations having many and widespread national and international branches and operations.

We believe that our enhanced marketing focus toward large enterprises has been effective, since during the past couple years we have closed and implemented material contracts with, and are receiving recurring revenues from, several large enterprise companies. Moreover, we currently are in the process of procuring material key contracts with certain additional large enterprise companies.

The increased length of our sales cycle necessary to sell our products to large enterprises, however, has been considerably longer than we earlier incurred while marketing our Fision platform to local and regional sized companies. This substantial increase in our sales cycle to negotiate and close contracts with new large enterprise customers resulted in a material decline in our revenues during the past couple years. We now believe this period of declining revenues due to our change in marketing strategy has ended, and that due to the large enterprise contracts we have recently closed and those we are now in the process of procuring, our revenues will appreciate substantially during 2019 and following years.

Recent Marketing Achievements

Our primary marketing strategy, which is focused toward large enterprise companies, has succeeded in various industries. We believe that significant recent clients acquired by us will result in substantial increases in our future recurring revenues from our cloud-based Fision software platform. Our recent large enterprise customers include:

Full Year 2018 Revenue Guidance

Based primarily on the recent integration and implementation of our Fision platform with the marketing/sales operations of several of our new large enterprise customers and their initial commercial use of Fision agile marketing software, we believe our revenues for the full year of 2018 will be at least as much as our full year 2017 revenues.

2017 Strategic Acquisition

In May 2017 we acquired substantially all the assets of Volerro Corporation (“Volerro”), a Minneapolis-based company, including its unique cloud-based proprietary software and development technology and its customer base. Volerro has developed and marketed “content collaboration” software services to enhance and improve the overall sales and marketing activities of its clients. We acquired these Volerro assets in consideration for 600,000 shares of our unregistered common stock issued to Volerro.

Volerro software enables the marketing, sales and brand personnel of its clients to collaborate in real time in the creation, refinement, and distribution of all types of their strategic content including print, packaging, high quality image and video content. For example, Volerro’s primary application allows all product, brand, marketing and creative teams of a business enterprise the ability to work on and create a document in real-time with integrated chat and voice conferencing.

Marketing of Volerro cloud-based software solutions has been primarily focused on large financial and retail enterprises. The two principal clients of Volerro are U.S. Bank, a leading national banking institution having numerous branches throughout the USA, and Shopko Stores, a $3.2 billion retailer selling many kinds of quality name-brand merchandise through its 363 operated retail stores in 24 states.

Volerro content collaboration software services and technology are particularly complementary with and readily adaptable to integrate into the SaaS marketing software services currently available on our Fision platform. Accordingly, we believe our acquisition of these Volerro software applications will both increase our revenues materially and also attract new customers to our Fision platform.

Our Employees and Properties

We currently have ten (10) full-time employees, including our Chief Executive Officer, Chief Financial Officer, Chief Revenue Officer, Controller/Office Manager, Customer Support Specialist, Client Services Manager, Marketing Manager, and three Programmer/Developers. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.

Our corporate headquarters and development and operational facilities are located at Butler Square, a large office building complex in downtown Minneapolis, Minnesota, where we occupy 5,229 square feet of office and development spaces. We lease these facilities under a two-year lease expiring in December 2019 for $8,323 monthly including rent, utilities and maintenance. We do not own any real estate.

Our computers, hardware servers, software assets and other technology development equipment, as well as considerable office and administrative computer and other equipment, furniture, and office and marketing supplies, are also located in our Minneapolis facility. We believe that our current facilities and equipment are adequate to satisfy our current operations and to support substantial future growth.

Revenue and Marketing Models

Revenue Model -- Our revenue model is primarily based on prescribed software licensing fees received by us on a regular monthly basis from customers which are under written licensing agreements with us. We consistently commit substantial expenses and sales personnel toward targeting, negotiating and procuring significant licensing agreements with new large enterprise customers. Because of the long-term nature and the substantial expense commitment required by each new customer to enter into a binding licensing agreement with us, the sales cycle involved in our revenue model is quite lengthy. Accordingly, the unpredictable and different timing involved from customer to customer to procure our licensing contracts has prevented us from receiving overall consistent revenues or accurately forecasting our future revenue stream, particularly since each new contract provides considerable one-time start-up revenues derived from initial set-up and integration fees.

