UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20192020
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For the transition period from ________ to ________
Commission File Number: 000-52635
CFN ENTERPRISES INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-3858769 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2601 OCEAN PARK BOULEVARD, SUITE 310
SANTA MONICA,600 E. 8TH STREET
CALIFORNIA 90405WHITEFISH, MT 59937
(Address of principal executive offices) (Zip code)
(310) 314-8804(833) 420-2636
(Registrant’s Telephone Number, including Area Code)
ACCELERIZE INC.(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company |
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No [X]☒
The number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, as of November 6, 2019,October 16, 2020, was 99,679,709.104,792,209.
When used in this quarterly report, the terms “CFN Enterprises,” “the Company,” “we,” “our,” and “us” refer to CFN Enterprises Inc., a Delaware corporation.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This quarterly report on Form 10-Q contains certain forward-looking statements. Forward-looking statements may include our statements regarding our goals, beliefs, strategies, objectives, plans, including product and service developments, future financial conditions, results or projections or current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. For example, when we discuss our expectations for 2019,2020, our expectations for revenue sources, costs of revenue and expenses going forward, and that we will continue to pursue strategic transactions and opportunities, we are using forward-looking statements. These statements are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. These factors include, but are not limited to, our ability to implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. The business and operations of CFN Enterprises Inc. are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described under “Item 1A. Risk Factors” contained in our annual report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, on April 16, 2019, and in our quarterly report on Form 10-Q as filed with the SEC on August 16, 2019.June 15, 2020. Readers are also urged to carefully review and consider the various disclosures we have made in this report and in our annual report on Form 10-K.
CFN ENTERPRISES INC.
(F/K/A ACCELERIZE INC.)
INDEX
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PART I - FINANCIAL INFORMATION: | 1 |
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Item 1. Financial Statements (Unaudited) | 1 |
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Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations |
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Item 4. Controls and Procedures |
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PART II - OTHER INFORMATION: |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| Item 5. Other Information | 22 |
Item 6. Exhibits |
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SIGNATURES |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CFN ENTERPRISES INC.
(F/K/A ACCELERIZE INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | Assets | Assets | ||||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 975,434 | $ | 27,295 | $ | 107,519 | $ | 107,727 | ||||||||
Restricted cash | - | 50,000 | 20,000 | - | ||||||||||||
Accounts receivable, net | 231,503 | - | 42,837 | 72,649 | ||||||||||||
Inventory | 38,427 | - | ||||||||||||||
Prepaid expenses and other current assets | 3,401 | - | 4,665 | 4,136 | ||||||||||||
Current assets of discontinued operations | - | 2,336,311 | ||||||||||||||
Total current assets | 1,210,338 | 2,413,606 | 213,448 | 184,512 | ||||||||||||
Other assets | ||||||||||||||||
Property and equipment | 3,369 | - | 8,428 | 3,020 | ||||||||||||
Goodwill | 3,225,817 | - | ||||||||||||||
Other intangible assets | 558,475 | - | ||||||||||||||
Noncurrent assets of discontinued operations | - | 160,246 | ||||||||||||||
Total other assets | 3,787,661 | 160,246 | 8,428 | 3,020 | ||||||||||||
Total assets | $ | 4,997,999 | $ | 2,573,852 | $ | 221,876 | $ | 187,532 | ||||||||
Liabilities and Stockholders' Equity (Deficit) | ||||||||||||||||
Liabilities and Stockholders' Deficit | Liabilities and Stockholders' Deficit | |||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and accrued expenses | $ | 186,572 | $ | - | $ | 816,213 | $ | 261,539 | ||||||||
Deferred revenues | 45,041 | - | 49,124 | 15,734 | ||||||||||||
Current portion of long-term debt | 144,327 | - | ||||||||||||||
Current liabilities of discontinued operations | 76,028 | 6,861,284 | 79,823 | 99,695 | ||||||||||||
Total current liabilities | 307,641 | 6,861,284 | 1,089,487 | 376,968 | ||||||||||||
Long-term note payable | 482,698 | - | ||||||||||||||
Noncurrent liabilities of discontinued operations | - | 9,185,743 | ||||||||||||||
Long-term notes payable, net of current portion and discounts | 757,255 | 484,177 | ||||||||||||||
Total liabilities | 790,339 | 16,047,027 | 1,846,742 | 861,145 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders' equity (deficit) | ||||||||||||||||
Series A Preferred stock, $0.001 par value, 500 shares authorized, 500 and 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 1 | - | ||||||||||||||
Series B Preferred stock, $0.001 par value, 3,000 shares authorized, 3,000 and 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 3 | - | ||||||||||||||
Common stock, $0.001 par value, 500,000,000 shares authorized, 99,679,709 and 66,179,709 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 99,679 | 66,179 | ||||||||||||||
Stockholders' deficit | ||||||||||||||||
Series A Preferred stock, $0.001 par value, 500 shares authorized, 500 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | 1 | 1 | ||||||||||||||
Series B Preferred stock, $0.001 par value, 3,000 shares authorized, 3,000 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | 3 | 3 | ||||||||||||||
Common stock, $0.001 par value, 500,000,000 shares authorized, 104,792,209 and 99,679,709 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 104,792 | 99,679 | ||||||||||||||
Additional paid-in capital | 34,031,326 | 29,498,125 | 34,281,838 | 34,031,326 | ||||||||||||
Accumulated deficit | (29,836,426 | ) | (42,960,124 | ) | (36,011,500 | ) | (34,721,149 | ) | ||||||||
Accumulated other comprehensive income | (86,923 | ) | (77,355 | ) | - | (83,473 | ) | |||||||||
Total stockholders' equity (deficit) | 4,207,660 | (13,473,175 | ) | |||||||||||||
Total liabilities and stockholders' equity | $ | 4,997,999 | $ | 2,573,852 | ||||||||||||
Total stockholders' deficit | (1,624,866 | ) | (673,613 | ) | ||||||||||||
Total liabilities and stockholders' deficit | $ | 221,876 | $ | 187,532 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements |
CFN ENTERPRISES INC.
