UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For quarterly period ended
or
For the Transition period from _______________ to ______________
Commission File Number:
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(Formerly CloudCommerce, Inc.) |
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(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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(Address of principal executive offices) (Zip Code) |
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Securities registered pursuant to Section 12(b) of the Act: None
Tile of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
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.
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).
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
Large accelerated filer | ☐ |
| Accelerated filer | ☐ |
Non-accelerated filer | ☒ |
| Smaller reporting company | |
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| 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
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
As of August 16, 2021, the number of shares outstanding of the registrant’s common stock, par value $0.001, was
2
Table of Contents
PART I – FINANCIAL INFORMATION |
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Item 1. |
| Consolidated Financial Statements |
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| Condensed Consolidated Balance Sheets as of December 31, 2020 and June 30, 2021 (unaudited) |
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| Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and June 30, 2020 (unaudited) |
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| Condensed Consolidated Statement of Shareholders’ Equity (Deficit) for the six months ended June 30, 2021 and June 30, 2020 (unaudited) |
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| Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and June 30, 2020 (unaudited) |
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| Notes to Condensed Consolidated Financial Statements (unaudited) |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
| Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. |
| Controls and Procedures |
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PART II - OTHER INFORMATION |
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Item 1. |
| Legal Proceedings |
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Item 1A. |
| Risk Factors |
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Item 2. |
| Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. |
| Defaults Upon Senior Securities |
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Item 4. |
| Mine Safety Disclosures |
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Item 5. |
| Other Information |
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Item 6. |
| Exhibits |
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Signatures |
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3
PART I. - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
4
AIADVERTISING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| December 31, 2020 | ||||
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ASSETS |
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CURRENT ASSETS |
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Cash |
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Accounts receivable, net |
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Costs in excess of billings |
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Prepaid and other current Assets |
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TOTAL CURRENT ASSETS |
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PROPERTY & EQUIPMENT, net |
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RIGHT-OF-USE ASSETS |
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OTHER ASSETS |
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Lease deposit |
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Goodwill and other intangible assets, net |
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TOTAL OTHER ASSETS |
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TOTAL ASSETS |
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |
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CURRENT LIABILITIES |
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Accounts payable |
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Accounts payable, related party |
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Accrued expenses |
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Operating lease liability |
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Lines of credit |
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Deferred revenue and customer deposit |
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Convertible notes and interest payable, current, net |
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Derivative Liability |
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Finance lease obligation, current |
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Notes payable |
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Notes payable, related parties |
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TOTAL CURRENT LIABILITIES |
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LONG TERM LIABILITIES |
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Accrued expenses, long term |
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TOTAL LONG TERM LIABILITIES |
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TOTAL LIABILITIES |
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COMMITMENTS AND CONTINGENCIES (see Note 14) |
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SHAREHOLDERS' EQUITY (DEFICIT) |
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Preferred stock, $ |
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Series A Preferred stock; |
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Series B Preferred stock; |
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Series C Preferred Stock; |
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Series D Preferred Stock; |
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Series E Preferred stock; |
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Series F Preferred stock; |
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Series G Preferred stock; |
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Series H Preferred stock; |
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Common stock, $ |
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Additional paid in capital |
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Accumulated deficit |
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TOTAL SHAREHOLDERS' EQUITY (DEFICIT) |
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
AIADVERTISING, INC. AND SUBSIDIARIES | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(UNAUDITED) | ||||||||||||||||
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| Three Months Ended |
| Six Months Ended | ||||||||||||
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REVENUE |
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REVENUE - related party |
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TOTAL REVENUE |
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COST OF REVENUE |
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Gross Profit |