We generate our revenues primarily from payments from customers having a license from one to three years to access and use our proprietary agile marketing software platform, which payments include monthly fees based on actual usage of the Fision platform, and a prescribed substantial one-time set-up and integration fee payable to us at the outset of the license. We also receive certain secondary fees from time to time for customized software development projects ordered from us, and for processing emails for certain customers.

A substantial majority of our revenues have been and are “sticky” and thus of a recurring nature. Most of our customers have remained with and consistently used our software platform once they have integrated it into their digital marketing model and experienced the benefits provided from our cloud-based Fision marketing solutions.

Marketing Model – We have marketed, sold and licensed our proprietary software products through our direct sales force including management and other direct sales personnel, and also through independent national sales agencies who sell (license) our branded software products as agents being paid commissions based on their actual sales. We regard and refer to these experienced sales agencies as our “channel partners.” To date we have entered into three channel partner arrangements with experienced and recognized technology sales agencies, and we have realized material revenues from their sales efforts.

We market and sell our products and services in the agile marketing software segment of the broad software-as-a-service (SaaS) industry, with virtually all our revenues derived from our proprietary cloud-based Fision marketing software platform.

Intellectual Property (IP) Protection

We commit substantial attention and resources toward obtaining patent and trademark rights and otherwise protecting our trade secrets, development know-how technology, trademarks, trade names, patent rights and other proprietary intellectual property (IP). Our IP protection includes written provisions relating to non-compete, non-recruit, confidentiality, and invention assignments as applicable with employees, vendors, sales agents, consultants and others.

In 2017 we were granted Patent No. US 9,639,551 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations.” In 2018 we were granted another Patent No. US 9,984,094 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations”. We also have a couple additional patent claims involving our software technology which are filed and pending with the USPTO, and we expect to obtain patent grants for them.

Inflation and Seasonality

We do not consider our operations and business to be materially affected by either inflation or seasonality.

Litigation

From time to time, we become subject to legal proceedings, claims and litigation arising in the ordinary course of business. We currently are not a party to any material legal proceedings, nor are we aware of any material pending or threatened litigation against or involving us.

Significant Accounting Policies

Stock-Based Compensation Valuations - Our estimated valuations for stock-based compensation grants are based primarily on the quoted prices for our common stock in the public trading market.

Accounts Receivable -- We maintain allowances for potential credit losses on accounts receivable. In connection with the preparation of our financial statements, management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, changes in customer payment patterns, and current economic trends in order to evaluate the adequacy of these allowances. Accounts determined to be uncollectible are charged to operations when that determination is made.

Research and Development -- We expense all our research and development operations and activities as they occur. Our development activities are conducted both internally from our Minneapolis headquarters facility by our development personnel, and externally from outsourced contracts with experienced independent software development companies and individuals. We own considerable servers and other computer equipment located at our Minneapolis facility, which are used by our development personnel to develop and enhance our marketing software platform.

Derivative Securities – We evaluate all of our agreements and financial instruments to determine if they contain features that qualify as embedded derivatives. For any derivative financial instruments accounted for as liabilities, they initially will be accounted for at fair value and if necessary revalued at each reporting date, with any changes in fair value reported in our statements of operations. For any stock-based derivative financial instruments or securities, we use an option pricing model to value them at inception and on any subsequent valuation dates. The classification of derivative instruments, including whether they should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in our balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Fair Value of Financial Instruments -- FASB ASC Topic 820 requires disclosure of and defines fair value of financial instruments, and also establishes a three-level valuation hierarchy for these disclosures. The carrying amounts reported in a balance sheet for receivables and current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between their origination and their expected realization and their current market rate of interest. The three levels of valuation hierarchy for fair value determinations are defined as follows:

Level 1 inputs include quoted prices for identical assets or liabilities in active markets.

