FORM 10-K U.S.UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X]FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30,
2014 COMMISSION FILE NUMBER 0-13215 WARP 9,2016[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 005-56293
CLOUDCOMMERCE, INC.
------------------------------------------------------------- (Exact(Exact name of registrant as specified in its charter)
NEVADA 30-0050402 ------------------------ ----------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.)
Nevada | 30-0050402 |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
1933 Cliff Dr., Suite 11,1, Santa Barbara, California 93109
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(Address
(Address of principal executive offices) (Zip Code)
(805) 964-3313
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Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK OTC
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: common stock $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes |_| No |X|
Yes | [_] | No | [x] |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes |_| No |X|
Yes | [_] | No | [x] |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Yes | [x] | No | [_] |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).
Yes | [x] | No | [_] |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
|X|
[_] |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [___] Accelerated filer [___]
Non-accelerated filer [___] Smaller reporting company [_X_]
(Do not check if a
smaller reporting company)
Large accelerated filer | [_] | Accelerated filer | [_] | |
Non-accelerated filer | [_] | Smaller reporting company | [x] | |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Yes | [_] | No | [x] |
The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $520,382$622,000 as of December 31, 2013,2015, the last business day of the registrant's most recently completed second fiscal quarter (computed by reference to the last sale price of a share of the registrant's Common Stock on that date as reported by OTC Bulletin Board).
There were100,878,825129,899,595 shares outstanding of the registrant's Common Stock as of September26, 2014.27, 2016.
TABLE OF CONTENTS
PART 1
ITEM 1 Business 2
ITEM 2 Properties 7
ITEM 3 Legal Proceedings 7
ITEM 4 Mine Safety Disclosures 7
PART II
ITEM 5 Market for Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities 7
ITEM 6 Selected Financial Data 8
ITEM 7 Management's Discussion and Analysis or Plan of Operation 9
ITEM 8 Financial Statements and Supplementary Data 15
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 33
ITEM 9A Controls and Procedures 33
ITEM 9B Other Information 34
PART III
ITEM 10 Directors, Executive Officers, and Corporate Governance 35
ITEM 11 Executive Compensation 37
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 43
ITEM 13 Certain Relationships and Related Transactions, and
Director Independence 44
ITEM 14 Principal Accounting Fees and Services 44
ITEM 15 Exhibits, Financial Statement Schedules 44
SIGNATURES 46
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PART 1 | |||
ITEM 1 | Business | 4 | |
ITEM 1A | Risk Factors | 8 | |
ITEM 2 | Properties | 12 | |
ITEM 3 | Legal Proceedings | 12 | |
ITEM 4 | Mine Safety Disclosures | 12 | |
PART II | |||
ITEM 5 | Market for Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | 12 | |
ITEM 6 | Selected Financial Data | 14 | |
ITEM 7 | Management's Discussion and Analysis or Plan of Operation | 14 | |
ITEM 8 | Financial Statements and Supplementary Data | 19 | |
ITEM 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 41 | |
ITEM 9A | Controls and Procedures | 41 | |
ITEM 9B | Other Information | 42 | |
PART III | |||
ITEM 10 | Directors, Executive Officers, and Corporate Governance | 43 | |
ITEM 11 | Executive Compensation | 45 | |
ITEM 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 49 | |
ITEM 13 | Certain Relationships and Related Transactions, and Director Independence | 50 | |
ITEM 14 | Principal Accounting Fees and Services | 51 | |
ITEM 15 | Exhibits, Financial Statement Schedules | 51 | |
SIGNATURES | 54 |
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ITEM 1. BUSINESS
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COMPANY HISTORY
Warp 9,
General
CloudCommerce, Inc. ("Warp 9,CloudCommerce," "we," "us," "our," or the "Company") is a global provider of cloud-driven e-commerce and mobile commerce solutions. Through our wholly-owned subsidiaries, we provide online merchants and leading brands with complete solutions for successfully conducting business with customers anytime, anywhere and on any device. Whether it is selling products or services online or making business processes available on the cloud, we deliver solutions that maximize user experience with real-time integration to enterprise applications. We focus primarily on four main areas to deliver exceptional value to our customers: engaging frontend design, robust backend integration, effective digital marketing and analytics, and complete solutions management.
To better serve our customers and create value for our shareholders, we strategically acquire profitable cloud commerce solutions providers with strong management teams.
Company History
CloudCommerce, Inc. ("CloudCommerce," "we," "us," "our," or the "Company") was incorporated in Nevada corporationon January 22, 2002 and was formerly known as Warp 9, Inc., Roaming Messenger, Inc., formerly known asand Latinocare Management Corporation ("LMC").Corporation. On August 24, 2006, the Company's board of directors (the "Board of Directors") and majority shareholders voted to change the name of the Company from Roaming Messenger, Inc. to Warp 9, Inc. to reflect a new strategic plan of focusing primarily on the business of the Company's wholly ownedwholly-owned subsidiary, Warp 9, Inc., a Delaware corporation that is an e-commerce Software-as-a-Service ("SaaS") provider. GENERAL
We are a providerOn July 9, 2015, the Company's Board of mobileDirectors and e-commercemajority shareholders voted to change the name of the Company from Warp 9, Inc. to CloudCommerce, Inc. to reflect the Company's current business plan of strategically acquiring profitable CloudCommerce solutions for midsize online
sellers, inproviders with strong management teams. On October 1, 2015, our operating subsidiary, Warp 9, Inc., merged with and into Indaba Group, LLC, with Warp 9, Inc. being the retailsurviving entity. The name of the subsidiary was changed on October 6, 2015 to Indaba Group, Inc. ("Indaba").
Industry Overview
Growth of Mobile and business to business ("B2B") industries. Our
solutions and services are designed to help multi-channel retailers maximize
digital commerce revenues by applying our technologies and solutions for mobile
e-commerce, desktop e-commerce, e-mail marketing, social media and other digital
avenues. Offered as an outsourced and fully managed SaaS model, our solutions
allow customers to focus on their core business, rather than technical
implementations and software and hardware architecture, design, and maintenance.
We also offer professional services to our clients which include graphic design,
store management, new feature development, promotion management, search engine
optimization ("SEO"), Social Media management, merchandizing, integration to
third party payment processing and fulfillment systems, analytics, custom
reporting, and strategic consultation.
We believe our products and services allow our clients to lower costs and
focus on promoting and marketing their brand, product line and website while
leveraging the investments we have made in technology and infrastructure to
operate a dynamic digital presence.
INDUSTRY OVERVIEW
GROWTH OF MOBILE AND DIGITAL COMMERCE
Digital Commerce
We believe there are a number of factors that are contributing to the growth of mobile and digital commerce, including the following: (i) accessibility and adoption of smartphone devices throughout the world ;world; (ii) rapid advancements in high-speed internet and 4G cellular networks making the internet more available, reliable, and efficient; (iii) shoppers are more comfortable with the process of browsing and buying products from their mobile devices; (iv) the functionality of both mobile and desktop e-commerce sites continues to improve, a greater range of mobile payment options are available, and special offers and shipping discounts are making online shopping more attractive; (v) businesses are placing more emphasis on their digital commerce strategies as mobile and desktop commerce can reach a larger audience at a comparatively lower cost than the methods used to drive traffic to traditional brick-and-mortar retail stores. As a result of these growth drivers, we believe retailers and wholesalers have begun to build large, global customer bases that can be reached cost-effectively, potentially resulting in higher sales and profitability.
OPPORTUNITIES FOR OUTSOURCED E-COMMERCE
Opportunities for Outsourced e-Commerce
We believe there are advantages to outsourcing mobile and desktop e-commerce development and management that will continue to make solutions like those of Warp 9CloudCommerce an attractive alternative to building and maintaining this capability in-house. These advantages include: (i) eliminating the substantial up-front and ongoing costs of computer hardware, network infrastructure and specialized application software and personnel; (ii) reducing the time it takes to get online stores live and productive; (iii) shifting the
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ongoing technology, financial, regulatory and compliance risks to a proven service provider; (iv) leveraging the expertise of a mobile and desktop e-commerce service provider to accelerate growth of an online business; and (v) allowing businesses to focus on their specific core competencies.
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TECHNOLOGY PRODUCTS
Core Services
Our three core solutions are creating optimal front-end user experiences, building enterprise back-end application integrations, driving traffic mobile e-commerce, desktop e-commerce and managed hosting. We have assembled
Front-End User Experience
Without an optimal user interface, even the most technically advanced solution will not achieve great business results. Therefore, we design our solutions with the end-user first. From fast loading webpages, to user-friendly navigation, to high quality graphic designs, to useful organization of information, we apply industry best practices along with our deep internal expertise to deliver solutions that delight the customers in their online experience of a company's brand.
Back-End Enterprise Application Integration
In an increasingly omni-channel world, seamless integration between web channels, mobile channels, and brick-and-mortar channels, are critical in serving the demanding and technically savvy customers of the 21st century. For example, an e-commerce site without real-time inventory data will frustrate customers with backorders, impedes a company's growth, and erodes brand loyalty. These channels can integrate to each other complementarythrough the cloud, or centrally through cloud-connected back-end business systems. Whether the back-end system is a full-blown enterprise resource planning (ERP) software like SAP and Oracle, or a medium size system such as Brightpearl, our expert teams can customize a solution using best-of-breed middleware, or custom engineering, to achieve any level of integration our customers desire.
Digital Marketing And Analytics
Once a solution is deployed, regardless of whether it's for business-to-consumer (B2C) or business-to-business (B2B) transactions, effective digital marketing and analytics are absolutely essential to ensuring online success. Our teams can perform a myriad of digital marketing services such as, search engine optimization, e-mail campaign creation, or social media management, graphicpromotions. In addition to digital marketing services, we also apply data analytics to help businesses understand the behavior of their online customers to derive actionable refinements to business or marketing programs.