(F/K/A ACCELERIZE INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Net revenues | $ | 568,992 | $ | - | $ | 631,712 | $ | - | $ | 154,369 | $ | 568,992 | $ | 349,071 | $ | 631,712 | ||||||||||||||||
Cost of revenue | 381,277 | - | 414,726 | - | 128,885 | 381,277 | 414,154 | 414,726 | ||||||||||||||||||||||||
Gross profit | 187,715 | - | 216,986 | - | ||||||||||||||||||||||||||||
Gross profit (loss) | 25,484 | 187,715 | (65,083 | ) | 216,986 | |||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Selling, general and administrative | 600,663 | 313,536 | 1,495,492 | 1,016,368 | 307,069 | 600,663 | 906,739 | 1,495,492 | ||||||||||||||||||||||||
Total operating expenses | 600,663 | 313,536 | 1,495,492 | 1,016,368 | 307,069 | 600,663 | 906,739 | 1,495,492 | ||||||||||||||||||||||||
Loss from operations | (412,948 | ) | (313,536 | ) | (1,278,506 | ) | (1,016,368 | ) | (281,585 | ) | (412,948 | ) | (971,822 | ) | (1,278,506 | ) | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest expense | (2,514 | ) | - | (2,514 | ) | - | (13,560 | ) | (2,514 | ) | (38,055 | ) | (2,514 | ) | ||||||||||||||||||
Loss on extinguishment of debt | (30,069 | ) | - | (30,069 | ) | - | ||||||||||||||||||||||||||
Other income | 10,000 | - | 10,000 | - | ||||||||||||||||||||||||||||
Interest income | 19 | 25 | 131 | 61 | 2 | 19 | 17 | 131 | ||||||||||||||||||||||||
Total other income (expense) | (2,495 | ) | 25 | (2,383 | ) | 61 | (33,627 | ) | (2,495 | ) | (58,107 | ) | (2,383 | ) | ||||||||||||||||||
Net loss before provision for income taxes | (415,443 | ) | (313,511 | ) | (1,280,889 | ) | (1,016,307 | ) | (315,212 | ) | (415,443 | ) | (1,029,929 | ) | (1,280,889 | ) | ||||||||||||||||
Provision for income taxes | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net loss from continuing operations | (415,443 | ) | (313,511 | ) | (1,280,889 | ) | (1,016,307 | ) | (315,212 | ) | (415,443 | ) | (1,029,929 | ) | (1,280,889 | ) | ||||||||||||||||
Gain (loss) from discontinued operations, net of tax | 1,113 | (1,649,626 | ) | 14,471,162 | (3,767,333 | ) | (80,422 | ) | 1,113 | (80,422 | ) | 14,471,162 | ||||||||||||||||||||
Net income (loss) | $ | (414,330 | ) | $ | (1,963,137 | ) | $ | 13,190,273 | $ | (4,783,640 | ) | $ | (395,634 | ) | $ | (414,330 | ) | $ | (1,110,351 | ) | $ | 13,190,273 | ||||||||||
Preferred stock interest | 60,000 | - | 66,575 | - | 60,000 | 60,000 | 180,000 | 66,575 | ||||||||||||||||||||||||
Net income (loss) available to common shareholders | $ | (474,330 | ) | $ | (1,963,137 | ) | $ | 13,123,698 | $ | (4,783,640 | ) | $ | (455,634 | ) | $ | (474,330 | ) | $ | (1,290,351 | ) | $ | 13,123,698 | ||||||||||
Net loss from continuing operations per share, basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.02 | ) | ||||||||
Net income (loss) from discontinued operations per share, basic and diluted | $ | 0.00 | $ | (0.02 | ) | $ | 0.18 | $ | (0.06 | ) | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.18 | ||||||||||||||
Weighted average number of common shares outstanding, basic and diluted | 99,679,709 | 66,177,101 | 78,696,193 | 66,019,709 | 102,808,921 | 99,679,709 | 100,814,828 | 78,696,193 | ||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements |
CFN ENTERPRISES INC.
(F/K/A ACCELERIZE INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Net income (loss) | $ | (414,330 | ) | $ | (1,963,137 | ) | $ | 13,190,273 | $ | (4,783,640 | ) | $ | (395,634 | ) | $ | (414,330 | ) | $ | (1,110,351 | ) | $ | 13,190,273 | ||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (13,050 | ) | (7,166 | ) | (9,568 | ) | (20,683 | ) | - | (13,050 | ) | (456 | ) | (9,568 | ) | |||||||||||||||||
Total other comprehensive income (loss), net of tax | (13,050 | ) | (7,166 | ) | (9,568 | ) | (20,683 | ) | - | (13,050 | ) | (456 | ) | (9,568 | ) | |||||||||||||||||
Comprehensive income (loss) | $ | (427,380 | ) | $ | (1,970,303 | ) | $ | 13,180,705 | $ | (4,804,323 | ) | $ | (395,634 | ) | $ | (427,380 | ) | $ | (1,110,807 | ) | $ | 13,180,705 | ||||||||||
See accompanying notes to unaudited condensed consolidated financial statements |
CFN ENTERPRISES INC.
(F/K/A ACCELERIZE INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)DEFICIT
For the Three and Nine Month period ended September 30, 2020 and 2019
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity (Deficit) | |||||||||||||||||||||||||||||||
Balance, June 30, 2020 | 500 | $ | 1 | 3,000 | $ | 3 | 99,929,709 | $ | 99,929 | $ | 34,035,933 | $ | (35,555,866 | ) | $ | (83,929 | ) | $ | (1,503,929 | ) | ||||||||||||||||||||
Share-based compensation | 62,500 | 63 | 10,705 | 10,768 | ||||||||||||||||||||||||||||||||||||
Shares issued as payment of accounts payable and accrued interest | 4,800,000 | 4,800 | 235,200 | 240,000 | ||||||||||||||||||||||||||||||||||||
Preferred stock interest | (60,000 | ) | (60,000 | ) | ||||||||||||||||||||||||||||||||||||
Net loss | (395,634 | ) | (395,634 | ) | ||||||||||||||||||||||||||||||||||||
Foreign currency translation | 83,929 | 83,929 | ||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | 500 | $ | 1 | 3,000 | $ | 3 | 104,792,209 | $ | 104,792 | $ | 34,281,838 | $ | (36,011,500 | ) | $ | - | $ | (1,624,866 | ) | |||||||||||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity (Deficit) | |||||||||||||||||||||||||||||||
Balance, December 31, 2019 | 500 | $ | 1 | 3,000 | $ | 3 | 99,679,709 | $ | 99,679 | $ | 34,031,326 | $ | (34,721,149 | ) | $ | (83,473 | ) | $ | (673,613 | ) | ||||||||||||||||||||
Share-based compensation | 312,500 | 313 | 15,312 | 15,625 | ||||||||||||||||||||||||||||||||||||
Shares issued as payment of accounts payable and accrued interest | 4,800,000 | 4,800 | 235,200 | 240,000 | ||||||||||||||||||||||||||||||||||||
Preferred stock interest | (180,000 | ) | (180,000 | ) | ||||||||||||||||||||||||||||||||||||
Net loss | (1,110,351 | ) | (1,110,351 | ) | ||||||||||||||||||||||||||||||||||||
Foreign currency translation | 83,473 | 83,473 | ||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | 500 | $ | 1 | 3,000 | $ | 3 | 104,792,209 | $ | 104,792 | $ | 34,281,838 | $ | (36,011,500 | ) | $ | - | $ | (1,624,866 | ) | |||||||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||||||||||||||
Balance, June 30, 2019 | 500 | $ | 1 | 3,000 | $ | 3 | 99,679,709 | $ | 99,679 | $ | 34,013,702 | $ | (29,362,096 | ) | $ | (73,873 | ) | $ | 4,677,416 | |||||||||||||||||||||
Fair value of warrants issued with promissory notes | - | - | - | - | - | - | 17,624 | - | - | 17,624 | ||||||||||||||||||||||||||||||
Preferred stock interest | - | - | - | - | - | - | - | (60,000 | ) | - | (60,000 | ) | ||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (414,330 | ) | - | (414,330 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | - | - | (13,050 | ) | (13,050 | ) | ||||||||||||||||||||||||||||
Balance, September 30, 2019 | 500 | $ | 1 | 3,000 | $ | 3 | 99,679,709 | $ | 99,679 | $ | 34,031,326 | $ | (29,836,426 | ) | $ | (86,923 | ) | $ | 4,207,660 | |||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||||||||||||||
Balance, December 31, 2018 | - | $ | - | - | $ | - | 66,179,709 | $ | 66,179 | $ | 29,498,125 | $ | (42,960,124 | ) | $ | (77,355 | ) | $ | (13,473,175 | ) | ||||||||||||||||||||
Fair value of options and restricted stock awards | - | - | - | - | - | - | 70,963 | - | - | 70,963 | ||||||||||||||||||||||||||||||
Fair value of warrants | - | - | - | - | - | - | 126,810 | - | - | 126,810 | ||||||||||||||||||||||||||||||
Fair value of warrants issued with promissory notes | - | - | - | - | - | - | 62,294 | - | - | 62,294 | ||||||||||||||||||||||||||||||
Fair value of repricing adjustment | - | - | - | - | - | - | 104,638 | - | - | 104,638 | ||||||||||||||||||||||||||||||
Conversion of debt into Series A Preferred Stock | 500 | 1 | - | - | - | - | 499,999 | - | - | 500,000 | ||||||||||||||||||||||||||||||
Issuance of Series B Preferred Stock for acquisition of CFN | - | - | 3,000 | 3 | - | - | 686,997 | - | - | 687,000 | ||||||||||||||||||||||||||||||
Issuance of common stock for acquistion of CFN | - | - | - | - | 30,000,000 | 30,000 | 2,670,000 | - | - | 2,700,000 | ||||||||||||||||||||||||||||||
Issuance of common stock as payment of interest | - | - | - | - | 3,500,000 | 3,500 | 311,500 | - | - | 315,000 | ||||||||||||||||||||||||||||||