Level 2 inputs include observable quoted prices for similar assets and liabilities in active markets, and quoted prices for identical assets or liabilities in inactive markets.

Level 3 inputs include one or more unobservable inputs which we have assessed and assumed that market participants would use in pricing the asset or liability.

Revenue Recognition. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016. On August 12, 2015, the FASB issued an Accounting Standards Update (“ASU”), Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This new revenue recognition standard (new guidance) has a five-step process: a) Determine whether a contract exists; b) Identify the performance obligations; c) Determine the transaction price; d) Allocate the transaction price; and e) Recognize revenue when (or as) performance obligations are satisfied. The Company has evaluated the impact of ASC 606 and does not currently believe that the application of ASC 606 will have a material impact on its consolidated financial statements and disclosures, as the Company has already implemented the five-step process in determining revenue recognition from contracts with customers.

Revenue is recognized in the period the services are provided over the contract period, normally one (1) to three (3) years. We invoice onetime startup and implementation costs, such as consolidating and uploading digital assets of the customer, upon completion of those services. Monthly services, such as internet access to software as a service (SaaS), hosting and weekly backups are invoiced monthly.

The Company recognizes a contract liability for its performance obligation upon receipt of a prepayment from a customer, which contract liability is for its performance obligation to transfer goods and services in the future. When the Company transfers those goods and services and, therefore, satisfies its performance obligation to the customer, the Company will then recognize the revenue.

Cost of Revenue -- Cost of revenue primarily represents third-party hosting, data storage and other services provided by Microsoft’s Azure Cloud service, as well as certain other expenses directly related to customer access and use of our marketing software platform. Cost of revenue relating to our cloud services is recognized monthly.

Income Taxes -- We account for income taxes in accordance with the asset and liability method of accounting for income taxes, whereby any deferred tax assets are recognized for deductible temporary differences and any deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of our management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Long-lived Assets -- We evaluate the recoverability of our identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds their fair value.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact of ASU 2016-02 to our future consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, the AICPA, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the our present or future financial statements.

Results of Operations for the Three Months Ended September 30, 2018 and 2017

Revenue -- Revenue was $134,818 for the quarter ended September 30, 2018 compared to revenue of $124,553 for the quarter ended September 30, 2017, which revenues for these two quarterly periods were basically the same.

Cost of Sales – Cost of sales for the quarter ended September 30, 2018 was $17,117 (13% of revenue) compared to cost of sales of $23,632 (19% of revenue) for the quarter ended September 30, 2017, which lower cost of sales percentage for the 2018 third quarter was due to more efficient use of our new cloud service provider.

Gross Margin – Gross margin for the quarter ended September 30, 2018 was $117,701 compared to $100,921 for the quarter ended September 30, 2017. Gross margin as a percentage of revenue was 87% for the third quarter of 2018 compared to 81% of revenue for the third quarter of 2017.

Operating Expenses – Operating expenses for the third quarter of 2018 were $692,443 compared to $1,505,893 for the third quarter of 2017. Sales and marketing expenses for the quarter ended September 30, 2018 were $158,193 compared to $513,121 for the quarter ended September 30, 2017, which decrease of $354,928 for the third quarter of 2018 was due primarily to substantial one-time marketing support expenses incurred in 2017 related to our enhanced marketing program directed toward large enterprise customers. Development and support expenses for the quarter ended September 30, 2018 were $124,550 compared to $340,620 for the quarter ended September 30, 2017, which decrease of $216,070 for the 2018 third quarter was due primarily to development of our Fision software platform being finished by early 2018. General and administrative expenses for the quarter ended September 30, 2018 were $409,700 compared to $652,152 for the quarter ended September 30, 2017, which decrease of $242,452 for the 2018 third quarter was due primarily to substantial issuances of stock-based compensation payments incurred in the 2017 third quarter for consulting and professional services to support our new marketing strategy.