Complete Solutions Management
Our mission is to be a full service provider of cloud commerce solutions to medium, large, and global enterprises. From front-end design, to back-end integration, to digital marketing, our solutions are as complete as our customers want them to be. In addition to development, we can also fully manage our client solutions with services such as technology consulting, ongoing maintenance, hosting infrastructure build out and management. We are constantly expanding our base of talents and expertise to deliver a fully integrated solution for a
successful e-commerce operation.
MOBILE E-COMMERCE - WARPMOBILE MAGENTO
Our WarpMobile Magento product offerings are designed and engineered to
maximize mobile conversions and sales for our customers. With over three yearsfull range of mobile commerce experience working on some of the world's biggest brands, we
believe we provide online sellers with the highest level of mobile
functionality, performance and ease of use in the industry, allowing customers
to focus on their core online businesses, rather than on technical
implementations. WarpMobile Magento is a streamlined mobile solution that allows
Magento merchants of any size to have a powerful mobile commerce website in a
matter of a few short weeks.
DESKTOP E-COMMERCE - MAGENTO
Warp 9's e-commerce solutions are focused on what we believe to be the
fastest-growing open-source e-commerce platform in the world-Magento. Magento (a
division of eBay) has experienced, highlighted by use of 240,000 businesses
globally -- a 60 percent increase from 2013 to 2014. Warp 9 offers full-service
Magento implementation, hosting and management solutions for both retailers and
B2B wholesalers. We believe our deep Magento and e-commerce experience allows us
to drive customer growth through ongoing development and new feature
implementation, tracking and support.
WARP 9 E-MAIL MARKETING SYSTEM (WARP 9 EMS)
Warp 9 E-mail Marketing System ("Warp 9 EMS") is a web-based e-mail
campaign and list management system designed for high performance and
reliability. EMS's sophisticated technology allow our clients to send targeted
e-mail campaigns that help grow, retain and maximize the lifetime value of their
customers. Through content personalization and list segmentation, campaign
efforts result in higher response rates, higher conversion rates and improved
customer loyalty. E-mail marketing systems, such as Warp 9 EMS, enable
unprecedented response times that are not achievable through traditional forms
of direct marketing. TCP customers can also purchase EMS to complement their
onlinesocial, mobile, e-commerce, strategy.
PROFESSIONAL SERVICES
Our customers are not technology companies and have varying internal
expertise in the areas of e-commerce, online marketing and web technologies. To
provide a complete solution to our customers, we also offer professional
services to help our customers maximize the use of our technology or other
online e-commerce technologies. Professional services include but are not
limited to e-commerce web page development, new feature development, testing,
bug fixing, product catalog management, social media management, SEO, e-mail
marketing management, custom system configuration, graphic design, management of
online marketing programs, and integration to backend business systems.
SITE DESIGN AND DEVELOPMENT
e-business.
Revenue Model
We offer our clients site design services that utilize our experience and
expertise to create efficient and effective online stores powered by the Magento
platform. Our e-commerce solutions can be deployed quickly for our clients and
implemented inhave a variety of ways from simple shopping websites to complex
systems that integrate to backend enterprise resource planning ("ERP") and
inventory management systems. This is all done by maximally using the feature
set contained within Magento.
MERCHANDIZING AND PROMOTIONS DESIGN
Warp 9 and the Magento platform support a wide range of merchandising
activities. On an ongoing basis, we help our clients create effective
promotional activities, up-sell, cross-sell as well as promote featured products
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during any phase of the shopping process. By doing so, our professional services
team continues to work with our clients to deliver targeted offers designed to
increase conversion ratios and average order size. We have also developed an
algorithm that can help our clients automate the upsell/cross-sell
opportunities. Additionally, we have created a new advertising feature that
allows our clients to easily add graphical elements with interior or exterior
links to assist with instantaneous promotion of featured products.
ADVANCED REPORTING AND ANALYTICS
Warp 9 implements solutions that capture a great deal of information about
sales and visitor activities in its database. We provide our clients access to a
collection of standard and customizable reports as well as create any report
they need for their individual business making decisions. For example, we can
create custom reports to help our clients analyze the average orders size of one
design versus another. This enables our clients to track and analyze sales,
products, transactions and customer behavior to further refine their market
strategies to increase sales.
STRATEGIC MARKETING SERVICES
We offer a wide range of strategic marketing services designed to increase
customer acquisition, retention and lifetime value. Through a combination of web
analytics, analytic-based statistical testing and optimization, our team of
strategic marketing consultants develop, deliver and manage programs such as
social media campaigns, search engine optimization, affiliate marketing, store
optimization and e-mail optimization for our clients. We believe our ability to
capture and analyze integrated traffic and commerce data enhances the value of
our strategic marketing services as we can precisely determine the effectiveness
of specific marketing activities, website changes, and other actions taken by
our clients. We are also working on providing this beneficial sales data in
real-time and in a more customizable format.
REVENUE MODEL
Warp 9 has a variety of revenue-generatedrevenue-generating models. We charge fixed or variable implementation fees to design, build and launch websites. In addition, we have both month-to-month and annual hosting contractsseveral retainer arrangements for other services that provide steady andvary in term length that provides reliable income. Our professional services are billed at hourly or monthly rates, depending on the customer's needs. We believe this flexibility allows us to attract customers while maximizing profits based on billable hours.
The Company also generates incremental revenue by offering additional
products such as Warp 9 EMS, professional web production, graphic design,
marketing, and other consulting services
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Benefits to support Warp 9 products and
generally to aid in the operations of our customers' e-commerce activities.
BENEFITS TO CLIENTS
Clients
Our complete solution of providing robust technology along with complementary professional services delivers many benefits to our customers.
REDUCED TOTAL COST OF OWNERSHIP AND RISK
Reduced Total Cost of Ownership and Risk
Utilizing our technology and services, businesses can dramatically reduce or eliminate upfront and ongoing hardware, software, maintenance and support costs associated with developing, customizing, deploying and upgrading an in-house e-commerce solution. They can have a global e-commerce presence without assuming the costs and risks of developing it themselves and take immediate advantage of the investments we continually make in our e-commerce systems and associated services. Our commitment to the latest technologies and e-commerce functionality helps ensure that our clients maintain pace with industry advances.
REVENUE GROWTH
Through our services consultants, we
Revenue Growth
We help our clients grow their businesses by applyingleveraging our technology and experience to (i) increase the acquisition, retention and lifetime value of new customers; (ii) extending their businesses into new geographic markets; and (iii) expanding the visibility and sales of their products through new online sales channels. We have developed substantial
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Warp 9.
DEPLOYMENT SPEED
the Company.
Deployment Speed
Businesses can reduce the time required to develop an e-commerce presence by utilizing our outsourced business model. Typically, a new client can have an online store live much more quickly than if they decided to build, test and deploy the e-commerce capability in-house. Once they are operational, on our
platform, clients can make real-time changes to their online store, allowing them to address issues and take advantage of opportunities without technical assistance.
FOCUS ON CORE COMPETENCY
Focus on Core Competency
By utilizing our outsourced e-commerce model, businesses can focus on developing, marketing and selling their products rather than devoting time and resources to building and maintaining an e-commerce infrastructure. Management can focus their time on their core business while ensuring they have access to the latest technologies, tools and expertise for running a successful e-commerce operation.
SALES AND MARKETING
Sales and Marketing
Our objective is to be thea leading Magentoglobal provider of cloud-driven e-commerce and mobile commerce provider in the
market.solutions. To achieve this objective, we intend to enhance, promote and supporthave assembled a team of experts working collectively for the idea that Warp 9's Magento mobile commerce solutions are the most powerful and
affordable options that require the least amountbest interest of time to get to market. With
over three years of mobile commerce experience working on some of the world's
biggest brands, we believe Warp 9 understands what a successful mobile commerce
website is in terms of customer experience, merchant management and growth, and
technological implementation.
We currently market our e-commerce solutions directly to existing Magento
merchants, merchants looking for an enhanced e-commerce platform, as well as
through channel partnerships with other industry leaders. We focus our efforts
on generating awareness of the Warp 9 brand and capabilities and establishing
our position as a leader in the Magento mobile and e-commerce space.
customers.
During the client sales process, our staffteam delivers demonstrations, presentations, proposals and contracts. Many new customers have come frombeen retained through email marketing, direct sales, and word-of-mouth referrals. Our direct sales efforts are aimed at senior marketing and information technology ("IT")(IT) executives within a retailer or B2B company who are looking to create or expand their mobile and e-commerce operations. Word-of-mouth referrals have been very valuable to us and we intend to continue nurturing our customer and industry relationships to maximize these referrals.
In addition to our direct sales efforts trade shows, and referrals, we have established and continue to explore channel partnerships to expand our customer base. Prospective channel partners include existing Magento development companies, hosting providers, ERP vendors, and e-commerce marketing professionals. With the growing maturity of multi-channel
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mobile and desktop e-commerce strategies, many of the robust backend systems providers are looking for robust mobile and desktop e-commerce solutions, such as what Warp 9CloudCommerce provides.
COMPETITION
Competition
The market for e-commerce solutions is highly competitive, especially as it
reaches maturity.fragmented with vendors providing expertise in specific areas. Usually, merchants or online sellers must manage multiple vendors that supply specific services. We compete with emerging mobile commerce technologies and
e-commerce solutions that our customers develop themselves or contract with
third parties to develop. We also compete with other outsourced e-commerce providers.providers as well as with companies that maintain their own internal teams and build their solutions themselves. The competition we encounter includes:
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o
In-house development of e-commerce capabilities using tools or applications from companies such asincluding, but not limited to, Art Technology Group, Netsuite, and IBM;
o
E-Commerce capabilities custom-developed by companies such asincluding, but not limited to, IBM Global Services, and Accenture, Inc.;
o
Other providers of outsourced e-commerce solutions such asincluding, but not limited to Demandware, Volusion, UniteU MarketLive, etc.;
o and MarketLive;
Companies that provide technologies, services or products that support a portion of the e-commerce process, such as payment processing, including, but not limited to, CyberSource Corporation, PayPal Corporation and Authorize.net;
o
High-traffic branded websites that generate a substantial portion of their revenue from e-commerce and may offer or provide to others the means to offer their products for sale, such asincluding, but not limited to, Amazon.com, Inc.; and
o
Web hosting, web services and infrastructure companies that offer portions of our solution and are seeking to expand the range of their offering, such asincluding, but not limited to, Network Solutions, LLC, Akamai Technologies, Inc., Yahoo! Inc., eBay Inc. and Hostopia.com Inc.