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OPERATING EXPENSES |
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Salaries and outside services |
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Selling, general and administrative expenses |
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Depreciation and amortization |
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TOTAL OPERATING (INCOME) EXPENSES |
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INCOME (LOSS) FROM OPERATIONS BEFORE OTHER INCOME AND TAXES |
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OTHER INCOME (EXPENSE) |
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Other expense |
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Gain (loss) on extinguishment of debt |
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Gain (loss) forgiveness of PPP Loan |
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Gain (loss) on Sales of Discontinued Operations |
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Gain (loss) on changes in derivative liability |
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Interest expense |
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TOTAL OTHER INCOME (EXPENSE) |
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INCOME/(LOSS) FROM OPERATIONS BEFORE PROVISION FOR TAXES |
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE PROVISION FOR TAXES |
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PROVISION (BENEFIT) FOR INCOME TAXES |
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NET INCOME/(LOSS) |
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PREFERRED DIVIDENDS |
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NET INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS |
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NET LOSS PER SHARE |
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BASIC |
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DILUTED |
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WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING |
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BASIC |
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DILUTED |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
AIADVERTISING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
|
| Six months ended June 30, 2020 | ||||||||||||
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| Preferred Stock |
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| Shares |
| Amount |
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| Additional Paid-in Capital |
| Accumulated Deficit |
| Total | |
Balance, December 31, 2019 |
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Conversion of convertible note |
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Exchange debt-for-equity |
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Series A preferred stock dividend declared ($ |
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Series D preferred stock dividend declared ($ |
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Series F preferred stock dividend declared ($ |
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Stock based compensation |
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Derivative settlement |
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Other - RegA Investor Funds |
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Net Income/(Loss) |
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Balance, March 31, 2020 (unaudited) |
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Conversion of convertible note |
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Series A preferred stock dividend declared ($ |
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Series D preferred stock dividend declared ($ |
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Series F preferred stock dividend declared ($ |
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Stock based compensation |
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Derivative settlement |
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Other - RegA Investor Funds |
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Net Income/(Loss) |
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Balance, June 30, 2020 (unaudited) |
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Six months ended June 30, 2021 | ||||||||||||||
Balance, December 31, 2020 |
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Conversion of convertible note |
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Stock issuances to lenders |
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Series A preferred stock dividend declared ($ |
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Series F preferred stock dividend declared ($ |
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Stock based compensation |
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Stock option exercises |
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Warrant issuance |
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Warrant exercise |
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Other - RegA Investor Funds |
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| ( |
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| ( | ||||
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Issuance of Series H Preferred stock |
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Net Income/(Loss) |
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| ( |
| ( | |||||
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Balance, March 31, 2021 |
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| $ |
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| $ |
| $ |
| $ ( |
| $ | ||
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Series A preferred stock dividend declared ($ |
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| ( | |||||
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Series F preferred stock dividend declared ($ |
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Stock based compensation |
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Stock option exercises |
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Preferred stock conversion |
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| ( |
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| ( |
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Warrant exercise |
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Redemption of Series F Preferred Stock |
| ( |
| ( |
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| ( |
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| ( | |||
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Redempion of Series H Preferred stock |
| ( |
| ( |
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Revaluation of Series H Preferred Stock |
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| ( |
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| ( | ||
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Net Income/(Loss) |
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Balance, June 30, 2021 |
|
| $ |
|
| $ |
| $ |
| $ ( |
| $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
AIADVERTISING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| Six Months Ended | ||||||
|
| June 30, 2021 |
| June 30, 2020 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net gain (loss) from continued operations |
| $ | ( | ) |
| $ | ( | ) |