Preferred stock interest | - | - | - | - | - | - | - | (66,575 | ) | - | (66,575 | ) | ||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 13,190,273 | - | 13,190,273 | ||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | - | - | (9,568 | ) | (9,568 | ) | ||||||||||||||||||||||||||||
Balance, September 30, 2019 | 500 | $ | 1 | 3,000 | $ | 3 | 99,679,709 | $ | 99,679 | $ | 34,031,326 | $ | (29,836,426 | ) | $ | (86,923 | ) | $ | 4,207,660 | |||||||||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||||||||||||||
Balance, June 30, 2018 | - | $ | - | - | $ | - | 65,939,709 | $ | 65,938 | $ | 28,543,529 | $ | (34,363,187 | ) | $ | (55,057 | ) | $ | (5,808,777 | ) | ||||||||||||||||||||
Fair value of options and restricted stock awards | - | - | - | - | 240,000 | 240 | 37,137 | - | - | 37,377 | ||||||||||||||||||||||||||||||
Fair value of warrants | - | - | - | - | - | - | 101,836 | - | - | 101,836 | ||||||||||||||||||||||||||||||
Fair value of warrants issued with promissory notes | - | - | - | - | - | - | 689,281 | - | - | 689,281 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (1,963,137 | ) | - | (1,963,137 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | - | - | (7,166 | ) | (7,166 | ) | ||||||||||||||||||||||||||||
Balance, September 30, 2018 | - | $ | - | - | $ | - | 66,179,709 | $ | 66,178 | $ | 29,371,783 | $ | (36,326,324 | ) | $ | (62,223 | ) | $ | (6,950,586 | ) | ||||||||||||||||||||
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Total | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Income | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | - | $ | - | - | $ | - | 65,939,709 | $ | 65,938 | $ | 26,301,747 | $ | (31,542,684 | ) | $ | (41,540 | ) | $ | (5,216,539 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | - | $ | - | - | $ | - | 66,179,709 | $ | 66,179 | $ | 29,498,125 | $ | (42,960,124 | ) | $ | (77,355 | ) | $ | (13,473,175 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of options and restricted stock awards | - | - | - | - | 240,000 | 240 | 113,058 | - | - | 113,298 | - | - | - | - | - | - | 70,963 | - | - | 70,963 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of warrants | - | - | - | - | - | - | 229,401 | - | - | 229,401 | - | - | - | - | - | - | 126,810 | - | - | 126,810 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of warrants issued with promissory notes | - | - | - | - | - | - | 2,727,577 | - | - | 2,727,577 | - | - | - | - | - | - | 62,294 | - | - | 62,294 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (4,783,640 | ) | - | (4,783,640 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of repricing adjustment | - | - | - | - | - | - | 104,638 | - | - | 104,638 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of debt into Series A Preferred Stock | 500 | 1 | - | - | - | - | 499,999 | - | - | 500,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series B Preferred Stock for acquisition of CFN | - | - | 3,000 | 3 | - | - | 686,997 | - | - | 687,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for acquisition of CFN | - | - | - | - | 30,000,000 | 30,000 | 2,670,000 | - | - | 2,700,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock as payment of interest | - | - | - | - | 3,500,000 | 3,500 | 311,500 | - | - | 315,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock interest | - | - | - | - | - | - | - | (66,575 | ) | - | (66,575 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 13,190,273 | - | 13,190,273 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | - | - | (20,683 | ) | (20,683 | ) | - | - | - | - | - | - | - | - | (9,568 | ) | (9,568 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2018 | - | $ | - | - | $ | - | 66,179,709 | $ | 66,178 | $ | 29,371,783 | $ | (36,326,324 | ) | $ | (62,223 | ) | $ | (6,950,586 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | 500 | $ | 1 | 3,000 | $ | 3 | 99,679,709 | $ | 99,679 | $ | 34,031,326 | $ | (29,836,426 | ) | $ | (86,923 | ) | $ | 4,207,660 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements |
CFN ENTERPRISES INC.
(F/K/A ACCELERIZE INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income (loss) | $ | 13,190,273 | $ | (4,783,640 | ) | $ | (1,110,351 | ) | $ | 13,190,273 | ||||||
Gain (loss) from discontinued operations | (80,422 | ) | 14,471,162 | |||||||||||||
Net loss from continuing operations | (1,029,929 | ) | (1,280,889 | ) | ||||||||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||
Restricted stock awards | - | 60,000 | ||||||||||||||
Depreciation and amortization | 52,132 | 461,893 | 1,225 | 565 | ||||||||||||
Gain on sale of CAKE Business | (19,473,080 | ) | - | |||||||||||||
Loss on extinguishment of debt | 30,069 | - | ||||||||||||||
Share-based compensation | 15,625 | - | ||||||||||||||
Amortization of deferred financing cost | 2,512,282 | 636,125 | 4,405 | 322 | ||||||||||||
Provision for bad debt | 54,264 | (202,221 | ) | 20,000 | - | |||||||||||
Fair value of options and warrants | 197,773 | 342,698 | ||||||||||||||
Loss on sale of fixed assets | - | 997 | ||||||||||||||
Issuance of common stock as payment of interest | 315,000 | - | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (183,558 | ) | 764,381 | 9,812 | (231,503 | ) | ||||||||||
Inventory | (38,427 | ) | - | |||||||||||||
Prepaid expenses and other current assets | 199,965 | 147,888 | (529 | ) | (3,401 | ) | ||||||||||
Other assets | 68,482 | 13,346 | ||||||||||||||
Accounts payable and accrued expenses | (2,224,935 | ) | (415,072 | ) | 644,606 | 186,572 | ||||||||||
Deferred revenue | (260,497 | ) | 264,065 | 33,390 | 45,041 | |||||||||||
Other liabilities | (602,083 | ) | - | |||||||||||||
Net cash used in operating activities of continuing operations | (309,754 | ) | (1,223,293 | ) | ||||||||||||
Net cash used in operating activities of discontinued operations | (16,365 | ) | (4,930,689 | ) | ||||||||||||
Net cash used in operating activities | (6,153,982 | ) | (2,769,540 | ) | (326,119 | ) | (6,153,982 | ) | ||||||||
Cash flows from investing activities | ||||||||||||||||
Capitalized software for internal use | - | (1,125,000 | ) | |||||||||||||
Purchase of property and equipment | (1,751 | ) | (31,579 | ) | (6,633 | ) | (1,751 | ) | ||||||||
Proceeds from sale of fixed assets | - | 750 | ||||||||||||||
Proceeds from sale of CAKE Business | 20,892,667 | - | ||||||||||||||
Payments for acquisition of subsidiary | (420,000 | ) | - | - | (420,000 | ) | ||||||||||
Net cash used in investing activities of continuing operations | (6,633 | ) | (421,751 | ) | ||||||||||||
Net cash provided by investing activities of discontinued operations | - | 20,892,667 | ||||||||||||||
Net cash provided by (used in) investing activities | 20,470,916 | (1,155,829 | ) | (6,633 | ) | 20,470,916 | ||||||||||
Cash flows from financing activities | ||||||||||||||||
Principal repayments of credit facility and loan | (11,772,514 | ) | (2,402,652 | ) | ||||||||||||
Proceeds from credit facility | 900,000 | 5,489,850 | ||||||||||||||
Proceeds from notes payable | 413,000 | 500,000 | ||||||||||||||
Payment of preferred stock interest | (35,000 | ) | - | (60,000 | ) | (35,000 | ) | |||||||||
Proceeds from promissory notes | 500,000 | 3,500,000 | ||||||||||||||
Repayment of related party notes | (300,000 | ) | - | |||||||||||||
Repayment of promissory notes | (2,700,000 | ) | (1,000,000 | ) | ||||||||||||
Net cash (used in) provided by financing activities | (13,407,514 | ) | 5,587,198 | |||||||||||||
Net cash provided by financing activities of continuing operations | 353,000 | 465,000 | ||||||||||||||
Net cash used in financing activities of discontinued operations | - | (13,872,514 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 353,000 | (13,407,514 | ) | |||||||||||||
Effect of exchange rate fluctuations on cash | (11,281 | ) | (20,683 | ) | (456 | ) | (11,281 | ) | ||||||||
Net change in cash and restricted cash | 898,139 | 1,641,146 | 19,792 | 898,139 | ||||||||||||
Cash and restricted cash, beginning of the period | 77,295 | 216,883 | 107,727 | 77,295 | ||||||||||||
Cash and restricted cash, end of the period | $ | 975,434 | $ | 1,858,029 | $ | 127,519 | $ | 975,434 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Interest paid | $ | 946,691 | $ | 1,133,678 | $ | - | $ | 946,691 | ||||||||