GOVERNMENT REGULATION
Government Regulation
We are subject to various federal, state, and local laws affecting e-commerce and communication businesses. The Federal Trade Commission and equivalent state agencies regulate advertising and representations made by businesses in the sale of their products, which apply to us. We are also subject to government laws and regulations governing health, safety, working conditions, employee relations, wrongful termination, wages, taxes and other matters applicable to businesses in general.
EMPLOYEES
Employees
As of September 26, 2014,27, 2016, we had nine28 full time employees, onefour of whom isare employed in an administrative position, onepositions, three in a sales and marketing position,positions, and seven technical21 employees in technical product maintenance positions. All but seven employees are located in Colorado, with five located in California, one in Montana and one in Texas.
All of our employees have executed agreements that impose nondisclosure obligations on the employee and assign to us (to the extent permitted by California law)state and federal laws) all copyrights and other inventions created by the employee during his employment with us. Additionally, we have a trade secret protection policy in place that management believes to be adequate to protect our intellectual property and trade secrets.
SEASONALITY
Seasonality
We do not anticipate that our business will be substantially affected by seasonality.
TRADEMARKS
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We have registered trademarks for Roaming Messenger(R)Warp 9® and Warp 9(R)CloudCommerce®.
ITEM 1A. RISK FACTORS
We have a history of losses and can provide no assurance of our future operating results.
We have experienced net losses and negative cash flows from operating activities and we expect such losses and negative cash flows to continue in the foreseeable future. As of June 30, 2016 and 2015, we had working capital deficit of $923,480 and $2,552,692, respectively. For the years ended June 30, 2016 and 2015, we incurred net losses of $7,492,111 and $404,210, respectively. The opinion of our independent registered public accountants on our audited financial statements as of and for the years ended June 30, 2016 and 2015 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future sales.
A significant portion of our total assets consists of goodwill, which is subject to a periodic impairment analysis and a significant impairment determination in any future period could have an adverse effect on our results of operations even without a significant loss of revenue or increase in cash expenses attributable to such period.
We have goodwill totaling $1,128,004 at June 30, 2016 resulting from the acquisition of Indaba Group, LLC. We evaluate this goodwill for impairment based on the fair value of the operating business units to which this goodwill relates at least once a year and plan to conduct the next evaluation in conjunction with the preparation of our financial statements for the quarter ending June 30, 2017. This estimated fair value could change if we are unable to achieve operating results at the levels that have been forecasted, the market valuation of those business units decreases based on transactions involving similar companies, or there is a permanent, negative change in the market demand for the services offered by the business units. These changes could result in an impairment of the existing goodwill balance that could require a material non-cash charge to our results of operations.
We operate with significant levels of debt and rely on funding to operate.
As of June 30, 2016, our total outstanding debts were approximately $549,000. Due to operational losses, we continue to require funding from our lenders to cover operational expenses. Although we are not required to make quarterly or annual payments on the outstanding balance of our debt, interest accrues on the principal amount of such debt and the balance is required to be paid back at some point in the future. There is no guarantee that we will have sufficient funds to pay our obligations, nor is there a guarantee that our lenders will re-finance the debts or extend the maturity dates.
There is no guarantee that our lenders will continue to support us.
We may require additional capital to fund operations, finance additional acquisitions, purchase computer equipment, expand into additional markets, initiate advertising campaigns, or hire key personnel. Although we have positive working relationships with our lenders, there is no guarantee that the lenders will continue to support us in all the ways we choose to spend our capital. If our lenders choose not to fund the Company, then our operations may be halted, our growth may decrease or we may need to scale back on our expenditures.
We are operating at a loss and may incur additional losses in the future.
Our net loss for the year ended June 30, 2016 was $(7,492,111). -6-
We are dependent on key personnel for our operations. If those key personnel were to leave the Company, operations may suffer.
Our performance is highly dependent on the continued services of our executive officers and other key personnel, the loss of any of whom could materially adversely affect our business. In addition, we need to attract and retain other highly-skilled, technical and managerial personnel for whom there is intense competition. For example, if we are unable to hire or continually train our employees to keep pace with the rapid and continuing changes in technology and the markets we serve or changes in the types of services our clients are
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demanding, we may not be able to develop and deliver new services and solutions to fulfill client demand. Our inability to attract and retain qualified technical and managerial personnel could materially adversely affect our ability to maintain and grow our business significantly.
If labor rates for key personnel increases, the increase may strain cash flows further.
Competition for labor could substantially increase our labor costs. Although we seek to preserve the contractual ability to pass through increases in labor costs to our clients, not all of our current contracts provide us with this protection, and we may enter into contracts in the future which limit or prohibit our ability to pass through increases in labor costs to our clients. If we are unable to pass costs through to our clients, our financial condition may be materially affected.
Future acquisitions may include an equity component that may dilute the positions of current stockholders.
As we search for additional companies to acquire, the components of the purchase price include a combination of cash, debt and equity. The issuance of a substantial amount of equity may have a dilutive effect on our current shareholders upon such equity being deemed free-trading. Although this dilution may result in higher trading volume, it may result in lower market prices, which may limit an investor's ability to obtain a return on their investment.
Even though the Company incurs significant costs while attempting to acquire other businesses, there is no guarantee that the transaction will be consummated
The Company incurs significant costs associated with both searching for companies to acquire and in closing a transaction. These costs include, but are not limited to, airfare, legal, audit and consulting fees. Because the merger/acquisition is not only dependent on both parties being dedicated to the completion of the transaction, but also the operational fit must be right, we may not close on all transactions we pursue. Incomplete transactions may result in significant capital out flows with no benefit to the Company.
If there is a triggering event that adversely effects the Company, then our intangible assets may be impaired, resulting in significant write offs.
Goodwill and identifiable intangible assets represented approximately 75% of our total assets as of June 30, 2016. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. We are required to test goodwill and intangible assets for impairment annually, as well as on an interim basis to the extent that factors or indicators become apparent that could reduce the fair value below its book value. Such factors requiring an interim test for impairment include loss of key employees, pending bankruptcy, loss of a significant client, declining sales, significant cost increases, change in management or declining spend in the industry. If it is determined that there has been an event that may reduce the fair value of our intangible assets, then we would be required to write off all, or a portion, of the balance recorded as intangible assets. Such a write off would reduce earnings during the period of the write off.
We may become a party to litigation involving intellectual property rights, employment violations, breach of contract, or other lawsuit, which may place a burden on management and cash flows.
Third parties have asserted, and may in the future assert, that our business, the technologies we use, or the business practices we use, infringe on their intellectual property rights or employment rights or that we are in violation of other rights or laws. Defending the Company against such actions may require significant time of management and substantial amounts of money. We cannot predict whether third parties will assert claims in the future or whether any future claims will prevent us from offering our products or services. If we are found to be in the wrong, we may be required to pay a significant amount of money which could include damages and attorneys' fees.
A portion of our services are provided by third parties which we do not control. Such third parties may provide poor service which may harm the relationships we have with our clients.
We currently, and may in the future, rely on third party providers to provide various portions of our service offering. If our business relationship with a third-party provider is negatively affected, or is terminated, we might not be able to deliver the corresponding service offering to our clients, which could cause us to lose clients and future business, reducing
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our revenues. Any such failure on the part of the third party, may damage our reputation and otherwise result in a material adverse effect upon our business and financial condition.
A large portion of our revenue is concentrated with a small number of clients.
For the year ended June 30, 0216, three clients represented approximately 44% of our service fee revenue and we currently expect these clients will represent approximately 44% of our service fee revenue during the year ended June 30, 2017. Termination, reduction, or delay of our services under a contract could result from factors unrelated to our work product or the progress of the project such as factors related to business or financial conditions of the client, changes in client strategies or the domestic or global economy generally. Termination, reduction or substantial delay of services any significant client, or nonrenewal of any significant client contract, or the nonpayment of a material amount of our service fees by a significant client, could have a material adverse effect upon our business, results of operation and financial condition.
If a larger number of companies compete with us, it may be difficult to grow or maintain our revenue.
Many companies offer, on an individual basis, one or more of the same services we do, and we face competition from many different sources depending upon the type and range of services requested by a potential client. Many of these companies have greater capabilities and resources than we do for the single or multiple functions they provide. In addition, we compete against other professional service firms that have substantial offshore operations with lower labor costs, which enable them to offer lower pricing to potential clients. We cannot be certain we will be able to compete successfully against these or other competitors in the future.
In addition, growth in our clients' e-commerce businesses may cause a client to consider making the necessary investments to process their e-commerce operations in-house. In such event, unless we can provide a more cost-effective solution to the client, the client may choose to terminate our services. There is no assurance that we will be able to provide a more cost-effective solution, or that any such solution will not reduce our profitability or be accepted by the client.
If we do not accurately price our fixed fee projects, the Company may suffer from decreased cash flows.
When making a proposal for, or managing, a fixed-price engagement, we rely on our estimates of costs and timing for delivering our services, which may be based on limited data and could be inaccurate. If we do not accurately estimate our costs and the timing for completion of a fixed-price project, the contract for such a project could prove unprofitable or yield a profit margin that is lower than expected. Losses, if any, on fixed-price contracts are recognized when the loss is determined. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-price contracts, including delays caused by factors outside of our control, could make these contracts less profitable or unprofitable and may affect the amount of revenue, profit, and profit margin reported in any period.