Adjustment to reconcile net loss to net cash (used in) operating activities |
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Bad debt expense |
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| ( | ) |
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| |
Depreciation and amortization |
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Finance charge, related party |
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Loss on impairment of goodwill & intangibles |
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Amortization of Debt Discount |
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Gain on settlemet of debt |
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| ( | ) |
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| |
Gain on forgiveness of PPP loan |
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Gain on Sale of Discontinued Operations |
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| ( | ) |
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Non-cash compensation expense |
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Non-cash service expense |
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Issuance of Series H Pref to employee |
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(Gain)/loss on derivative liability valuation |
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| ( | ) | |
Derivative expense |
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Change in assets and liabilities: |
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(Increase) Decrease in: |
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Accounts receivable |
|
| ( | ) |
|
| ( | ) |
Prepaid expenses and other assets |
|
| ( | ) |
|
| ( | ) |
Costs in excess of billings |
|
| ( | ) |
|
| ( | ) |
Accounts payable |
|
| ( | ) |
|
| ( | ) |
Accrued expenses |
|
| ( | ) |
|
| ( | ) |
Customer Deposits |
|
| ( | ) |
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| ( | ) |
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NET CASH (USED IN) OPERATING ACTIVITIES - continued operations |
|
| ( | ) |
|
| ( | ) |
NET CASH (USED IN) OPERATING ACTIVITIES - discontinued operations |
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NET CASH USED IN OPERATING ACTIVITIES |
|
| ( | ) |
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| ( | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Cash paid for purchase of fixed assets |
|
| ( | ) |
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| |
Proceeds from the sale of discontinued operations |
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NET CASH PROVIDED BY INVESTING ACTIVITIES |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments on capital lease obligation |
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|
| ( | ) | |
Payment of dividend |
|
| ( | ) |
|
| ( | ) |
Proceeds of issuance of common stock |
|
|
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|
|
| ||
Proceeds (payments) on line of credit, net |
|
| ( | ) |
|
| ( | ) |
Proceeds (payments) of preferred stock |
|
| ( | ) |
|
|
| |
Principal payments on debt, third party |
|
| ( | ) |
|
| ( | ) |
Proceeds from PPP loan |
|
|
|
|
|
| ||
Principal payments on term loan |
|
|
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|
| ( | ) | |
Proceeds from issuance of term loan |
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| ||
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NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
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| ||
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NET INCREASE / (DECREASE) IN CASH |
|
|
|
|
| ( | ) | |
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CASH, BEGINNING OF PERIOD |
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|
|
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| ||
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CASH, END OF PERIOD |
| $ |
|
| $ |
| ||
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|
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|
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
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Interest paid |
| $ |
|
| $ |
| ||
Taxes paid |
| $ |
|
| $ |
| ||
|
|
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|
|
|
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|
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Non-cash financing activities: |
|
|
|
|
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|
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Conversion of notes payable to common stock |
| $ |
|
| $ |
| ||
Exchange of Debt-to-Equity (Preferred) |
| $ |
|
| $ |
| ||
Derivative settlement |
| $ |
|
| $ |
| ||
Right of use assets |
| $ |
|
| $ |
| ||
Derivative discount |
| $ |
|
| $ |
| ||
Conversion of preferred to common stock |
| $ |
|
| $ |
| ||
Exercise of stock options |
| $ |
|
| $ |
| ||
Exercise of warrants |
| $ |
|
| $ |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
AiADVERSTISING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 2021
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of AiAdvertising, Inc. (“AiAdvertising,” “we,” “us,” “our,” or the “Company”) and its wholly-owned subsidiaries, have been prepared in accordance with the instructions to interim financial reporting as prescribed by the Securities and Exchange Commission (the “SEC”). The results for the interim periods are not necessarily indicative of results for the entire year. These interim financial statements do not include all disclosures required by generally accepted accounting principles (“GAAP”) and should be read in conjunction with our consolidated financial statements and footnotes in the Company's annual report on Form 10-K filed with the SEC on March 15, 2021. In the opinion of management, the unaudited Consolidated Financial Statements contained in this report include all known accruals and adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods reported herein. Any such adjustments are of a normal recurring nature.
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries which the Company does not expect to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Going Concern
The accompanying Consolidated Financial Statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying Consolidated Financial Statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, raising additional capital. Historically, the Company has obtained funds from investors since its inception through sales of our securities. The Company will also seek to generate additional working capital from increasing sales from its data sciences, creative, website development and digital advertising service offerings, and continue to pursue its business plan and purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of AiAdvertising is presented to assist in understanding the Company’s Consolidated Financial Statements. The Consolidated Financial Statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the Consolidated Financial Statements.
The Consolidated Financial Statements include the Company and its wholly owned subsidiaries CLWD Operations, Inc a Delaware corporation (“CLWD Operations”), Parscale Digital, Inc., a Nevada corporation (“Parscale Digital”), WebTegrity, Inc., a Nevada corporation (“WebTegrity”), Data Propria, Inc., a Nevada corporation (“Data Propria”), and Giles Design Bureau, Inc., a Nevada corporation (“Giles Design Bureau”).All significant inter-company transactions are eliminated in consolidation of the financial statements.