Income taxes paid | $ | - | $ | - | $ | - | $ | - | ||||||||
Supplemental disclosure of non-cash investing and financing information: | ||||||||||||||||
Fair value of warrants issued in connection with line of credit and promissory notes | $ | 62,294 | $ | 2,727,577 | $ | - | $ | 62,294 | ||||||||
Capital expenditure included in accounts payable | $ | - | $ | 1,739 | ||||||||||||
Accrued payables and short-term note directly paid off by credit facility | $ | - | $ | 680,149 | $ | - | $ | 62,379 | ||||||||
Prepaid expenses reclassified to deferred financing costs | $ | - | $ | 70,000 | ||||||||||||
Deferred financing costs incurred in connection with promissory notes | $ | - | $ | 75,000 | ||||||||||||
Accrual of preferred stock interest | $ | 31,575 | $ | - | $ | 120,000 | $ | 31,575 | ||||||||
Accrued interest reclassed to credit facility | $ | 62,379 | $ | - | ||||||||||||
Warrant repricing adjustment | $ | 104,638 | $ | - | $ | - | $ | 104,638 | ||||||||
Conversion of notes payable to Series A Preferred Stock | $ | 500,000 | $ | - | $ | - | $ | 500,000 | ||||||||
Issuance of Series B Preferred Stock for acquisition of subsidiary | $ | 687,000 | $ | - | $ | - | $ | 687,000 | ||||||||
Issuance of common stock for acquisition of subsidiary | $ | 2,700,000 | $ | - | $ | - | $ | 2,700,000 | ||||||||
Issuance of common stock for payment of accrued preferred stock interest | $ | 104,931 | $ | - | ||||||||||||
Issuance of common stock as payment of accounts payable and accrued expenses | $ | 105,000 | $ | - | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements |
CFN ENTERPRISES INC.
(F/K/A ACCELERIZE INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
Organization
CFN Enterprises Inc., formerly known as Accelerize Inc., or the Company, is a Delaware corporation incorporated on November 22, 2005 which owned and operated CAKE, a Software-as-a-Service platform providing online tracking and analytics solutions for advertisers and online marketers. The Company provided software solutions for businesses interested in expanding their online advertising spend. Effective October 22, 2019, the Company filed a certificate of amendment to its certificate of incorporation with the Secretary of State of the State of Delaware to change its corporate name to CFN Enterprises Inc.
On May 15, 2019, the Company entered into an asset purchase agreement, or the Asset Purchase Agreement, with CAKE Software, Inc., a Delaware corporation and a subsidiary of Constellation Software Inc., an Ontario, Canada corporation (TSX: CSU), or Constellation, pursuant to which the Company agreed to sell substantially all of the assets associated with its CAKE and Journey by CAKE business, or the CAKE Business, to Constellation for a base purchase price of $19,400,000 plus or minus an estimated closing date adjustment based on the net tangible assets of the CAKE Business at the closing, a holdback of $500,000 adjusted pursuant to the terms of the Asset Purchase Agreement and payable on the first anniversary of the closing date, and a three year earnout equal to 30% of the amount that the annual net revenue of the CAKE Business exceeds $13,750,000 and payable within 120 days on each of the first, second and third end of month anniversaries of the closing date. The sale of the assets of the CAKE Business pursuant to the Asset Purchase Agreement closed on June 18, 2019, and the Company received proceeds of $20,892,667, net of the estimated closing date adjustment.
As of the closing date, Constellation acquired all of the assets used by the Company in the CAKE Business and assumed the Company’s post-closing obligations under certain vendor, customer and other commercial contracts related to the CAKE Business, including the Company’s lease for its headquarters in Newport Beach, California. The Company’s cash and cash equivalents, and the assets associated with its Accelerize trademark, are excluded from the sale of the CAKE Business. Constellation offered employment to certain of the Company’s employees following the closing date.
On May 15, 2019, the Company entered into the Emerging Growth Agreement with Emerging Growth, LLC (the “Seller” or the Seller,“Emerging Growth”), pursuant to which the Company acquired certain assets from the Seller related to its sponsored content and marketing business for a purchase price consideration consisting of $420,000 in cash, 30,000,000 shares of the Company’s common stock, and 3,000 shares of Series B preferred stock with a total stated value of $3,000,000 which bears interest at 6% per annum and is convertible into the Company’s common stock at a conversion price to be mutually agreed in the future, without voting rights or a liquidation preference except with respect to default interest. The securities were issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended. The closing of the purchase of the assets pursuant to the Emerging Growth Agreement occurred on June 20, 2019.
Subsequent to the closing of the Asset Purchase Agreement on June 18, 2018,2019, the Company’s continuing operations consist of the sponsored content and marketing business from the assets acquired pursuant to the Emerging Growth Agreement.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis which implies the Company will continue to meet its obligations for the next 12 months as of the date these financial statements are issued.
The Company had working capital deficit of $902,697$876,039 and an accumulated deficit of $29,836,426$36,011,500 as of September 30, 2019.2020. The Company also had a net loss from continuing operations of $1,280,889$1,029,929 during the nine months ended September 30, 2019.2020.
As discussed above, on May 15, 2019, the Company entered into the Asset Purchase Agreement with Constellation under which all the net assets associated with the CAKE Business were sold. The proceeds from the Asset Purchase Agreement were used to pay off the Company’s existing debt, as well as to acquire certain assets in the Emerging Growth Agreement from the Seller related to its sponsored content and marketing business. Management’s plan to continue as a going concern includes raising capital in the form of debt or equity, growing theits existing business acquired under the Emerging Growth Agreement, and managing and reducing operating and overhead costs. Thecosts and continuing to pursue strategic transactions and opportunities including launching an e-commerce network focused on the sale of general wellness cannabidiol, or CBD, products. On May 6, 2020, the Company received $263,000 in the form of a loan from the PPP, as well as $150,000 in proceeds from a loan with the SBA on June 24, 2020 (see Note 5). However, the Company cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for the Company to raise additional capital on an immediate basis.
These matters, among others, raise substantial doubt about the ability of the Company to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including each of the areas in which the Company operates. While to date the Company has not been required to stop operating, COVID-19 has had and is expected to continue to have an adverse effect on the financial condition of the Company and its customers. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, it is expected to have a significant adverse impact to the Company’s revenue and ability to obtain financing.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the results of operations of the Company and Cake Marketing UK Ltd., or the Subsidiary. The Company discontinued its operations associated with its CAKE Business and the operations of its Subsidiary in May 2019. The Subsidiary was officially dissolved in August 2020. These accounts have been presented as discontinued operations in the accompanying unaudited condensed consolidated financial statements. Continuing operations presented in periods prior reflect administrative expenses associated with business insurance, legal and accounting fees that the Company will continue to incur. All material intercompany accounts and transactions between the Company and its Subsidiary have been eliminated in consolidation.