Our industry is dependent on quickly evolving technologies and knowledge. If we do not maintain proper technology or knowledge, then our operations may be adversely affected.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our services and the underlying network infrastructure. If we are unable to adapt to changing market conditions, client requirements or emerging industry standards, our business could be adversely affected. The internet and e-commerce environments are characterized by rapid technological change, changes in user requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render our technology and systems obsolete. We must continue to address the increasingly sophisticated and varied needs of our clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
Due to the low price and volume of our stock, a shareholder may be unable to sell shares, or may lose money on their investment.
The trading price of our common stock may be subject to wide fluctuations in response to quarter-to-quarter fluctuations in operating results, announcements of material adverse events, general conditions in our industry or the public marketplace and other events or factors, including the thin trading of our common stock. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many technology-related
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companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. In addition, if our operating results differ from our announced guidance or the expectations of equity research analysts or investors, the price of our common stock could decrease significantly.
Our common stock is subject to the "penny stock" rules of the sec and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission (the "SEC") has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
● | that a broker or dealer approve a person's account for transactions in penny stocks; and |
● | the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
● | obtain financial information and investment experience objectives of the person; and |
● | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which:
● | sets forth the basis on which the broker or dealer made the suitability determination; and |
● | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
We have never paid dividends and have no plans to pay dividends in the future. As a result, our common stock may be less valuable because a return on an investor's investment will only occur if our stock price appreciates.
Holders of shares of our common stock are entitled to receive such dividends as may be declared by our Board of Directors. To date, we have paid no cash dividends and we do not expect to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in will be in the form of appreciation, if any, in the market value of our shares of common stock. There can be no assurance that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
If we fail to remain current on our reporting requirements, we could be removed from the OTCQB which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
If we fail to remain current in our reporting requirements, we could be removed from the OTCQB. As a result, the market liquidity of our securities could be severely adversely affected by limiting the ability of broker-dealers to trade our securities and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to get re-listed on the OTCQB which may have an adverse material effect on our Company.
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There is substantial doubt about our ability to continue as a going concern.
Our independent public accounting firm in their report dated September 27, 2016 included an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. Our ability to continue as a going concern ultimately is dependent on our ability to generate a profit which is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. As a result, our financial statements do not reflect any adjustment which would result from our failure to continue to operate as a going concern. Any such adjustment, if necessary, would materially affect the value of our assets.
Because there is a limited market in our common stock, stockholders may have difficulty in selling our common stock and our common stock may be subject to significant price swings.
There is a very limited market for our common stock. Since trading commenced on the OTCQB, there has been little activity in our common stock and on some days there is no trading in our common stock. Because of the limited market for our common stock, the purchase or sale of a relatively small number of shares may have an exaggerated effect on the market price for our common stock. We cannot assure stockholders that they will be able to sell common stock or, that if they are able to sell their shares, that they will be able to sell the shares in any significant quantity at the quoted price.
ITEM 2. PROPERTIES
------------------
On August 26, 2013,April 15, 2016, the Company signed a lease for approximately 2,5341,800 square feet of office space at 1933 Cliff Dr., Suite 11,1, Santa Barbara, California 93109 for approximately $4,308$3,000 per month, pursuant toon a two yearmonth-to-month basis which lease agreementcommenced on March 1, 2016.
On December 10, 2012, the management of Indaba signed a lease which commences on October 1, 2013. In addition, the Company is
responsiblecommenced January 16, 2013 for its pro-rata shareapproximately 3,300 square feet at 2854 Larimer Street, Denver, CO 80205, for approximately $3,500 per month. The original lease term expired February 28, 2016, but was extended until February 28, 2017, at a rate of common area maintenance fees.
$5,800 per month.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
The Company may be involved in legal actions and claims arising in the ordinary course of business from time to time none of whichin the future. However, at this time there are consideredno current legal proceedings to be material towhich the Company's businessCompany or financial condition.
The Company may file additional collection actions and be involved in other
litigation inany of its subsidiaries is a party or of which any of their property is the future.
subject.
ITEM 4. MINE SAFETY DISCLOSURES
-------------------------------
DISCLOSURES.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
--------------------------------------------------------------------------------
COMMON STOCK
Common Stock
The Company's common stock trades on the OTCQB Bulletin Board Market under the symbol "WNYN.""CLWD", and previously traded under the symbol "WNYN" until September 30, 2015. The range of high and low bid quotationsprices for each fiscal quarter within the last two fiscal years was as follows:
Year Ended June 30, 2014 HIGH LOW
------- -------
First Quarter ended September 30, 2013 $0.0189 $0.0100
Second Quarter ended December 31, 2013 $0.0200 $0.0092
Third Quarter ended March 31, 2014 $0.0180 $0.0100
Fourth Quarter ended June 30, 2014 $0.0344 $0.0106
Year Ended June 30, 2013 HIGH LOW
------- -------
First Quarter ended September 30, 2012 $0.0170 $0.0040
Second Quarter ended December 31, 2012 $0.1790 $0.0063
Third Quarter ended March 31, 2013 $0.0171 $0.0122
Fourth Quarter ended June 30, 2013 $0.0250 $0.0100
--------------------------------------
The aboveis set forth below. These high and low bid prices represent prices quoted by broker-dealers on the OTCQB. These prices represent inter-dealer quotations reflect inter-dealer prices, without retail markup, mark-down,markdown, or commission and may not necessarily represent actual transactions.
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|
| |
Year Ended June 30, 2016 | High | Low |
|
| |
First Quarter ended September 30, 2015 | $0.043 | $0.009 |
Second Quarter ended December 31, 2015 | $0.130 | $0.015 |
Third Quarter ended March 31, 2016 | $0.019 | $0.008 |
Fourth Quarter ended June 30, 2016 | $0.068 | $0.011 |
|
|
Year Ended June 30, 2015 | High | Low |
|
| |
First Quarter ended September 30, 2014 | $0.034 | $0.011 |
Second Quarter ended December 31, 2014 | $0.017 | $0.008 |
Third Quarter ended March 31, 2015 | $0.026 | $0.010 |
Fourth Quarter ended June 30, 2015 | $0.017 | $0.009 |
|
|
The Company is authorized to issue 495,000,0002,000,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share. The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.
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As of June 30, 2014,September 27, 2016, there were approximately 300 record2,000 holders of the Company's common stock, not including shares held in "street name" in brokerage accounts, which are unknown. As of June 30, 2014,September 27, 2016, there were 100,878,825129,899,595 shares of common stock outstanding on record.
DIVIDENDS
Dividends
The Company has not declared or paid any cash dividends on its common stock and does not anticipate paying dividends for the foreseeable future.
WARRANTS
Warrants
During the fiscal year ended June 30, 2014,2016, the Company did not issue any warrants to purchase shares of the Company's capital stock. EQUITY COMPENSATION PLAN INFORMATION
As of June 30, 2016, the Company has no issued or outstanding warrants.
On June 22, 2016, all warrant holders exercised their outstanding warrants, on a cashless basis, resulting in the issuance of 24,109,404 shares of restricted common stock. The issuances are calculated as follows:
Warrant # | Warrants | Exercise Price | Shares |
002 | 10,000,000 | $0.003 | 8,604,651 |
003 | 10,000,000 | $0.003 | 8,604,651 |
005 | 8,019,037 | $0.003 | 6,900,102 |
Total | 28,019,037 |
| 24,109,404 |
Equity Compensation Plan Information
On August 13, 2012, we granted nonqualified stock options to purchase up to 2,500,000, 5,000,000 and 5,000,000 shares of our common stock to Greg Boden, our Chief Financial Officer, Andrew Van Noy, our Chief Executive Officer and Zachary Bartlett, our Vice President of Communications, respectively, in consideration for services. The stock options are exercisable at an exercisea price of $0.0053 per share exercisable for a period of seven years from the date of grant in consideration for his services to us. These
stock optionsand vest at a rate of 1/36 per month commencing on the date of grant until all of the options are vested.
On August 13, 2012,February 3, 2015, we granted nonqualified stock options to purchase up to 5,000,00030,000,000, 20,000,000, 10,000,000 and 3,000,000 shares of our common stock to Andrew Van Noy, our Chief Executive Officer, Zachary Bartlett, our Vice President of Communications, Greg Boden, our Chief Financial Officer and three employees, respectively, in consideration for
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services. The stock options are exercisable at an exercisea price of $0.0053$0.0131 per share exercisable for a period of seven years from the date of grant in consideration for his services to us.
These stock optionsand vest at a rate of 1/36 per month commencing on the date of grant until all of the options are vested. During the third quarter of the year ended June 30, 2016, three employees separated from the Company and during the fourth quarter their 3,000,000 options were unexercised and expired.
On August 13, 2012,March 20, 2015, we granted nonqualified stock options to purchase up to 5,000,00015,000,000 shares of our common stock to Zachary Bartlett,Andrew Van Noy, our Vice President of
Operations,Chief Executive Officer, in consideration for services. The stock options are exercisable at an exercisea price of $0.0053$0.013 per share exercisable for a period of seven years from the date of grant in consideration for his services to us.
These stock optionsand vest at a rate of 1/36 per month commencing on the date of grant until all of the options are vested.
On August 25, 2015, we granted nonqualified stock options to purchase up to 20,000,000, 10,000,000 and 5,000,000 shares of our common stock to Andrew Van Noy, our Chief Executive Officer, Zachary Bartlett, our Vice President of Communications, and Greg Boden, our Chief Financial Officer, respectively, in consideration for services. The stock options are exercisable at a price of $0.015 per share for a period of seven years from the date of grant and vest at a rate of 1/36 per month commencing on the date of grant until all of the options are vested.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the fiscal year ended June 30, 2016 other than those transactions previously reported to the SEC on our quarterly reports on Form 10-Q and current reports on Form 8-K.
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
DATA.
None.