Reclassifications
During the quarter ended June 30, 2021 we recognized cost of revenue in the statement of operation. Certain prior periods have been reclassified to reflect current period presentation.
9
Accounts Receivable
The Company extends credit to its customers, who are located nationwide. Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’ financial condition. Management reviews accounts receivable on a regular basis, based on contractual terms and how recently payments have been received to determine if any such amounts will potentially be uncollected. The Company includes any balances that are determined to be uncollectible in its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The balance of the allowance account at June 30, 2021 and December 31, 2020 are $
On
On
On
10
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are primarily used in our revenue recognition, the allowance for doubtful account receivable, fair value assumptions in accounting for business combinations and analyzing goodwill, intangible assets and long-lived asset impairments and adjustments, the deferred tax valuation allowance, and the fair value of stock options and warrants.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of six months or less to be cash equivalents. As of June 30, 2021, the Company held cash and cash equivalents in the amount of $
Property and Equipment
Property and equipment are stated at cost, and are depreciated or amortized using the straight-line method over the following estimated useful lives:
| ||
Furniture, fixtures & equipment |
| |
Computer equipment |
| |
Commerce server |
| |
Computer software |
| |
Leasehold improvements |
|
Depreciation expenses were $
Revenue Recognition
The Company recognizes income when the service is provided or when product is delivered. We present revenue, net of customer incentives. Most of our income is generated from professional services and site development fees. We provide online marketing services that we purchase from third parties. The gross revenue presented in our statement of operations includes digital advertising revenue. We also offer professional services such as development services. The fees for development services with multiple deliverables constitute a separate unit of accounting in accordance with ASC 606, which are recognized as the work is performed. Upfront fees for development services or other customer services are deferred until certain implementation or contractual milestones have been achieved. If we have performed work for our clients, but have not invoiced clients for that work, then we record the value of the work on the balance sheet as costs in excess of billings. The terms of services contracts generally are for periods of less than one year. The deferred revenue and customer deposits as of June 30, 2021, and December 31, 2020 were $
We always strive to satisfy our customers by providing superior quality and service. Since we typically bill based on a Time and Materials basis, there are no returns for work delivered. When discrepancies or disagreements arise, we do our best to reconcile them by assessing the situation on a case-by-case basis and determining if any discounts can be given. Historically, we have not granted any significant discounts.
11
Included in revenue are costs that are reimbursed by our clients, including third party services, such as photographers and stylists, furniture, supplies, and the largest component, digital advertising. We have determined, based on our review of ASC 606-10-55-39, that the amounts classified as reimbursable costs should be recorded as gross revenue, due to the following factors:
| ● | The Company is primarily in control of the inputs of the project and responsible for the completion of the client contract; |
| ● | We have discretion in establishing price; and |
| ● | We have discretion in supplier selection. |
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were
Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $
Fair value of financial instruments
The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which approximates their fair value, due to the relatively short maturity of these instruments. As of June 30, 2021 and December 31, 2020, the Company’s notes payable have stated borrowing rates that are consistent with those currently available to the Company and, accordingly, the Company believes the carrying value of these debt instruments approximates their fair value.
Fair value is defined as the price to sell an asset or transfer a liability, between market participants at the measurement date. Fair value measurements assume that the asset or liability is (1) exchanged in an orderly manner, (2) the exchange is in the principal market for that asset or liability, and (3) the market participants are independent, knowledgeable, able and willing to transact an exchange. Fair value accounting and reporting establishes a framework for measuring fair value by creating a hierarchy for observable independent market inputs and unobservable market assumptions and expands disclosures about fair value measurements. Considerable judgment is required to interpret the market data used to develop fair value estimates. As such, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current exchange. The use of different market assumptions and/or estimation methods could have a material effect on the estimated fair value.
ASC Topic 820 established a nine-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
· | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
· | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
· | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
12
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the estimated future undiscounted net cash flows from the asset are less than its carrying amount. If impairment is indicated, the long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold, including quoted market prices, if available, or the present value of the estimated future cash flows based on reasonable and supportable assumptions. During the year ended December 31, 2020, management reviewed the intangible assets and goodwill of WebTegrity, and determined that there were indications of impairment.