Operating Loss -- Operating loss for the quarter ended September 30, 2018 was $574,742 compared to $1,404,972 for the quarter ended September 30, 2017, which substantial decrease was due to the reasons described in the foregoing paragraph. 

Other Income/( Expenses) – Other income/(expenses) for the quarter ended September 30, 2018 were a negative amount of $(333,541) compared to $(231,643) for the quarter ended September 30, 2017, which large decrease for the 2018 third quarter was due primarily to the accounting treatment of our derivative debt for these three quarters. Other income/expenses for the 2018 third quarter consisted of interest, debt discount amortization and other debt-related expenses of ($527,731), offset by a positive change of $739,449 in the fair value of derivatives related to our outstanding convertible debt, a $545,259 loss on settlement of debt and $664 of non-operating income. In comparison, other income/expenses for the 2017 third quarter consisted of interest, debt discount amortization and other debt-related expenses of $316,793 and settlement of debt expenses of $56,066, offset by a positive change of $141,216 in the fair value of derivatives related to our outstanding convertible debt.

Net Loss – Our net loss for the third quarter ended September 30, 2018 was $908,283 compared to $1,636,615 for the third quarter ended September 30, 2017, which large decrease for the 2018 third quarter was due to the foregoing reasons.

Results of Operations for the Nine Months Ended September 30, 2018 and 2017

Revenue -- Revenue was $391,037 for the nine months ended September 30, 2018 compared to $409,980 for the nine months ended September 30, 2017, which revenues for these two nine-month periods were basically the same.

Cost of Sales -- Cost of sales for the nine months ended September 30, 2018 was $63,104 (16% of revenue) compared to cost of sales of $53,012 (13% of revenue) for the nine months ended September 30, 2017, which small increase in the percentage of cost of sales in the 2018 nine-month period was due primarily to decreased revenues.

Gross Margin -- Gross margin for the nine months ended September 30, 2018 was $327,933 compared to $356,968 for the nine months ended September 30, 2017. Gross margin as a percentage of revenue was 84% for the 2018 nine-month period compared to 87% of revenue for the 2017 nine-month period.

Operating Expenses -- Operating expenses for the nine-month period ended September 30, 2018 were $2,276,116 compared to $3,087,715 for the nine-month period ended September 30, 2017, which the decrease of $811,599 for the 2018 nine-month period was due primarily to substantial one-time marketing support expenses incurred in 2017 related to our enhanced marketing program directed to large enterprises. Sales and marketing expenses for the nine-month period ended September 30, 2018 were $536,164 compared to $1,296,921 for the nine-month period ended September 30, 2017, which large decrease of $760,757 for the 2018 nine-month period was due primarily to the one-time marketing support expenses incurred in 2017. Development and support expenses for the nine-month period ended September 30, 2018 were $531,359 compared to $763,168 for the nine-month period ended September 30, 2017, which decrease of $231,809 for the 2018 nine-month period was due primarily to development of our software platform being essentially completed by early 2018. General and administrative expenses for the nine-month period ended September 30, 2018 were $1,208,593 compared to $1,027,626 for the nine-month period ended September 30, 2017, which increase of $180,967 for the 2018 nine-month period was due primarily to certain one-time stock-based consulting and advisory expenses incurred in early 2017.

Operating Loss -- Operating loss for the nine months ended September 30, 2018 was $1,948,183 compared to $2,730,747 for the nine months ended September 30, 2017, which decrease for the 2018 nine-month period was due to the reasons described in the foregoing paragraph.

Other Income/(Expenses) -- Other income/(expenses) for the nine-month period ended September 30, 2018 were $(671,944) compared to $(962,742) for the nine-month period ended September 30, 2017, which large decrease for the 2018 nine-month period was due primarily to the accounting treatment for amortization and changes in fair value of our derivative convertible debt. Other income/expenses for the 2018 nine-month period consisted of interest, debt discount amortization and other debt-related expenses of $1,507,818, offset by a positive change in the value of derivatives of $1,069,175, a loss on settlement of debt of $233,301 and $646 in non-operating income. In comparison, other income/expenses for the 2017 nine-month period consisted of interest, debt discount amortization and other debt-related expenses of $898,920 and settlement of debt expense of $121,854, offset by a positive change in the value of derivatives of $57,847 and $185 in non-operating income. 