-8-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
--------------------------------------------------------------------------------
CAUTIONARY STATEMENTS
This Form 10-K
The following Management's Discussion and Analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere herein. The Management's Discussion and Analysis contains financial projectionsforward-looking statements that involve risks and other "forward-looking
statements,"uncertainties, such as that term is used in federal securities laws, about Warp 9,
Inc.'s ("Warp 9," "we," "us," or the "Company") financial condition, results of
operations, and business. These statements include, among others:
o statements concerning the potential for benefits that Warp 9 may
experience from its business activities and certain transactions it
contemplates or has completed; and
o statements of Warp 9'sour plans, objectives, expectations future plans and strategies,
anticipated developments, and other mattersintentions. Any statements that are not statements of historical facts. These statements may be made expressly in this Form 10-K. You
can find many of these statements by looking forfact are forward-looking statements. When used, the words such as
"believes,"believe," "expects,"plan," "anticipates,"intend," "estimates,"anticipate," "target," "estimate," "expect," and the like, and/or future-tense or conditional constructions ("will," "may," "could," "should," etc.), or similar expressions, used in this Form 10-K.identify certain of these forward-looking statements. These forward-looking statements
are subject to numerous assumptions, risks, and uncertainties that may
cause the Company's actual results to be materially different from any
future results expressed or implied by the Company in those
statements. The most important facts that could prevent the Company
from achieving its stated goals include, but are not limited to, the
following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue or expand its business, and
inability to raise additional capital or financing to
implement its business plans;
(e) failure to further commercialize its technology or to make
sales;
(f) reduction in demand for the Company's products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside
parties;
(i) insufficient revenues to cover operating costs;
(j) failure of the relicensing or other commercialization of the
Roaming Messenger technology to produce revenues or profits;
(k) aspects of the Company's business are not proprietary and in
general the Company is subject to inherent competition;
(l) further dilution of existing shareholders' ownership in
Company; and
(m) uncollectible accounts and the need to incur expenses to
collect amounts owed to the Company.
There is no assurance that the Company will be profitable. The Company may
not be able to successfully develop, manage, or market its products and
services. The Company may not be able to attract or retain qualified executives
and technology personnel. The Company may not be able to obtain customers for
its products or services. The Company's products and services may become
obsolete. Government regulation may hinder the Company's business. Additional
dilution in outstanding stock ownership may be incurred due to the issuance of
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more shares, warrants and stock options, the exercise of outstanding warrants
and stock options.
Because the statements are subject to risks and uncertainties that could cause actual results mayor events to differ materially from those expressed or implied by the forward-looking statements. The Company cautions youstatements in this annual report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors including, but not limited to, place undue reliance
on the statements, which speak only asthose noted under "Risk Factors" of the date of this Form 10-K. The
cautionary statements contained or referred to in this section should be
considered in connectionreports filed with any subsequent written or oral forward-looking
statements that the Company or persons acting on its behalf may issue. The
Company doesSecurities and Exchange Commission. We do not undertake any obligation to review or confirm analysts'
expectations or estimates or to release publicly any revisions to anyupdate forward-looking statements to reflect events or circumstances occurring after the date of this annual report on Form 10-K or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes to those statements. In addition to
historical information, the following discussion and other parts of this
quarterly report contain forward-looking information that involves risks and
uncertainties.
CURRENT OVERVIEW
10-K.
Current Overview
We are a global provider of cloud-driven e-commerce and mobile commerce solutions. Through our wholly-owned subsidiaries, we provide online merchants and e-commerceleading brands with complete solutions for midsizesuccessfully conducting business with customers anytime, anywhere and on any device. Whether it is selling products or services online sellers, inor making business processes available on the retail and businesscloud, we deliver solutions that maximize user experience with real-time integration to business ("B2B") industries. Our
solutions and services are designedenterprise applications. We focus intently on four main areas to help multi-channel retailers maximize
digital commerce revenues by applying our technologies and solutions for mobile
e-commerce, desktop e-commerce, e-mail marketing, social media and other digital
avenues. Offered as an outsourced and fully managed Software-as-a-Service
("SaaS") model, our solutions allow customers to focus on their core business,
rather than technical implementations and software and hardware architecture,
design, and maintenance. We also offer professional servicesdeliver exceptional value to our clients
which include graphiccustomers: engaging frontend design, storerobust backend integration, effective digital marketing and analytics, and complete solutions management.
To better serve our customers and create value for our shareholders, we strategically acquire profitable cloud commerce solutions providers with strong management new feature development,
promotion management, search engine optimization ("SEO"), Social Media
management, merchandizing, integration to third party payment processing and
fulfillment systems, analytics, custom reporting, and strategic consultation.
teams.
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We believe our products and services allow our clients to lower costs and focus on promoting and marketing their brand, product line and website while leveraging the investments we have made in technology and infrastructure to operate a dynamic digital presence.
Research and development efforts have been focused both on these new
products and on updating our current products with new features. In the planning
phase of these new features, we look to direct client feedback and feature
requests; we study the e-commerce landscape to determine features that will
provide our clients with a competitive advantage in producing greater and more
effective selling; and we also examine features that will create a competitive
advantage during our sales process to clients. Emerging and declining trends
also play a role in how clients perceive what features should be provided by
which vendors and we are sometimes able to capitalize on these opportunities by
bundling features for greater value and/or increased fees and revenue.
A significant portion of the Company's revenues are from monthly recurring
fees for mobile and desktop development. During the fiscal year ending June 30,
2014, these products accounted for approximately 19% of our gross revenue.
During the fiscal year ending June 30, 2014, professional services accounted for
approximately 79% of our gross revenue.
CRITICAL ACCOUNTING POLICIES
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations, including the discussion on liquidity and capital resources, are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management re-evaluates its estimates and judgments, particularly those related to the determination of the estimated recoverable amounts of trade accounts receivable, impairment of long-lived assets, revenue recognition, and deferred tax assets. We believe the following critical accounting policies require more significant judgment and estimates used in the preparation of the financial statements.
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Among the significant judgments made by management in the preparation of our financial statements are the following:
Revenue recognition
The Company recognizes income when the service is provided or when the product is delivered. We maintain anpresent revenue, net of customer incentives. Most of the 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 is in accordance with ASC 605-45. 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 605-25, 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.
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 contracted 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.
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.
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 lossesfair values. 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.
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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 arise if anynot be recoverable. In accordance with its policies, the Company performed a qualitative assessment of our customers are unableindefinite lived intangibles and goodwill at June 30, 2016, and determined there was no impairment of indefinite lived intangibles and goodwill.
Business Combinations
The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make required payments.
Management specifically analyzes the age ofsignificant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer balances, historical bad
debt experience, customer credit-worthiness,lists, acquired technology, and changes in customer payment
terms when makingtrade names from a market participant perspective, useful lives and discount rates. Management's estimates of the uncollectability of our trade accounts
receivable balances. If we determine that the financial conditions of any of our
customers has deteriorated, whether due to customer specific or general economic
issues, increases in the allowance may be made. Accounts receivablefair value are written
off when all collection attempts have failed.
We follow the provisions of ASC 605-10-25, that four conditions must be met
before revenue can be recognized: (i) there is persuasive evidence that an
arrangement exists, (ii) delivery has occurred or service has been rendered,
(iii) the price is fixed or determinable, and (iv) collection is reasonably
assured.
Income taxes are accounted for under the asset and liability method. Under
this method, to the extent that we believe that the deferred tax asset is not
likelybased upon assumptions believed to be recovered,reasonable, but which are inherently uncertain and unpredictable and, as a valuation allowance is provided. In making this
determination, we consider estimated future taxable income and taxable timing
differences expected in the future. Actualresult, actual results may differ from those
estimates. FAIR VALUE OF FINANCIAL INSTRUMENTSDuring the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
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, 20142016 and 2013,2015, the Company's capital lease
obligations and 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 that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-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)1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
o
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
o
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
o
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.
Off-Balance Sheet Arrangements
We measure certaindo not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company's consolidated financial instruments at fair value on a recurring
basis. Assets and liabilities measured at fair value on a recurring basis are as
follows at June 30, 2014:
-11-
For the year ended June 30, 2014 Total (Level 1) (Level 2) (Level 3)
----------------- -------------- ---------------- --------------
Assets $ - $ - $ - $ -
----------------- -------------- ---------------- --------------
Total assets measured at fair value $ - $ - $ - $ -
----------------- -------------- ---------------- --------------
Liabilities
Derivative liability 2,169,051 - - 2,169,051
Convertible notes, net of discount 150,536 - - 150,536
----------------- -------------- ---------------- --------------
Total liabilities measured at fair value $ 2,319,587 $ - $ - $ 2,319,587
================= ============== ================ ==============
Assets and liabilities measured at fair value on a recurring basis are as
follows at June 30, 2013:
Total (Level 1) (Level 2) (Level 3)
----------------- -------------- ---------------- --------------
Assets $ - $ - $ - $ -
----------------- -------------- ---------------- --------------
Total assets measured at fair value $ - $ - $ - $ -
----------------- -------------- ---------------- --------------
Liabilities
Derivative liability - - - -
Convertible notes, net of discount 126,984 - - 126,984
----------------- -------------- ---------------- --------------
Total liabilities measured at fair value $ 126,984 $ - $ - $ 126,984
================= ============== ================ ==============
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Management reviewed accounting pronouncements issued duringposition, results of operations or cash flows.
Results of operations for the year ended June 30,2014, and adopted2016 as compared to thefollowing pronouncement: The Company adopted ASC 815 "Accounting for Derivative Instruments and Hedging Activities". This pronouncement addresses the accounting for derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. Derivative instruments that meet the definition of assets and liabilities should be reported in the financial statements at fair value, and any gain or loss should be recognized in current earnings. The adoption of this pronouncement had a material effect on the financial statements of the Company. -12-RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNEyear ended June 30,2014 AS COMPARED TO THE YEAR ENDED JUNE 30, 20132015
REVENUE
Total revenue for the twelve month periodfiscal year ended June 30, 2014 decreased2016 increased by $39,924$1,481,398 to $966,239,$2,079,743, compared to $1,006,162$598,345 in the prior year, a decreasean increase of 4%248%. The decreaseincrease is primarily due to a reduction in recurring fees for hostingthe acquisition of Indaba.
-16-
SALARIES AND OUTSIDE SERVICES
Salaries and professional services.