Indefinite Lived Intangibles and Goodwill Assets
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer lists, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, at December 31, 2020 the Company performed a qualitative assessment of indefinite lived intangibles and goodwill related to WebTegrity and determined there was impairment of indefinite lived intangibles and goodwill. Therefore, an impairment of indefinite lived intangibles and goodwill was recognized.
The impairment test conducted by the Company includes a two-step approach to determine whether it is more likely than not that impairment exists. If it is determined, after step one, that it is not more likely than not, that impairment exists, then no further analysis is conducted. The steps are as follows:
| 1. | Based on the totality of qualitative factors, determine whether the carrying amount of the intangible asset may not be recoverable. Qualitative factors and key assumptions reviewed include the following: |
| ● | Increases in costs, such as labor, materials or other costs that could negatively affect future cash flows. The Company assumed that costs associated with labor, materials, and other costs should be consistent with fair market levels. If the costs were materially higher than fair market levels, then such costs may adversely affect the future cash flows of the Company or reporting units. |
13
| ● | Financial performance, such as negative or declining cash flows, or reductions in revenue may adversely affect recoverability of the recorded value of the intangible assets. During our analysis, the Company assumes that revenues should remain relatively consistent or show gradual growth month-to-month and quarter-to-quarter. If we report revenue declines, instead of increases or flat levels, then such condition may adversely affect the future cash flows of the Company or reporting units. |
| ● | Legal, regulatory, contractual, political, business or other factors that could affect future cash flows. During our analysis, the Company assumes that the legal, regulatory, political or business conditions should remain consistent, without placing material pressure on the Company or any of its reporting units. If such conditions were to become materially different than what has been experienced historically, then such conditions may adversely affect the future cash flows of the Company or reporting units. |
| ● | Entity-specific events such as losses of management, key personnel, or customers, may adversely affect future cash flows. During our analysis, the Company assumes that members of management, key personnel, and customers will remain consistent period-over-period. If not effectively replaced, the loss of members of management and key employees could adversely affect operations, culture, morale and overall success of the company. In addition, if material revenue from key customers is lost and not replaced, then future cash flows will be adversely affected. |
| ● | Industry or market considerations, such as competition, changes in the market, changes in customer dependence on our service offerings, or obsolescence could adversely affect the Company or its reporting units. We understand that the markets we serve are constantly changing, requiring us to change with them. During our analysis, we assume that we will address new opportunities in service offering and industries served. If we do not make such changes, then we may experience declines in revenue and cash flow, making it difficult to re-capture market share. |
| ● | Macroeconomic conditions such as deterioration in general economic conditions or limitations on accessing capital could adversely affect the Company. During our analysis, we acknowledge that macroeconomic factors, such as the economy, may affect our business plan because our customers may reduce budgets for our services. If there are material worsening in economic conditions, which lead to reductions in revenue then such conditions may adversely affect the Company. |
| 2. | Compare the carrying amount of the intangible asset to the fair value. |
| 3. | If the carrying amount is greater than the fair value, then the carrying amount is reduced to reflect fair value. |
In accordance with its policies, the Company conducted an impairment assessment during the year ended December 31, 2020 related to the WebTegrity acquisition and determined that impairment of indefinite lived intangibles and goodwill was necessary. Accordingly, all intangible assets and goodwill related to the WebTegrity acquisition have been written off, amounting to $
14
Goodwill and Intangible assets are comprised of the following, presented as net of amortization:
|
| June 30, 2021 | ||||||||||||||
|
| Parscale Digital |
| WebTegrity |
| AiAdvertising |
| Total | ||||||||
Customer list |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-compete agreement |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Domain name and trademark |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Brand name |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2020 | ||||||||||||||
|
| Parscale Digital |
| WebTegrity |
| AiAdvertising |
| Total | ||||||||
Customer list |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-compete agreement |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Domain name and trademark |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Brand name |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
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|
|
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|
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|
| ||||
|
|
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|
|
|
|
|
|
Business Combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair value, at the acquisition date, of assets received, liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the acquiree. Any costs directly attributable to the business combination are expensed in the period incurred. The acquiree’s identifiable assets and liabilities are recognized at their fair values at the acquisition date.
Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized.
Concentrations of Business and Credit Risk
The Company operates in a single industry segment. The Company markets its services to companies and individuals in many industries and geographic locations. The Company’s operations are subject to rapid technological advancement and intense competition. Accounts receivable represent financial instruments with potential credit risk. The Company typically offers its customers credit terms. The Company makes periodic evaluations of the credit worthiness of its enterprise customers and other than obtaining deposits pursuant to its policies, it generally does not require collateral. In the event of nonpayment, the Company has the ability to terminate services. As of June 30, 2021, the Company held cash and cash equivalents in the amount of $
Stock-Based Compensation
The Company addressed the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The transactions are accounted for using a fair-value-based method and recognized as expenses in our statement of operations.
15
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the consolidated statement of operations during the six months ended June 30, 2021, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of June 30, 2021 based on the grant date fair value estimated. Stock-based compensation expense recognized in the consolidated statement of operations for the six months ended June 30, 2021 is based on awards ultimately expected to vest or has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation expense recognized in the consolidated statements of operations during the six months ended June 30, 2021 and 2020 were $
Basic and Diluted Net Income (Loss) per Share Calculations
Income (Loss) per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The shares for employee options, warrants and convertible notes were used in the calculation of the income per share.
For the six months ended June 30, 2021, the Company has excluded
For the six months ended June 30, 2020, the Company has excluded
Dilutive per share amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities, using the treasury stock method if their effect would be dilutive.
Accounting for Derivatives
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average series Binomial lattice formula pricing models to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the 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.
16
Recently Adopted Accounting Pronouncements
The Company does not elect to delay complying with any new or revised accounting standards, but to apply all standards required of public companies, according to those required application dates.
Management reviewed accounting pronouncements issued during the quarter ended June 30, 2021, and no pronouncements were adopted during the period.
Management reviewed accounting pronouncements issued during the year ended December 31, 2020, and the following pronouncements were adopted during the period.
In January 2017, the FASB issued 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Instead, under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. Due to the limited amount of goodwill and intangible assets recorded at December 31, 2020, the impact of this ASU on its consolidated financial statements and related disclosures was immaterial.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In January 2017, the FASB issued 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Instead, under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2022. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued Accounting Standards Update (ASU) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The intention of ASU 2020-06 update is to address the complexity of accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Under ASU 2020-06, the number of accounting models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for computing diluted Earnings Per Share. ASU 2020-06 is effective for fiscal years and interim periods beginning after December 15, 2021 and may be adopted through either a modified or fully retrospective transition. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and related disclosures.
17
Discontinued Operations
On June 11, 2021, the Company entered in to an asset purchase agreement (the “Asset Purchase Agreement”) with Liquid Web, LLC (“Buyer”) under which it agreed to sell the web hosting and maintenance revenue stream (the “Asset Sale”) to the Buyer for a Purchase Price of $
The Company did not classify any assets or liabilities specific to the Purchased Assets. Therefore, the purchase price from the Purchased Assets are recorded as a Gain on Sale of Discontinued Operations in our statement of operations for the quarter ended June 30, 2021. As a result of the Company entering into the Asset Purchase Agreement, the Company’s web hosting revenue stream has been characterized as discontinued operations in its financial statements as disclosed within the disaggregated revenue schedule in footnote 3.
Pursuant to the Asset Purchase Agreement, the Company will continue to maintain, support, and deliver on all customer services during the transition period of 90 days following the Closing Date. The Company will continue to invoice the hosting customers in the ordinary course of business. Any payments received from the customers, on or after the Closing Date are the property of Liquid Web. The Company will remit the payment for collected revenue less taxes collected and net of hosting expenses to the Buyer no later than the 15th day of the following month. As of June 30, 2021, the Company recorded a payable due to the Buyer in the amount of $
The following table summarizes the results of operations for the three months ended June 30, 2021 and 2020.