Net Loss – Our net loss for the nine months ended September 30, 2018 was $2,620,127 compared to a net loss of $3,693,489 for the nine months ended September 30, 2017, which smaller loss in the 2018 nine-month period was due to the foregoing reasons.

Liquidity and Capital Resources

Our financial condition and future prospects critically depend on our access to financing in order to continue funding our operations. Much of our cost structure is based on costs related to personnel and facilities and our cloud-based service provider, and not subject to material variability. We will need to raise substantial additional capital through private or public offerings of equity or debt securities, or a combination thereof, and we may have to use a material portion of the capital raised to repay certain past due debt obligations. To the extent any capital raised is insufficient to satisfy operational working capital needs and meet any required debt payments, we will need to either extend, refinance or convert to equity our past or soon due indebtedness, which there is no assurance we can accomplish.

As of September 30, 2018, we had total current liabilities of $4,350,144 including Notes Payable of $475,965 and $2,572,376 of derivative liabilities. We also had long-term liabilities of $501,129 as of September 30, 2018, which consist of Convertible Notes Payable having varying maturity dates. A summary of our current outstanding Notes Payable indebtedness including accrued interest thereon as of September 30, 2018 is set forth in Note 4 of our foregoing interim financial statements included in this quarterly report.

Currently we have approximately $220,000 in cash, which we believe along with our projected receipt of accounts receivable and customer revenues will last until December 2018. Accordingly, we need to continue raising substantial capital to support our current and future operations. Our management estimates that based on our current monthly expenses net of expected revenue, we will require approximately $2,500,000 in additional financing to fund our operational working capital and satisfy certain debt payments for the next 12 months. Financing may be sought from a number of sources such as sales of equity or debt (including convertible debt) securities, and loans from affiliates, banks or other financial institutions. We may not be able to sell any such securities or otherwise obtain such financing when needed on terms acceptable to us, if at all. If further financing is not available as needed, our business would suffer substantially or could even fail.

Liquidity represents the ability of a company to generate sufficient cash to provide for its immediate needs for cash, which our continued losses have made it difficult for us to accomplish. As of September 30, 2018 we had cash and current receivables of $248,359 plus notes receivable of $295,664, and a working capital deficiency of $(3,717,568). Over the past couple years, we have continued to incur substantial losses without any material increase in revenues or liquid assets, which has caused a serious and harmful effect to our liquidity and a substantial strain on our ongoing business operations.

Along with our revenues, we have financed our operations to date through various means including loans from management and from financial and other lenders; stock-based compensation issued to employees, outsourced software developers, consultants and professionals; common stock issued to satisfy outstanding loans and accounts payable/accrued expenses; and sales of our common stock and convertible Notes.

Net Cash Used in Operating Activities – We used $1,808,220 of net cash in operating activities for the nine months ended September 30, 2018 compared to $605,586 of net cash used in operating activities for the nine months ended September 30, 2017. This increase of $1,202,634 of net cash used in operating activities in the 2018 nine-month period was due primarily to the accounting treatment of our substantially increased convertible debt for changes in derivative liability, debt discount amortization and other debt-related expenses.

 Net Cash Provided By (Used in) Investing Activities -- During the nine months ended September 30, 2018, we used net cash in investing activities of $5,000 for an equipment purchase compared to net cash provided by investing activities of $51,500 (acquired incident to our Volerro acquisition) during the nine months ended September 30, 2017.

Net Cash Provided By Financing Activities -- During the nine months ended September 30, 2018 we were provided net cash by financing activities of $2,021,824 including proceeds from notes payable of $2,422,325 offset by repayments on notes payable of $417,526 and a $9,100 payment on our line of credit. In comparison, during the nine months ended September 30, 2017 we were provided net cash by financing activities of $612,108 including sales of common stock of $300,000, issuance of notes payable of $424,300 offset by $164,367 for repayments on notes payable of and a $7,525 payment on our line of credit.