COST OF REVENUE
The cost of revenueoutside services expenses for the twelve month periodfiscal year ended June 30, 20142016 increased by $35,669$1,698,817, or approximately 18%185% to $238,449,$2,619,188, compared to $202,780$920,371 for the twelve month periodfiscal year ended June 30, 2013.2015. The increase in the cost of revenue
wasis primarily due to higher developer cost, partially offset by a decrease duethe acquisition of Indaba and the additional costs of employees and contractors used to a change in our cloud hosting architecture.
operate the combined Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A")
SG&A expenses for the twelve monthsfiscal year ended June 30, 20142016 increased by $68,521,$703,983, or approximately 6%194% to $1,179,013,$1,067,777, compared to $1,110,492$363,794 for the twelve month periodfiscal year ended June 30, 2013.2015. The increase in SG&A expenses wasis primarily due to an increase in rent, salary,
cloud-based toolsthe acquisition of Indaba and advertising expenses, partially offset by decreases in
health benefits.
the additional costs to operate the combined Company.
RESEARCH AND DEVELOPMENT
Research and development expenses for the twelve monthsfiscal year ended June 30, 2014
decreased by $13,307, or approximately 100% to zero, compared to $13,3072016 and June 30, 2015 were zero.
STOCK OPTION EXPENSE
Stock option expense for the twelve monthsfiscal year ended June 30, 2013.2016 increased by $335,383, or approximately 223% to $485,993, compared to $150,610 for the fiscal year ended June 30, 2015. The decreaseincrease was due to a focus away from
platform development and onto the widely used, open-source platform, Magento.
issuance of additional stock options to key members of management.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the twelve monthsfiscal year ended June 30, 20142016 increased by $19,252,$177,694, or approximately 82%2,926% to $42,747,$183,767, compared to $23,495$6,073 for the twelve monthsfiscal year ended June 30, 2013.2015. The increase was due to certain data
centerthe amortization of acquired intangible assets and additional fixed assets being disposed duringacquired with Indaba, and additional intangible assets associated with the movechange of the Company's name to our current location.
CloudCommerce.
OTHER INCOME AND EXPENSE
Total other income (expense) for the twelve monthsfiscal year ended June 30, 20142016 decreased by $1,929,886,$5,649,695, or approximately 5,903%1,726% to expense of $1,897,191,$5,208,326, compared to income of $32,695$441,369 for the twelve monthsfiscal year ended June 30, 2013.2015. The decrease was primarily due to losses recorded as a result of the recognitionconversion of debt to equity (see Footnote 8 - Capital Stock), in addition to a loss on changesdecrease in the fair value of our derivative liability duringliabilities.
NET (LOSS)
For the fiscal year ended June 30, 2014.
NET (LOSS)
For the twelve months ended June 30, 2014, Warp 9's2016, CloudCommerce's consolidated net loss increased by $2,080,305,$7,087,901, to $2,414,147,$7,492,111, compared to a consolidated net loss of $333,842$404,210 for the twelve monthsfiscal year ended June 30, 2013.2015. This increase in net loss is primarily due to a loss on changes in derivative liability.
LIQUIDITY AND CAPITAL RESOURCES
liability and additional expenses related to the Indaba acquisition.
As of June 30, 20142016 the Company had a cash balance of $50,041$49,663, compared to $12,636$19,051 as of June 30, 2013. Warp 92015. The Company had a net working capital deficit (i.e. the(the difference between current assets and current liabilities) of ($2,416,687)923,480) as of June 30, 2014,2016, compared to a net working capital deficit of ($377,733)2,552,692) at June 30, 2013.
2015.
Cash flow used byin operating activities was $322,638$1,082,707 for the year ended June 30, 2014,2016, compared to $175,543$749,635 used for the year ended June 30, 2013.2015. Operating cash flow was negative during the year due to a net operating loss.
-13-
Cash flow provided byused in investing activities was $5,043$3,181 for the year ended June 30, 2014,2016, compared to cash flow used of $4,925by $2,355 in the year ended June 30, 2013. Cash2015. The increase in cash flow fromused by investing activities provided during the year ended June 30, 20142016 was primarily the result of selling excessthe purchase of computer equipment.
equipment and the Indaba acquisition.
-17-
Cash flow provided by financing activities was $355,000$1,116,500 for the year ended June 30, 2014,2016, compared to $130,000$721,000 provided for the year ended June 30, 2013.2015. The increase is primarily due to additional borrowings during the year.
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
The 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 we are unable to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the year ended June 30, 2014.
For2016 and 2015 expressed substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon, among other things, additional cash infusion. Management believes the twelve months ended June 30, 2014,existing shareholders, the Company'sprospective new investors and future revenue will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business operations.
As a result of the recent economic recession, and the continuing economic uncertainty, it has been difficult for companies to obtain equity or debt financing. While the credit markets have improved over the last year, it remains difficult for smaller companies to obtain financing on reasonable terms.
Any additional capital needs have
primarily been met from cash balances on hand.
While Warp 9 expects that its capital needsraised through the sale of equity or equity-backed securities may dilute current stockholders' ownership percentages and could also result in a decrease in the foreseeablefair market value of our equity securities. The terms of the securities issued by us in future capital transactions may be met by cash-on-handmore favorable to new investors and projected positive cash-flow, there is no assurancemay include preferences, superior voting rights and the issuance of warrants or other derivative securities which may have a further dilutive effect.
Furthermore, any additional debt or equity or other financing that the Company will be able to generate enough positive cash flow or have
sufficient capital to finance its growth and business operations, or that such
capital willwe may need may not be available on terms that are favorable to the Companyus, or at all. In the current financial environment, it could become difficult for the CompanyIf we are unable to obtain equipment leases and other business financing. There is no assurance
that Warp 9 wouldrequired additional capital, we may have to curtail our growth plans or cut back on existing business. Further, we may not be able to obtain additional workingcontinue operations if we do not generate sufficient revenues from operations.
We may incur substantial costs in pursuing future capital through the
private placement of common stock or from anyfinancing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other source.
OFF-BALANCE SHEET ARRANGEMENTS
None.
-14-
-18-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF WARP 9,CLOUDCOMMERCE, INC.
-------------------------------------------------------------------
WARP 9,
CLOUDCOMMERCE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 20142016 AND 2013
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
2015
CONTENTS
PAGE | ||
Report of Independent Registered Public Accounting Firms | 20-21 | |
Consolidated Balance Sheets | 22 | |
Consolidated Statements of Operations | 23 | |
Consolidated Statements of Shareholders' Equity (Deficit) | 24 | |
Consolidated Statements of Cash Flows | 25 | |
Notes to Consolidated Financial Statements | 26-40 |
-19-
Report of Independent Registered Public Accounting Firm 16
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Shareholders' Equity (Deficit) 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21-32
-15-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
CloudCommerce, Inc.
(formerly Warp 9, Inc. )
Santa Barbara, California
We have audited the accompanying consolidated balance sheetssheet of CloudCommerce, Inc. (formerly Warp 9, Inc.) and subsidiary as of June 30, 2014 and 2013,2016, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the yearsyear then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
audit.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditsaudit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our auditsaudit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CloudCommerce, Inc. (formerly Warp 9, Inc.) and subsidiary as of June 30, 2014 and 2013,2016, and the results of their operations and their cash flows for the yearsyear then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company does not generate significant revenue and has negative cash flows from operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/
/s/ Liggett & Webb, P.A.
New York, New York
September 27, 2016
-20-
Report of Independent Registered Public Accounting Firm
To the Board of Directors
CloudCommerce, Inc.