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| Three months ended June 30, 2021 (unaudited) |
| Three months ended June 30, 2020 (unaudited) | ||||||||||||||||||||
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| Third Parties |
| Related Parties |
| Total |
| Third Parties |
| Related Parties |
| Total | ||||||||||||
Hosting Revenue |
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Cost of Sales |
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Net Income from Discontinued Operations |
| $ |
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| $ |
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| $ |
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| $ |
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|
| $ |
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The following table summarizes the results of operations for the six months ended June 30, 2021 and 2020
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| Six months ended June 30, 2021 (unaudited) |
| Six months ended June 30, 2020 (unaudited) |
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| Third Parties |
| Related Parties |
| Total |
| Third Parties |
| Related Parties |
| Total | ||||||||||||
Hosting Revenue |
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Cost of Sales |
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Net Income from Discontinued Operations |
| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, the Company does not expect realize.
For the six months ended June 30, 2021, we used the federal tax rate of
18
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| For the six months ended June 30, 2021 | ||
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Current tax provision: |
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Federal |
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Taxable income |
| $ |
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Total current tax provision |
| $ |
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Deferred tax provision: |
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Federal |
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Loss carryforwards |
| $ |
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Change in valuation allowance |
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| ( | ) |
Total deferred tax provision |
| $ |
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3. REVENUE RECOGNITION
On January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The adoption of ASC 606 did not have a material impact on the Company’s Consolidated Financial Statements.
The core principles of revenue recognition under ASC 606 includes the following five criteria:
| 1. | Identify the contract with the customer |
Contract with our customers may be oral, written, or implied. A written and signed contract stating the terms and conditions is the preferred method and is consistent with most customers. The terms of a written contract may be contained within the body of an email, during which proposals are made and campaign plans are
outlined, or it may be a stand-alone document signed by both parties. Contracts that are oral in nature are consummated in status and pitch meetings and may be later followed up with an email detailing the terms of the arrangement, along with a proposal document. No work is commenced without an understanding between the Company and our customers, that a valid contract exists.
| 2. | Identify the performance obligations in the contract |
Our sales and account management teams define the scope of services to be offered, to ensure all parties are in agreement and obligations are being delivered to the customer as promised. The performance obligation may not be fully identified in a mutually signed contract, but may be outlined in email correspondence, face-to-face meetings, additional proposals or scopes of work, or phone conversations.
| 3. | Determine the transaction price |
Pricing is discussed and identified by the operations team prior to submitting a proposal to the customer. Based on the obligation presented, third-party service pricing is established, and time and labor are estimated, to determine the most accurate transaction pricing for our customer. Price is subject to change upon agreed parties, and could be fixed or variable, milestone focused or time and materials.
| 4. | Allocate the transaction price to the performance obligations in the contract |
If a contract involves multiple obligations, the transaction pricing is allocated accordingly, during the performance obligation phase (criteria 2 above).
19
| 5. | Recognize revenue when (or as) we satisfy a performance obligation |
The Company uses several means to satisfy the performance obligations:
| a. | Billable Hours – The Company employs a time tracking system where employees record their time by project. This method of satisfaction is used for time and material projects, change orders, website edits, revisions to designs, and any other project that is hours-based. The hours satisfy the performance obligation as the hours are incurred. |
| b. | Ad Spend - To satisfy ad spend, the Company generates analytical reports monthly or as required to show how the ad dollars were spent and how the targeting resulted in click-throughs. The ad spend satisfies the performance obligation, regardless of the outcome or effectiveness of the campaign. In addition, the Company utilizes third party invoices after the ad dollars are spent, in order to satisfy the obligation. |
| c. | Milestones – If the contract requires milestones to be hit, then the Company satisfies the performance obligation when that milestone is completed and presented to the customer for review. As each phase of a project is complete, we consider it as a performance obligation being satisfied and transferred to the customer. At this point, the customer is invoiced the amount due based on the transaction pricing for that specific phase and/or we apply the customer deposit to recognize revenue. |
| d. | Monthly Retainer – If the contract is a retainer for work performed, then the customer is paying the Company for its expertise and accessibility, not for a pre-defined amount of output. In this case, the obligation is satisfied at the end of the period, regardless of the amount of work effort required. |
| e. | Hosting – Monthly recurring fees for hosting are recognized on a monthly basis, at a fixed rate. Hosting contracts are typically one-year and reviewed annually for renewal. Prices are subject to change at management discretion. During the six month ended June 30, 2021 web hosting services was discontinued from our operating revenue streams. |
The Company generates income from five main revenue streams: data science, creative design, web development, digital marketing, and other. Each revenue stream is unique, and includes the following features:
Data Science
We analyze big data (large volume of information) to reveal patterns and trends associated with human behavior and interactions that can lead to better decisions and strategic business moves. As a result of our data science work, our clients are able to make informed and valuable decisions to positively impact their bottom lines. We classify revenue as data science that includes polling, research, modeling, data fees, consulting and reporting. Contracts are generated to assure both the Company and the client are committed to partnership and both agree
to the defined terms and conditions and are typically less than one year. Transaction pricing is usually a lump sum, which is estimated by specific project requirements. The Company recognizes revenue when performance obligations are met, including, when the data sciences service is performed, polling is conducted, or support hours are expended. If the data sciences service is a fixed fee retainer, then the obligation is earned at the end of the period, regardless of how much service is performed.