Convertible Note Financing

A substantial majority of our financing during the past couple years has consisted of Convertible Notes sold to various accredited investors. We raised a total of $1,020,000 from such convertible debt financing in 2017, and we raised a total of $2,518,500 from such convertible debt financing in 2018 as of the date of this quarterly report on Form 10-Q. Moreover, we anticipate raising additional substantial future financing from this source.

Going Concern

Our financial statements contained in this quarterly report have been prepared on a going concern basis, which contemplates and implies that we will continue to realize our assets and satisfy our liabilities and commitments in the normal course of business. For the nine months ended September 30, 2018 we continued to incur a substantial net loss of $2,620,127 and our accumulated deficit as of September 30, 2018 is $21,141,992. In addition, as of September 30, 2018, we have Notes Payable and related accrued interest of $3,642,175, a material amount of which are overdue or soon due. These adverse financial conditions raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary if we are unable to continue as a going concern.

Off-Balance Sheet Arrangements

We have no off-balance sheet items as of September 30, 2018, or as of the date of this report.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable

ITEM 4 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures -- We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating these disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired objectives. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Moreover, the design of any disclosure controls and procedures is based in large part upon certain assumptions regarding the likelihood of future events, and there can be no assurance than any such design will succeed in achieving its stated goals under all potential future conditions.

Our management will apply its best judgment in evaluating the cost-benefit relationship of any disclosure controls and procedures adopted by us. The design of our disclosure controls and procedures must reflect the fact that we will face personnel and financial restraints for some time, and accordingly the benefit of such controls must be considered relative to their costs.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2018 (the end of the period covered by this Quarterly Report on Form 10-Q). Based on their evaluation as of the end of the quarterly period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company and required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure, because of continuing material weaknesses in our internal control over financial reporting as reported in our Annual Report on Form 10-K for the period ended December 31, 2017.

Changes in Internal Control over Financial Reporting -- There have been no changes in our internal control over financial reporting during our last fiscal quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II -- OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

None

ITEM 1A RISK FACTORS

Not applicable.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES

Unregistered sales of our equity securities in the third quarter ended September 30, 2018 are as follows:

During July-August, 2018, we issued 712,500 unregistered common shares valued at $102,500 to two consultants and a Noteholder for investor relations and shareholder communications services.

During July-September 2018, we issued a total of 32,765,491 unregistered common shares valued at $228,191 for debt conversions and related interest from four Noteholders, which conversion prices were based on specific provisions contained in the Convertible Notes.

During September 2018 we issued 93,333 unregistered common shares valued at $14,000 to an accredited investor incident to a cashless exercise of an outstanding warrant.

During September 2018 we issued 200,000 unregistered common shares valued at $31,800 to Volerro Corporation as bonus shares earned pursuant to the terms of the 2017 acquisition agreement.

During the three months ended September 30, 2018 we granted warrants to purchase a total of 540,000 unregistered common shares, valued at $33,656 using Black-Scholes, as follows:

(i) warrants for 100,000 shares granted to two Noteholders incident to their purchase of $100,000 Convertible Notes, fully vested and exercisable at $.01 per share anytime during a two-year term;

(ii) warrants for 50,000 shares vested to two consultants incident to a Consulting Agreement, vesting at 25,000 warrants each, per year, vested during the period, with a strike price of $0.25 per share, exercisable over a two year term; and

(iii) warrants for 390,000 shares granted to accredited investor Noteholders incident to their purchase of $390,000 Convertible Notes, fully vested, and exercisable at $.01 per share anytime during a two-year term.

The issuances of all of our securities in the foregoing unregistered transactions were exempt from registration under the Securities Act of 1933, as amended, in reliance on the exemption under Section 4(a)(2) of the Securities Act.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

None.

ITEM 6 EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.