(formerly Warp 9, Inc. )
Santa Barbara, California
We have audited the accompanying consolidated balance sheet of CloudCommerce, Inc. (formerly Warp 9, Inc.) and subsidiary as of June 30, 2015, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CloudCommerce, Inc. (formerly Warp 9, Inc.) and subsidiary as of June 30, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company does not generate significant revenue and has negative cash flows from operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ HJ Associates & Consultants, LLP HJ Associates & Consultants, LLP
Salt Lake City Utah
September 26, 2014
-16-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2014 June 30, 2013
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash $ 50,041 $ 12,636
Accounts Receivable, net 101,393 62,887
Prepaid and Other Current Assets 5,440 1,343
--------------- ---------------
TOTAL CURRENT ASSETS 156,874 76,866
--------------- ---------------
PROPERTY & EQUIPMENT, at cost
Furniture, Fixtures & Equipment 10,533 83,288
Computer Equipment 23,982 266,789
Computer Software 1,904 14,840
Leasehold Improvements - 18,696
--------------- ---------------
36,419 383,613
Less accumulated depreciation (24,033) (333,215)
--------------- ---------------
NET PROPERTY AND EQUIPMENT 12,386 50,398
--------------- ---------------
OTHER ASSETS
Lease Deposit 5,955 8,244
Licensing fees - 5,000
--------------- ---------------
TOTAL OTHER ASSETS 5,955 13,244
--------------- ---------------
TOTAL ASSETS $ 175,215 $ 140,508
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES
Accounts Payable $ 69,946 $ 176,871
Accrued Expenses 134,611 91,966
Accrued Interest 11,932 7,948
Deferred Income 3,300 -
Deferred Operating Lease Liability - 6,117
Convertible Notes Payable, current, net 140,008 126,984
Derivative Liability 2,169,051 -
Note Payable, Other 37,867 37,867
Customer Deposit 6,846 6,846
--------------- ---------------
TOTAL CURRENT LIABILITIES 2,573,561 454,599
--------------- ---------------
LONG TERM LIABILITIES
Convertible Notes Payable, net 10,528 -
Accrued Expenses, long term 222,153 -
--------------- ---------------
TOTAL LONG TERM LIABILITIES 232,681 -
--------------- ---------------
TOTAL LIABILITIES 2,806,242 454,599
--------------- ---------------
SHAREHOLDERS' EQUITY/(DEFICIT)
Preferred Stock, $0.001 Par Value;
5,000,000 Authorized Shares; no shares issued and outstanding - -
Common Stock, $0.001 Par Value;
495,000,000 Authorized Shares;
100,878,825 and 96,135,126 Shares Issued and Outstanding , respectively 100,879 96,135
Additional Paid In Capital 7,466,090 7,373,623
Accumulated Deficit (10,197,996) (7,783,849)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) (2,631,027) (314,091)
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) $ 175,215 $ 140,508
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
-17-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
June 30, 2014 June 30, 2013
---------------- ----------------
REVENUE $ 966,239 $ 1,006,162
COST OF SERVICES 238,449 202,780
---------------- ----------------
GROSS PROFIT 727,790 803,382
---------------- ----------------
OPERATING EXPENSES
Selling, general and administrative expenses 1,179,013 1,110,492
Research and development - 13,307
Stock option expense 22,986 21,010
Depreciation and amortization 42,747 23,495
---------------- ----------------
TOTAL OPERATING EXPENSES 1,244,746 1,168,304
---------------- ----------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME AND TAXES (516,956) (364,921)
---------------- ----------------
OTHER INCOME/(EXPENSE)
Other income 15,678 29,094
Gain on sale of fixed assets 9,778 2,500
Gain/(Loss) on extinguishment of debt (6,367) 8,807
Loss on changes in derivative liability (1,869,301) -
Interest expense (46,979) (7,706)
---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) (1,897,191) 32,695
---------------- ----------------
LOSS FROM OPERATIONS BEFORE PROVISION FOR TAXES (2,414,147) (332,226)
---------------- ----------------
PROVISION FOR INCOME (TAXES)/BENEFIT
Income taxes paid - (1,616)
Income tax (provision)/benefit - -
---------------- ----------------
PROVISION FOR INCOME (TAXES)/BENEFIT - (1,616)
---------------- ----------------
NET LOSS $ (2,414,147) $ (333,842)
================ ================
LOSS PER SHARE
BASIC AND DILUTED $ (0.02) $ (0.00)
================ ================
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 100,384,960 96,135,126
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
-18-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Value Shares Value Capital Deficit Total
----------- ----------- -------------- ----------- ------------- -------------- --------------
Balance, June 30, 2012 - $ - 96,135,126 $ 96,135 $ 7,334,613 $ (7,450,007) $ (19,259)
Stock compensation expense - - - - 21,010 - 21,010
Contributed services - - - - 12,000 - 12,000
Net loss - - - - - (333,842) (333,842)
Discount on Note - - - - 6,000 - 6,000
----------- ----------- -------------- ----------- ------------- -------------- --------------
Balance, June 30, 2013 - - 96,135,126 96,135 7,373,623 (7,783,849) (314,091)
Stock compensation expense - - - - 22,986 - 22,986
Note conversion - - 4,743,699 4,744 14,231 - 18,975
Net loss - - - - - (2,414,147) (2,414,147)
Discount on Note - - - - 55,250 - 55,250
----------- ----------- -------------- ----------- ------------- -------------- --------------
Balance, June 30, 2014 - $ - 100,878,825 $ 100,879 $ 7,466,090 $ (10,197,996) $ (2,631,027)
=========== =========== ============== =========== ============= ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
-19-
WARP 9, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
June 30, 2014 June 30, 2013
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,414,147) $ (333,842)
Adjustment to reconcile net loss to net cash
(used) by operating activities
Depreciation and amortization 42,747 23,496
Bad debt expense - (27,502)
Cost of stock compensation recognized 22,986 21,010
Contributed services - 12,000
Amortization of debt discount 20,477 542
Gain on sale of fixed assets (9,778) (2,500)
Loss/(Gain) on settlement of debt 6,367 (8,807)
Loss on change in derivative liability 1,869,301 -
Change in assets and liabilities:
(Increase) Decrease in:
Accounts receivable (38,506) 57,955
Prepaid and other assets (10,052) 10,449
Other assets 5,000 12,000
Increase (Decrease) in:
Accounts payable 46,770 94,534
Accrued expenses 139,014 5,583
Deferred income 3,300 (32,853)
Other liabilities (6,117) (7,608)
------------- --------------
NET CASH (USED) IN OPERATING ACTIVITIES (322,638) (175,543)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,735) (7,425)
Proceeds from sale of fixed assets 9,778 2,500
------------- --------------
NET CASH PROVIDED/(USED) IN INVESTING ACTIVITIES 5,043 (4,925)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 355,000 130,000
------------- --------------
NET CASH PROVIDED IN FINANCING ACTIVITIES 355,000 130,000
------------- --------------
NET INCREASE/(DECREASE) IN CASH 37,405 (50,468)
CASH, BEGINNING OF YEAR 12,636 63,104
------------- --------------
CASH, END OF YEAR $ 50,041 $ 12,636
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 66 $ 578
============= ==============
Taxes paid $ 3,828 $ 2,989
============= ==============
The accompanying notes are an integral part of these
consolidated financial statements.
-20-
WARP 9,24, 2015
-21-
| CLOUDCOMMERCE, INC. (FORMERLY WARP9, INC.) AND SUBSIDIARY | |||||
| CONSOLIDATED BALANCE SHEETS | |||||
| June 30, 2016 | June 30, 2015 | ||||
| ASSETS | |||||
| CURRENT ASSETS | |||||
| Cash | $ | 49,663 | $ | 19,051 | |
| Accounts receivable, net | 427,866 | 138,308 | |||
| Prepaid and other current Assets | 12,426 | 5,048 | |||
| TOTAL CURRENT ASSETS | 489,955 | 162,407 | |||
| PROPERTY & EQUIPMENT, net | 73,158 | 8,668 | |||
| OTHER ASSETS | |||||
| Lease deposit | 3,500 | 5,955 | |||
| Internet domain | 20,202 | 20,202 | |||
| Goodwill and other intangible assets, net | 1,623,624 | - | |||
| TOTAL OTHER ASSETS | 1,647,326 | 26,157 | |||
| TOTAL ASSETS | $ | 2,210,439 | $ | 197,232 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | |||||
| CURRENT LIABILITIES | |||||
| Accounts payable | $ | 177,383 | $ | 61,866 | |
| Accrued expenses | 267,805 | 70,713 | |||
| Line of credit | 83,540 | - | |||
| Deferred income and customer deposit | 335,642 | 11,998 | |||
| Convertible notes and interest payable, current, net | 87,086 | 619,321 | |||
| Notes Payable | 461,979 | - | |||
| Derivative liability | - | 1,951,201 | |||
| TOTAL CURRENT LIABILITIES | 1,413,435 | 2,715,099 | |||
| LONG TERM LIABILITIES | |||||
| Convertible notes and interest payable, net | - | 81,563 | |||
| Accrued expenses, long term | 213,753 | 217,953 | |||
| TOTAL LONG TERM LIABILITIES | 213,753 | 299,516 | |||
| TOTAL LIABILITIES | 1,627,188 | 3,014,615 | |||
| SHAREHOLDERS' EQUITY (DEFICIT) | |||||
| Preferred stock, $0.001 par value; | |||||
| 5,000,000 Authorized shares: | - | - | |||
| Series A Preferred stock; 10,000 authorized, 10,000 and zero | |||||
| issued and outstanding shares, respectively; | 10 | - | |||
| Series B Preferred stock; 20,000 authorized, 18,025 and zero shares issued and | |||||
| outstanding, respectively; | 18 | - | |||
| Common stock, $0.001 par value; | |||||
| 2,000,000,000 authorized shares; | |||||
| 129,899,595 and 105,790,195 shares issued and outstanding, respectively | 129,899 | 105,790 | |||
| Additional paid in capital | 18,547,641 | 7,679,033 | |||
| Accumulated deficit | (18,094,317) | (10,602,206) | |||
| TOTAL SHAREHOLDERS' EQUITY (DEFICIT) | 583,251 | (2,817,383) | |||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | $ | 2,210,439 | $ | 197,232 | |
| The accompanying notes are an integral part of these consolidated financial statements | |||||
-22-
| CLOUDCOMMERCE, INC. (FORMERLY WARP9, INC.) AND SUBSIDIARY | ||||||
| CONSOLIDATED STATEMENT OF OPERATIONS | ||||||
| Year Ended | ||||||
| June 30, 2016 | June 30, 2015 | |||||
| REVENUE | $ | 2,079,743 | $ | 598,345 | ||
| OPERATING EXPENSES | ||||||
| Salaries and outside services | 2,619,188 | 920,371 | ||||
| Selling, general and administrative expenses | 1,067,777 | 363,794 | ||||
| Stock based compensation | 485,993 | 150,610 | ||||
| Depreciation and amortization | 183,767 | 6,073 | ||||
| TOTAL OPERATING EXPENSES | 4,356,725 | 1,440,848 | ||||
| LOSS FROM OPERATIONS BEFORE OTHER INCOME AND TAXES | (2,276,982) | (842,503) | ||||
| OTHER INCOME (EXPENSE) | ||||||
| Other income | 658 | 300 | ||||
| Gain (loss) on sale of fixed assets | (329) | - | ||||
| Gain (loss) on extinguishment of debt | (559,867) | 118,492 | ||||
| Gain (loss) on changes in derivative liability | (3,258,891) | 892,614 | ||||
| Interest expense | (1,389,897) | (570,037) | ||||
| TOTAL OTHER INCOME (EXPENSE) | (5,208,326) | 441,369 | ||||
| LOSS FROM OPERATIONS BEFORE PROVISION FOR TAXES | (7,485,308) | (401,134) | ||||
| PROVISION FOR INCOME TAXES | (6,803) | (3,076) | ||||
| NET LOSS | (7,492,111) | (404,210) | ||||
| PREFERRED DIVIDEND | (60,000) | - | ||||
| NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (7,552,111) | $ | (404,210) | ||
| NET LOSS PER SHARE | ||||||
| BASIC | $ | (0.07) | $ | (0.00) | ||
| DILUTED | $ | (0.07) | $ | (0.00) | ||
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | ||||||
| BASIC | 106,255,568 | 104,363,874 | ||||
| DILUTED | 106,255,568 | 104,363,874 | ||||