Creative Design
We provide branding and creative design services, which we believe, set apart our clients from their competitors and establish them in their specific markets. We believe in showcasing our clients’ brands uniquely and creatively to infuse the public with curiosity to learn more. We classify revenue as creative design that includes branding, photography, copyrighting, printing, signs and interior design. Contracts are generated to assure both the company and the client are committed to partnership and both agree to the defined terms and conditions and are typically less than one year. The Company recognizes revenue when performance obligations are met, usually when creative design services obligations are complete, when the hours are recorded, designs are presented, website themes are complete, or any other criteria as mutually agreed.
20
Web Development
We develop websites that attract high levels of traffic for our clients. We offer our clients the expertise to manage and protect their website, and the agility to adjust their online marketing strategy as their business expands. We classify revenue as web development that includes website coding, website patch installs, ongoing development support and fixing inoperable sites. Contracts are generated to assure both the company and the client are committed to the partnership and both agree to the defined terms and conditions. Although most projects are long-term (6-8 months) in scope, we do welcome short-term projects which are invoiced as the work is completed at a specified hourly rate. In addition, we offer monthly hosting support packages, which ensures websites are functioning properly. The Company records web development revenue as earned, when the developer hours are recorded (if time and materials arrangements) or when the milestones are achieved (if a milestone arrangement).
Digital Marketing
We have a reputation for providing digital marketing services that get results. We classify revenue as digital marketing that includes ad spend, SEO management and digital ad support. Billable hours and advertising spending are estimated based on client specific needs and subject to change with client concurrence. Revenue is recognized when ads are run on one of the third-party platforms or when the hours are recorded by the digital marketing specialist, if the obligation relates to support or services.
Other
We offer services that do not fit into the other four categories but rely heavily on the “other” services to provide the entire support package for our clients. Included in this category are domain name management, account management, web hosting, client training, and partner commissions. Revenue is recognized for these services as the service is performed (such as account management or training) or during the month in which the service was provided (such as hosting, partner commissions and domain name registration).
Included in creative design and digital marketing revenues are costs that are reimbursed by our clients, including third party services, such as photographers and stylists, furniture, supplies, and the largest component, digital advertising. We have determined, based on our review, that the amounts classified as reimbursable costs should be recorded as gross (principal), due to the following factors:
| - | The Company is the primary obligor in the arrangement; |
| - | We have latitude in establishing price; |
| - | We have discretion in supplier selection; and |
| - | The Company has credit risk |
During the six months ended June 30, 2021 and 2020, we included $
The deferred revenue and customer deposits as of June 30, 2021 and December 31, 2020 were $
21
For the six months ended June 30, 2021 and 2020 (unaudited), revenue was disaggregated into the six categories as follows:
|
| Six months ended June 30, 2021 (unaudited) |
| Six months ended June 30, 2020 (unaudited) | ||||||||||||||||||||
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| Third Parties |
| Related Parties |
| Total |
| Third Parties |
| Related Parties |
| Total | ||||||||||||
Data Sciences |
| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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Design |
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Development |
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Digital Advertising |
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Swarm |
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Total |
| $ |
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| $ |