These unaudited condensed consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 20182019 and 2017,2018, respectively, which are included in the Company’s December 31, 20182019 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on April 16, 2019.June 15, 2020. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation of these may be determined in that context. The results of operations for the period ended September 30, 20192020 are not necessarily indicative of results for the entire year ending December 31, 2019.2020.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Actual results will differ from those estimates. Included in these estimates are assumptions about collection of accounts receivable, useful life of fixed assets and intangible assets, borrowing rate considered for operating lease right-of-use asset and related operating lease liability, and assumptions used in Black-Scholes valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
Financial Statement Reclassification
Certain account balances from prior periods have been reclassified in these unaudited condensed consolidated financial statements to conform to current period classifications. The prior year amounts have also been reclassified in these financial statements to properly report amounts under current operations and discontinued operations (see noteNote 7).
Segment Reporting
The Company’s sponsored content and marketing business acquired from Emerging Growth in June 2019 has historically been its one reportable segment. The Company is currently in the process of launching an e-commerce network focused on the sale of general wellness CBD products. As of September 30, 2020, the Company has not commenced with sales of these products and the operating activities associated with the e-commerce business have not been significant. However, management expects this e-commerce business to eventually become a reportable segment under GAAP as the business grows and the activity becomes more significant.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less when purchased, to be cash equivalents. The Company had restricted cash as a result of its corporate card program through its bank, which requiredrequires collateral placed in a money market account. The corporate card program was terminated duringDuring the threenine months ended September 30, 2020 and 2019, which resulted in the Company had restricted cash balance being transferred back to the Company for its general use. The Company’s restricted cash amounted tobalances of $20,000 and $0, at September 30, 2019 and $50,000 at December 31, 2018. The restricted cash balance of $50,000 isrespectively, included as a component of total cash and restricted cash as presented on the accompanying unaudited condensed consolidated statement of cash flows for the nine months endedflows. The Company had restricted cash balances at September 30, 2018.2020 and December 31, 2019 of $20,000 and $0, respectively.
Accounts Receivable
The Company’s account receivables are due from customers relating to contracts to provide investor relation services. Collateral is currently not required. The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these estimated allowances, including an analysis of the customers’ payment history and creditworthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to make payments as well as historical collection trends for its customers as a whole. Based on this review, the Company specifically reserves for those accounts deemed uncollectible or likely to become uncollectible. When receivables are determined to be uncollectible, principal amounts of such receivables outstanding are deducted from the allowance. There was noThe allowance for doubtful accounts as of September 30, 2019 or2020 and December 31, 2018.2019 amounted to $183,750 and $163,750, respectively.
Inventory
The Company’s inventory consists of finished goods acquired for its e-commerce network business it is currently in the process of launching. The inventory is valued at the lower of cost (first-in, first-out) or estimated net realizable value.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and cash equivalents and accounts receivable.
The Company’s cash and cash equivalents accounts are held at a financial institution and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000. From time-to-time, the Company’s bank balances exceed the FDIC insurance limit. To reduce its risk associated with the failure of such financial institutions, the Company periodically evaluates the credit quality of the financial institution in which it holds deposits. The Company had cash balances of approximately $665,000 at September 30, 2019 that exceeded the FDIC insurance limit.
The Company's accounts receivable are due from customers located in the United States and Canada. The Company had threefour customers which accounted for 42.0%, 21.0%. 18.7% and 11.7%, respectively, of its net accounts receivable at September 30, 2020. The Company had five customers who each accounted for 13.0%32.3%, 11.7%13.8%, 13.8%, 13.8% and 11.0%10.3%, respectively, of its net accounts receivable at September 30, 2019 and none at December 31, 2018.2019.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification, or ASC, 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
The Company accounts for revenues when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Payment terms vary by client and the services offered.
Prior to the Company discontinuing the operations of its CAKE Business in May 2019, the Company’s SaaS revenues were generated from implementation and training fees and a monthly license fee, supplemented by per transaction fees paid by customers for monthly platform usage. The initial term of the customer contract were generally one year with one of two general cancellation policies. Each party could cancel the contract within the initial period or after the initial period, with 30-days’ prior notice. The Company did not provide any general right of return for its delivered items. Services associated with the implementation and training fees had standalone value to the Company’s customers, as there are third-party vendors who offer similar services to the Company’s services. Accordingly, they qualified as separate units of accounting. The Company allocated a fair value to each element deliverable at the recognition date and recognized such value when the services are provided. The Company bases the fair value of the implementation and training fees on third-party evidence and the monthly license fee on vendor-specific objective evidence. Fees charged by third-party vendors for implementation and training services do not vary significantly from the fees charged by the Company. Services associated with implementation and training fees were generally rendered within a month from the initial contract date. The value attributed to the monthly license fees as well as the fees associated with monthly transaction-based platform usage were recognized in the corresponding period.
Subsequent to the closing of the Emerging Growth Agreement on June 20, 2019, the Company’s revenue is generated from the sale of promotional service packages to its customers ranging from 3 to 6 months. The Company offers different packages tailored to the type and stage of the potential customer, such as public companies looking to increase their shareholder base, as well as private companies potentially looking to go public and attract capital and publicity. The services provided by the Company include advertising, publishing of interviews and articles across its network and featuring of client content on its newsletters and social media. The packages all have fixed prices that are billed monthly over the terms of the agreement in even amounts. The Company recognizes revenue for its performance obligation associated with its contracts with customers over time as work is performed, which is deemed to occur evenly throughout the duration of the contract. This also reflects the pattern in which costs are incurred on performing the contracts. To the extent revenue recognized on contracts at each period end exceeds collections, the amounts are reflected as accounts receivable. To the extent collections on contracts at each period end exceeds revenue recognized, the amounts are reflected as deferred revenue.
Fair Value of Financial Instruments
The Company accounts for assets and liabilities measured at fair value on a recurring basis in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. |
Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data. |
Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. |
Additional Disclosures Regarding Fair Value Measurements
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and lines of credit approximate their fair value due to the short-term maturity of these items.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses relating to continuing operations amounted to $148,738$32,445 and $160,029 for the three and nine months ended September 30, 2019, respectively. There were no advertising expenses during 2018 relating to continuing operations. Advertising expenses reported as a component of discontinued operations amounted to $0 and $140,907$148,738 for the three months ended September 30, 2020 and 2019, respectively. Advertising expenses related to continuing operations amounted to $101,760 and 2018, respectively, and $159,665 and $415,358$160,029 for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Income Taxes
Income taxes are accounted for in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.
Foreign Currency Translation
The Company’s reporting currency is U.S. Dollars. The functional currency of the Company’s Subsidiary in the United Kingdom was British Pounds. The translation from British Pounds to U.S. dollars is performed for asset and liability accounts using exchange rates in effect at the balance sheet date, equity accounts using historical exchange rates or rates in effect at the balance sheet date, and for revenue and expense accounts using the average exchange rate in effect during the period. The resulting translation adjustments arewere recorded as a component of Accumulated Other Comprehensive Income (Loss). Foreign currency translation gains and losses arising from exchange rate fluctuation on transactions denominatedUpon dissolving the Subsidiary in a currency other than the functional currency are included in the consolidated statements of operations.
Software Development Costs
At December 31, 2018,August 2020, the Company impairedhas reclassified the entireAccumulated Other Comprehensive Loss balance of unamortized internal-use software development costs$83,929 into earnings, which amounted to approximately $4,725,000 and did not capitalize internal-use software development costs in 2019. Costs incurred in the research and development of software products and significant upgrades and enhancements thereto during the preliminary project stage and the post-implementation operation stage are expensed as incurred. Costs incurred for maintenance and relatively minor upgrades and enhancements are expensed as incurred. Prior to the December 31, 2018 impairment, costs associated with the application development stage of new software products and significant upgrades and enhancements thereto were capitalized when 1) management implicitly or explicitly authorized and committed to funding a software project and 2) it was probable that the project would be completed and the software would be used to perform the function intended. The Company capitalized internal-use software development costs of $375,000 and $1,125,000 during the three and nine-month periods ended September 30, 2018. The Company amortized such costs once the new software products and significant upgrades and enhancements were completed. The Company’s amortization expenses associated with capitalized software development costs amounted to $105,000 and $426,146 during the three and nine-month periods ended September 30, 2018 and wasis reflected in cost of revenues. There were no expenses associated with capitalized software development costs during the three and nine-month periods ended September 30, 2019. The amortization expenses above are reported as a component of the loss from discontinued operations.operations in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2020.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of five years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized.