| The accompanying notes are an integral part of these consolidated financial statements | ||||||
-23-
| CLOUDCOMMERCE, INC. (FORMERLY WARP9, INC.) AND SUBSIDIARY | |||||||||||||||||||
| CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) | |||||||||||||||||||
| Additional | |||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | |||||||||||||
| Balance, June 30, 2014 | - | - | 100,878,825 | 100,879 | 7,466,090 | (10,197,996) | (2,631,027) | ||||||||||||
| Stock compensation expense | - | - | - | - | 150,610 | - | 150,610 | ||||||||||||
| Contributed capital | - | - | - | - | 8,308 | - | 8,308 | ||||||||||||
| Note conversion | - | - | 4,911,370 | 4,911 | 54,025 | - | 58,936 | ||||||||||||
| Net loss | - | - | - | - | - | (404,210) | (404,210) | ||||||||||||
| Balance, June 30, 2015 | - | $ | - | 105,790,191 | $ | 105,790 | $ | 7,679,033 | $ | (10,602,206) | $ | (2,817,383) | |||||||
| Issuance of Series A Preferred stock | 10,000 | 10 | - | - | 1,999,990 | - | 2,000,000 | ||||||||||||
| Issuance of Series B Preferred stock | 18,025 | 18 | - | - | 2,041,235 | - | 2,041,253 | ||||||||||||
| Reclassification of derivative accounting | - | - | - | - | 5,636,592 | - | 5,636,592 | ||||||||||||
| Beneficial conversion feature | - | - | - | - | 788,907 | - | 788,907 | ||||||||||||
| Warrant conversion | - | - | 24,109,404 | 24,109 | (24,109) | - | - | ||||||||||||
| Dividend on Series A Preferred stock | - | - | - | - | (60,000) | - | (60,000) | ||||||||||||
| Stock based compensation | - | - | - | - | 485,993 | - | 485,993 | ||||||||||||
| Net loss | - | - | - | - | - | (7,492,111) | (7,492,111) | ||||||||||||
| Balance, June 30, 2016 | 28,025 | $ | 28 | 129,899,595 | $ | 129,899 | $ | 18,547,641 | $ | (18,094,317) | $ | 583,251 | |||||||
| The accompanying notes are an integral part of these consolidated financial statements | |||||||||||||||||||
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| CLOUDCOMMERCE, INC. (FORMERLY WARP9, INC.) AND SUBSIDIARY | |||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||
| Year Ended | |||||||||
| June 30, 2016 | June 30, 2015 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||
| Net loss | $ | (7,492,111) | $ | (404,210) | |||||
| Adjustment to reconcile net loss to net cash | |||||||||
| used in operating activities | |||||||||
| Depreciation and amortization | 183,767 | 6,073 | |||||||
| Bad debt expense | 31,194 | (10,927) | |||||||
| Stock based compensation | 485,993 | 150,610 | |||||||
| Amortization of debt discount | 1,216,732 | 488,681 | |||||||
| (Gain) loss on sale of fixed assets | 329 | - | |||||||
| (Gain) loss on extinguishment of debt | 559,867 | (118,492) | |||||||
| (Gain)/Loss on derivative liability | 3,258,891 | (892,614) | |||||||
| Change in assets and liabilities: | |||||||||
| (Increase) Decrease in: | |||||||||
| Accounts receivable | (2,392) | (25,988) | |||||||
| Prepaid and other assets | 1,577 | (19,810) | |||||||
| Increase (Decrease) in: | |||||||||
| Accounts payable | 15,606 | (8,080) | |||||||
| Accrued expenses | 202,866 | 80,422 | |||||||
| Deferred income | 323,644 | 4,700 | |||||||
| Other liabilities | 131,330 | - | |||||||
| NET CASH (USED IN) OPERATING ACTIVITIES | (1,082,707) | (749,635) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||
| Purchase of property and equipment | (16,198) | (2,355) | |||||||
| Sale of property and equipment | 244 | ||||||||
| Net cash on acquisition | 22,773 | - | |||||||
| Purchase of intangible assets | (10,000) | - | |||||||
| NET CASH (USED IN) INVESTING ACTIVITIES | (3,181) | (2,355) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||
| Dividend paid | (40,000) | - | |||||||
| Proceeds from issuance of notes payable | 1,156,500 | �� 721,000 | |||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,116,500 | 721,000 | |||||||
| NET INCREASE/(DECREASE) IN CASH | 30,612 | (30,990) | |||||||
| CASH, BEGINNING OF YEAR | 19,051 | 50,041 | |||||||
| CASH, END OF PERIOD | $ | 49,663 | $ | 19,051 | |||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||
| Interest paid | $ | 12,531 | $ | 44 | |||||
| Taxes paid | $ | 8,548 | $ | 3,076 | |||||
| The accompanying notes are an integral part of these consolidated financial statements | |||||||||
-25-
CLOUDCOMMERCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20142016 AND 2013
2015
1. ORGANIZATION AND LINE OF BUSINESS
ORGANIZATION
Warp 9,
Organization
CloudCommerce, Inc. (the("we", "us", "our" or the "Company") is a Nevada corporation formerly known as Warp 9, Inc., Roaming Messenger, Inc., formerly known asand Latinocare Management Corporation ("LMC"). On August 24, 2006, the Company's board of directors
and a majority of shareholders voted to changeJuly 9, 2015, we changed the name of the Company from Roaming Messenger,Warp 9, Inc. to Warp 9,CloudCommerce, Inc. to reflect a new strategic plan of focusing primarily on the business of the Company's wholly owned
subsidiary, Warp 9, Inc., a Delaware corporation.strategically acquiring profitable CloudCommerce solutions providers with strong management teams. The Company, based in Goleta,Santa Barbara, California, began operations on October 1, 1999. The Company is a provider of fully hosted web based e-commerce software products. LINE OF BUSINESS
Line of Business
We are a provider of mobile and e-commerce solutions for midsize online sellers, in the retail and business to business ("B2B") industries. Our solutions and services are designed to help multi-channel retailers maximize digital commerce revenues by applying our technologies and solutions for mobile e-commerce, desktop e-commerce, e-mail marketing, social media and other digital avenues. Offered as an outsourced and fully managed Software-as-a-Service ("SaaS") model, our solutions allow customers to focus on their core business, rather than technical implementations and software and hardware architecture, design, and maintenance. We believe our products and services allow our clients to lower costs and focus on promoting and marketing their brand, product line and website while leveraging the investments we have made in technology and infrastructure to operate a dynamic digital presence.
GOING CONCERN
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 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, an additional cash infusion. The Company has obtained funds from its shareholders since its inception through June 30, 2014.2016. It is Management'smanagement's plan to generate additional working capital from increasing sales from its new Warp 9 Total
Commerce Platform ("TCP") and Warp 9 Mobilethe Company's service offerings, and then
continuein addition to pursue its business plan and purposes.
acquiring profitable service providers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Warp 9,CloudCommerce, Inc. is presented to assist in understanding the Company's financial statements. The 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 ("GAAP") and have been consistently applied in the preparation of the financial statements.
The Consolidated Financial Statements include the Company and its majority-owned subsidiary ("Warp 9, Inc., a Delaware corporation").subsidiary. All significant inter-company transactions are eliminated in consolidation.
ACCOUNTS RECEIVABLE
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 contracted 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, 20142016 and 20132015 are $24,907$45,584 and $24,907$4,808 respectively.
-21-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 AND 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
-26-
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include revenue recognition, the allowance for doubtful accounts, the estimate of
useful lives of property and equipment,long-lived assets, intangible assets, business combinations, the deferred tax valuation allowance, and the fair value of stock options and warrants. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
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 the 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 is in accordance with ASC 605-45. 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 605-25, 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. The terms of services contracts generally are for periods of less than one year. The deferred revenue as of June 30, 20142016 and 20132015 was $3,300$331,644 and zero,$8,000, respectively.
For the fiscal year ended, June 30, 2014, monthly recurring fees for mobile
We always strive to satisfy our customers by providing superior quality and desktop e-commerce development account for 19% of the Company's total
revenues, professional services account for 79%service. Since we typically bill based on a Time and the remaining 2% of
total revenues are from resale of third party products and services.
For the fiscal year ended, June 30, 2013, monthly recurring fees for mobile
and desktop e-commerce development account for 24% of the Company's total
revenues, professional services account for 72% and the remaining 4% of
total revenues are from resale of third party products and services.
RETURN POLICY
On all service offerings such as web based e-commerce productsMaterials basis, there are not returns for work delivered. When discrepancies or disagreements arise, we do our best to reconcile those by assessing the situation on a case-by-case basis and determining if any discounts can be given. Historically, no returns. Monthly fees are assessedsignificant discounts have been granted.
Research and revenue is recognized at the end of
every month, after service has been provided. Some higher paying customers
may have service level agreements where we guarantee system uptime such as
99.9% of the time per month. If we fall below the agreed upon level of
uptime, we shall credit one day of service fee for each hour our system is
down up to a maximum of one monthly fee. This guarantee only covers
downtime as a result of failure in the Company's cloud hosting architecture
or gross negligence. Historically, the Company has not had to issue any
credits for such returns.
COST OF REVENUE
Cost of revenue includes the direct costs of operating the Company's cloud
hosting architecture, contractors involved in the production process and
certain third party internet marketing charges.
RESEARCH AND DEVELOPMENTDevelopment
Research and development costs are expensed as incurred. Total research and development costs were zero and $13,307 for the years ended June 30, 20142016 and 2013, respectively.
-22-
WARP 9, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014 AND 2013
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ADVERTISING COSTS2015.
Advertising Costs
The Company expenses the cost of advertising and promotional materials when incurred. Total advertising costs were $22,137$57,654 and $498$61,157 for the years ended June 30, 20142016 and 2013,2015, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
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, 20142016 and 2013,2015, the Company's
capital lease obligations and 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 that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-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)1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
o
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
o
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
o
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.