Goodwill
The Company’s goodwill represents the excess of purchase price over tangible and intangible assets acquired, less liabilities assumed arising from business acquisitions. Goodwill is not amortized, but is reviewed for potential impairment on an annual basis at the reporting unit level. There was no impairment recorded during the three and nine months ended September 30, 2019 or 2018.
Long-Lived Assets
In accordance with ASC 360-10, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. There was no impairment of long-lived assets identified during the three and nine months ended September 30, 20192020 or 2018.2019.
Basic and Diluted Earnings Per Share
Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated using the modified-treasury stock method). As of September 30, 2019,2020, the Company had 6,595,0003,160,000 outstanding stock options and 8,127,1845,256,944 outstanding warrants which were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. As of September 30, 2018,2019, the Company had 7,237,5006,595,000 outstanding stock options and 25,045,5178,127,184 outstanding warrants which were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. As a result, the basic and diluted earnings per share are the same for each of the periods presented.
Share-Based Payment
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation, or ASC 718. Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.
The Company has elected to use the Black-Scholes option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Common stock awards
The Company has granted common stock awards to non-employees in exchange for services provided. The Company measures the fair value of these awards using the fair value of the services provided or the fair value of the awards granted. The fair value of the awards is recognized on a straight-line basis as services are rendered. The share-based payments related to common stock awards for the settlement of services provided by non-employees is recorded on the consolidated statement of comprehensive loss in the same manner and charged to the same account as if such settlements had been made in cash.
Warrants
In connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants are recorded at fair value as expense over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements are more fully described in Note 6, Stockholders’ Deficit.
Recent Accounting Pronouncements
In February 2016,December 2019, the FASB issued Accounting Standards Update, or ASU, 2016-02, “Leases” (Topic 842).2019-12, Simplifying the Accounting for Income Taxes which amends ASC 740 Income Taxes, or ASC 740. This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance will beto improve consistent application of ASC 740. This update is effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early2021. The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. The Company has adopted this standard on January 1, 2019 and recognized assets and liabilities arising from any leases that meet the requirements under this standard on the adoption date and included qualitative and quantitative disclosures in the Company’s notes to the condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the goodwill impairment test. The effective date for ASU 2017-04 is for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This Company is currently assessingevaluating the impacteffect of the standard on its financial statements.
In January 2016, the FASB issuedthis ASU No. 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective in the first quarter of fiscal 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. This standard has no impact on the Company’s financial statements.statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The objective of this standard is to eliminate the diversity in practice related to the classification of restricted cash or restricted cash equivalents in the statement of cash flows. For public business entities, this standard is effective for annual and interim reporting periods beginning after December 15, 2017. The Company has adopted this standard on January 1, 2018, and it has had no material impact on its financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting (ASU 2016-09),which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. The Company has adopted this standard on January 1, 2018 and it has had no material impact on its financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. This Company has adopted this standard on January 1, 2019 and it has had no impact in the Company’s condensed consolidated financial statements.
Other accounting pronouncements have been issued but deemed by management to be outside the scope of relevance to the Company.
NOTE 3: PROPERTY AND EQUIPMENT
The Company’s property and equipment relating to continuing operations consisted of the following at September 30, 20192020 and December 31, 2018.2019.
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Computer equipment and software | $ | 8,139 | $ | - | $ | 12,546 | $ | 8,139 | ||||||||
Furniture and equipment | 2,227 | - | ||||||||||||||
| 8,139 | - | 14,773 | 8,139 | |||||||||||||
Less: accumulated depreciation | (4,770 | ) | - | (6,345 | ) | (5,119 | ) | |||||||||
| $ | 3,369 | $ | - | $ | 8,428 | $ | 3,020 | |||||||||
Depreciation expense from continuing operations for the three months ended September 30, 2020 and 2019 amounted to $526 and $368, respectively. Depreciation expense from continuing operations for the nine months ended September 30, 2020 and 2019 amounted to $368$1,225 and $565, respectively. There was no depreciation expense from continuing operations during 2018.
NOTE 4: ACQUISITONS
On May 15, 2019, the Company entered into the Emerging Growth Agreement with Emerging Growth, LLC (see Note 1), which closed on June 20, 2019. Pursuant to the terms of the Emerging Growth Agreement, the Company acquired certain assets from the Seller related to its sponsored content and marketing business for a purchase price consideration consisting of $420,000 in cash, 30,000,000 shares of the Company’s common stock valued at $2,700,000, and 3,000 shares of Series B preferred stock valued at $687,000. As a result, the total purchase price amounted to $3,807,000.
A summary of the purchase price allocation at fair value is below. The business combination accounting is not yet complete and the amounts assigned to the net assets acquired are provisional. Therefore, this may result in future adjustments to the provisional amounts as new information is obtained about facts and circumstances that existed at the acquisition date.
Purchase Allocation | ||||
Property and equipment | $ | 2,183 | ||
Other intangible assets | 579,000 | |||
Goodwill | 3,225,817 | |||
| $ | 3,807,000 | |||
Intangible assets acquired represent amounts allocated to customers contracts of $7,000 and marketing-related intangible assets of $572,000, for an aggregate total of $579,000. The intangible assets related to customer contracts are being amortized over a periodand goodwill acquired in this transaction were fully impaired at the end of approximately 5 months and the marketing-related intangible assets are being amortized over 10 years. Amortization expense for intangible assets for both the three and nine months ended September 30, 2019 amounted to $20,525. Estimated future amortization of intangible assets as of September 30, 2019 is as follows.2019.
Year Ended | ||||
December 31, | ||||
2019 (remainder of) | $ | 16,751 | ||
2020 | 57,200 | |||
2021 | 57,200 | |||
2022 | 57,200 | |||
2023 | 57,200 | |||
Thereafter | 312,924 | |||
Total | $ | 558,475 | ||
The following are the unaudited pro forma results of operations for the three and nine months ended September 30, 2019 and 2018, as if the assets purchased in the Emerging Growth Agreement had been acquired on January 1, 2018.2019. The amounts presented on the accompanying unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2020, as well as for the three months ended September 30, 2019, already reflect the impact of the acquisition for the full period. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results do include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated.
Pro Forma Combined Financials (Unaudited) | Pro Forma Combined Financials (Unaudited) | |||||||||||
Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 | ||||||||||
Revenue from continuing operations | $ | 1,687,555 | $ | 1,552,730 | $ | 1,687,555 | ||||||
Net loss from continuing operations | $ | (1,160,045 | ) | $ | (575,749 | ) | $ | (1,160,045 | ) | |||
Net loss from continuing operations per common share - basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | |||
Pro Forma Combined Financials (Unaudited) | ||||||||
Thee Months Ended September 30, 2019 | Thee Months Ended September 30, 2018 | |||||||
Revenue from continuing operations | $ | 568,992 | $ | 545,582 | ||||
Net loss from continuing operations | $ | (415,443 | ) | $ | (247,501 | ) | ||
Net loss from continuing operations per common share - basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
NOTE 5: NOTENOTES PAYABLE
On September 10, 2019, the Company entered into a promissory note payable whereby the Company borrowed $500,000 bearing interest at 8% per annum. Interest on the note is payable quarterly on the first business day of December, March, June and September commencing December 1, 2019. Outstanding principal on the note is due in full on September 30, 2022.
Future scheduled maturities of long-term debt are as follows.
Year Ended | ||||
December 31, | ||||
2019 (remainder of) | $ | - | ||
2020 | - | |||
2021 | - | |||
2022 | 500,000 | |||
Total | $ | 500,000 | ||
In connection with the promissory note payable on September 10, 2019, the Company issued warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The warrants expire on September 10, 2024 and are fully vested upon issuance. The note was discounted by $17,624 allocated from the valuation of the warrants issued. The discount recorded on the note is being amortized as interest expense through the maturity date, which amounted to $322$1,479 and $4,405 for the three and nine months ended September 30, 2019.2020. As of September 30, 2019,2020, the net book value of the promissory note amounted to $482,698$488,582 including the principal amount outstanding of $500,000 net of the remaining discount of $17,302.$11,418.
The warrants issued with the promissory note were valued using the Black-Scholes pricing method using the following assumptions below.
Expected life in years | 5 | |||
Stock price volatility | 114.20% | |||
Risk free interest rate | 1.58% | |||
Expected dividends | None | |||
Estimated forfeiture rate | None |
On May 6, 2020, the Company entered into a promissory note, or the Note, with Pacific Western Bank, evidencing an unsecured loan, or the Loan, in the amount of $263,000 made to the Company under the Paycheck Protection Program, or the PPP. The PPP is a program of the U.S. Small Business Administration, or SBA, established under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. Under the PPP, the proceeds of the Loan may be used to pay payroll and make certain covered interest payments, lease payments and utility payments, or the Qualifying Expenses. The Company intends to use the entire Loan amount for Qualifying Expenses under the PPP. Under the terms of the CARES Act, PPP loan recipients can be granted forgiveness for all or a portion of the loan granted under the PPP, with such forgiveness to be determined, subject to limitations, based on the use of the loan proceeds for payment of Qualifying Expenses and the Company maintaining its payroll levels over certain required thresholds under the PPP. The terms of any forgiveness also may be subject to further requirements in any regulations and guidelines the SBA may adopt. No assurance can be provided that the Company will obtain forgiveness of the Loan in whole or in part.
The interest rate on the Loan is 1.0% per annum. The Note matures on May 6, 2022. On December 1, 2020 and on the first day of each month thereafter until May 1, 2022, the Company must make monthly payments of $14,727 under the Loan that is not forgiven in accordance with the terms of the PPP and related accrued interest thereon. The Note contains events of default and other conditions customary for a Note of this type. As of September 30, 2020, the current portion of the Loan due within the next 12 months amounted to $144,327.
On June 24, 2020, the Company entered into a Loan Authorization and Agreement with the SBA under which the Company borrowed $150,000, and issued to the SBA a note and security agreement for the amount borrowed. Outstanding borrowings accrue interest at a rate of 3.75% per annum, and installment payments, including principal and interest, of $731 are due monthly and begin 12 months from the date of the loan agreement. The balance of any remaining principal and interest is due 30 years from the date of the loan agreement. As collateral for the borrowing, the Company granted the SBA a security interest in substantially all assets of the Company.
Future scheduled maturities of long-term debt are as follows.
Year Ended | ||||
December 31, | ||||
2020 (remainder of) | $ | 13,221 | ||
2021 | 175,028 | |||
2022 | 574,751 | |||
2023 | 2,262 | |||
2024 | 3,285 | |||
2025 | 3,416 | |||
Thereafter | 141,037 | |||
Total | $ | 913,000 | ||
The aggregate current portion of long-term debt as of September 30, 2020 amounted to $144,327, which represents the contractual principal payments due in the next 12 months period.
NOTE 6: STOCKHOLDERS’ DEFICIT
Common Stock
On June 20, 2019, the Company issued an aggregate of 3,500,000 restricted shares of common stock to certain promissory note holders as consideration for early payment of the promissory notes. The value of the shares issued amounted to $315,000 and was recorded as interest expense during the nine months ended September 30, 2019.
On June 20, 2019, the Company issued 30,000,000 restricted shares of common stock to Emerging Growth, LLC as part of the acquisition under the Emerging Growth Agreement (see Note 4). The value of the stock amounted to $2,700,000 and was recorded as part of the acquisition price of the net assets acquired under the Emerging Growth Agreement.
Restricted Stock Issued as Compensation
During 2018, the Company issued an aggregate total of 240,000 restricted shares of its common stock to its non-employee directors as partial director compensation, at a value of $0.50 per share, vesting in 4 equal quarterly increments commencing on July 1, 2018 and ending June 30, 2019. TheDuring the three and nine months ended September 30, 2019, the Company recorded expenses of $0 and $30,000$60,000, respectively. There was no remaining expense related to this restricted stock recorded during 2020.
Effective April 3, 2020, the Company granted 500,000 of restricted shares of its common stock to a consultant for services as an advisory board member, with 250,000 shares vesting immediately and the remainder vesting in four equal quarterly installments commencing on July 1, 2020. During the three months ended September 30, 2019 and 2018, respectively, and $60,000 and $90,000 during the nine months ended September 30, 20192020, the Company recorded $4,632 and 2018, respectively. There$10,768, respectively, of share-based compensation expense. The arrangement was no remaining unrecorded compensation expense related toterminated on July 17, 2020, and the unvested portion of the restricted stock grant of 187,500 shares were forfeited.
Effective August 6, 2020, the Company and Emerging Growth reached an agreement whereby the Company issued 4.8 million shares of the its common stock with a value of $240,000 to Emerging Growth as payment for outstanding liabilities due to Emerging Growth totaling $209,931. The outstanding liabilities due to Emerging Growth included $104,931 in outstanding accrued interest on the Series B Preferred Stock through August 31, 2020, as well as $105,000 of outstanding payables. The additional $30,069 was recorded as loss on extinguishment of debt during the three and nine months ended September 30, 2019.2020.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock with a par value of $0.001 per share, of which 500 have been authorized as Series A Preferred Stock and 3,000 have been authorized as Series B Preferred Stock.
On June 20, 2019, the Company issued to certain of its promissory noteholders an aggregate of 500 shares of Series A Preferred Stock, each with a stated value per share of $1,000, as conversion of $500,000 worth of outstanding promissory notes. The Series A Preferred Stock bears interest at 12% per annum, and is convertible into the Company’s common stock at the election of the holder at a conversion price per share to be mutually agreed between the Company and the holder in the future, and be redeemable at the Company’s option following the third year after issuance, without voting rights or a liquidation preference.
On June 20, 2019, the Company issued 3,000 shares of Series B Preferred Stock to Emerging Growth, LLC, each with a stated value of $1,000 per share, as part of the Emerging Growth Agreement. The aggregate fair value of $687,000 was recorded as part of the acquisition price of the net assets acquired from Emerging Growth, LLC (see Note 4). The Series B Preferred Stock bears interest at 6% per annum and is convertible into the Company’s common stock at the election of Emerging Growth, LLC at a conversion price per share to be mutually agreed between the Company and Emerging Growth, LLC in the future, without voting rights or a liquidation preference, except with respect to accrued penalty interest.
For the three months ended September 30, 2020 and 2019, the Company incurred interest from the outstanding preferred stock of $60,000 and $60,000, respectively. For the nine months ended September 30, 2020 and 2019, the Company incurred $60,000 and $66,575, respectively, of interest from the outstanding preferred stock.stock of $180,000 and $66,575, respectively.
Warrants
The following summarizes the Company’s warrant activity for the nine months ended September 30, 2019.2020.
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Life | |||||||||||
Warrants | Price | (Years) | ||||||||||
Outstanding at December 31, 2018 | 25,045,517 | $ | 0.53 | 4.16 | ||||||||
Granted | 1,000,000 | 0.13 | ||||||||||
Forfeited/cancelled | (17,918,333 | ) | 0.50 | |||||||||
Outstanding at September 30, 2019 (unaudited) | 8,127,184 | $ | 0.56 | 3.38 | ||||||||
Vested and expected to vest at September 30, 2019 (unaudited) | 8,127,184 | $ | 0.56 | 3.38 | ||||||||
Exercisable at September 30, 2019 (unaudited) | 8,127,184 | $ | 0.56 | 3.38 | ||||||||
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Life | |||||||||||
Warrants | Price | (Years) | ||||||||||
Outstanding at December 31, 2019 | 7,543,944 | $ | 0.50 | 3.37 | ||||||||
Forfeited/cancelled | (2,287,000 | ) | 0.90 | |||||||||
Outstanding at September 30, 2020 (unaudited) | 5,256,944 | $ | 0.33 | 3.81 | ||||||||
Vested and expected to vest at September 30, 2020 (unaudited) | 5,256,944 | $ | 0.33 | 3.81 | ||||||||
Exercisable at September 30, 2020 (unaudited) | 5,256,944 | $ | 0.33 | 3.81 | ||||||||
During the threenine months ended March 31,September 30, 2019, the Company issued 500,000 warrants exercisable at a price of $0.15 per share which expire on January 25, 2024. The fair value of these warrants amounted to $44,670, and was recognized as deferred financing costs using the effective interest method during the three-month period ended March 31, 2019. Additionally, per the down round feature of 7,935,000 warrants issued in connection with the Beedie Credit Agreement (see Note 7),a prior credit agreement, pursuant to ASU 2017-11 which allows instruments with a down round feature to qualify for equity classification, the Company recognized the value of the feature when it was activated and there was an actual reduction of the strike price or conversion feature. The reduction in income of such 7,935,000 warrants amounted to $104,638 and was capitalized as deferred financing costs during the three-month period ended March 31, 2019.$104,638. In connection with the closing of the Asset Purchase Agreement for the sale of the CAKE Business on June 18, 2019, the above warrants were cancelled.
On September 10, 2019, the Company issued 500,000 warrants in connection with a promissory note payable (see Note 5).
During the three and nine-month periods ended September 30, 2018, the Company issued 3,835,000 and 12,135,000 warrants related to its loans, at a fair value of $689,281 and $2,727,577, respectively, and were recognized as deferred financing costs and amortized using the effective interest method over the term of the associated loan.
The Company recorded expenses of $0 and $101,836$37,691 during the three months ended September 30, 20192020 and 2018,2019, respectively, related to warrants granted for compensation. The Company recorded expenses of $126,810$0 and $229,400$126,810 during the nine months ended September 30, 2020 and 2019, and 2018, respectively, related to warrants granted for compensation.respectively. As of September 30, 2019,2020, all outstanding warrants were fully vested and there was no remaining unrecorded compensation expense.
Options
The following summarizes the Company’s stock option activity for the nine months ended September 30, 2019.2020.
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Life | |||||||||||
Options | Price | (Years) | ||||||||||
Outstanding at December 31, 2018 | 7,232,500 | $ | 0.40 | 3.45 | ||||||||
Forfeited/cancelled | (637,500 | ) | 1.00 | |||||||||
Outstanding at September 30, 2019 (unaudited) | 6,595,000 | $ | 3.40 | 2.60 | ||||||||
Vested and expected to vest at September 30, 2019 (unaudited) | 6,595,000 | $ | 0.34 | 2.60 | ||||||||
Exercisable at September 30, 2019 (unaudited) | 6,595,000 | $ | 0.34 | 2.60 | ||||||||
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Life | |||||||||||
Options | Price | (Years) | ||||||||||
Outstanding at December 31, 2019 | 6,320,000 | $ | 0.33 | 2.45 | ||||||||
Forfeited/cancelled | (3,160,000 | ) | 0.33 | |||||||||
Outstanding at September 30, 2020 (unaudited) | 3,160,000 | $ | 0.33 | 1.70 | ||||||||
Vested and expected to vest at September 30, 2020 (unaudited) | 3,160,000 | $ | 0.33 | 1.70 | ||||||||
Exercisable at September 30, 2020 (unaudited) | 3,160,000 | $ | 0.33 | 1.70 | ||||||||
The Company recorded expenses of $0 and $7,376 duringfor the three months ended September 30, 20192020 and 2018, respectively,2019 related to stock options. The Company recorded expenses of $10,963$0 and $23,298$10,963 during the nine months ended September 30, 20192020 and 2018,2019, respectively, related to stock options. Employees with unvested stock options all left the Company in connection with the closingAs of the Asset Purchase Agreement for the sale of the CAKE Business on June 18, 2019. As a result, no further options are expected to vest, and the total compensation cost related to non-vested awards not yet recognized amounted to $0 at September 30, 2019.2020, all outstanding options were fully vested and there was no remaining unrecorded compensation expense.
NOTE 7: DISCONTINUED OPERATIONS
During May 2019, the Company decided to discontinue most of its operating activities pursuant to the Asset Purchase Agreement entered into with CAKE Software, Inc. (see Note 1).
In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the unaudited condensed consolidated balance sheets. The assetssheets, and liabilities have been reflected as discontinued operations inconsist of the consolidated balance sheetsfollowing as of September 30, 20192020 and December 31, 2018, and consist of the following:2019.
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Current assets of discontinued operations | ||||||||
Accounts receivable, net [1] | $ | - | $ | 2,081,551 | ||||
Prepaid expenses and other assets | - | 254,760 | ||||||
Total current assets of discontinued operations | $ | - | $ | 2,336,311 | ||||
Noncurrent assets of discontinued operations | ||||||||
Property and equipment, net [2] | $ | - | $ | 52,035 | ||||
Other assets | - | 108,211 | ||||||
Total noncurrent assets of discontinued operations | $ | - | $ | 160,246 | ||||
Current liabilities of discontinued operations | ||||||||
Accounts payable and accrued expenses | $ | 76,028 | $ | 3,018,394 | ||||
Deferred revenues [3] | - | 443,650 | ||||||
Credit facility, short term [4] | - | 3,399,240 | ||||||
Total current liabilites of discontinued operations | $ | 76,028 | $ | 6,861,284 | ||||
Noncurrent liabilities of discontinued operations | ||||||||
Credit facility, net of unamortized financing costs [4] | $ | - | $ | 5,888,155 | ||||
Other loan, related party net of unamortized financing costs [5] | - | 386,686 | ||||||
Other long-term loan, net of unamortized financing costs [5] | - | 2,273,402 | ||||||
Other liabilities | - | 637,500 | ||||||
Total noncurrent liabilites of discontinued operations | $ | - | $ | 9,185,743 | ||||
|
|
|
|
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Computer equipment and software | $ | - | $ | 422,441 | ||||
Office furniture and equipment | - | 123,932 | ||||||
Leasehold improvements | - | 288,937 | ||||||
| - | 835,310 | |||||||
Less: accumulated depreciation | - | (783,275 | ) | |||||
| $ | - | $ | 52,035 | |||||
Depreciation expense from discontinued operations amounted to $0 and $10,035 for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense amounted to $31,042 and $35,747 for the nine months ended September 30, 2019 and 2018, respectively. The deprecation expense for each period is reflected as a component of discontinued operations.
|
|
|
|
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
Saas Capital Loan | $ | - | $ | 4,810,135 | ||||
Less: deferred financing costs | - | (100,867 | ) | |||||
Saas Capital Loan, net | - | 4,709,268 | ||||||
Beedie Credit Agreement | $ | - | $ | 6,000,000 | ||||
Less: deferred financing costs | - | (1,421,873 | ) | |||||
Beedie Credit Agreement, net | - | 4,578,127 | ||||||
Total outstanding | $ | - | $ | 10,810,135 | ||||
Less: deferred financing costs | - | (1,522,740 | ) | |||||
Total credit facility loans | $ | - | $ | 9,287,395 | ||||
Short-term balance | $ | - | $ | 3,399,240 | ||||
Long-term balance | - | 5,888,155 | ||||||
Total credit facility loans | $ | - | $ | 9,287,395 | ||||
SAAS Capital Loan
On May 5, 2016, the Company entered into a loan and security agreement, or the SaaS Capital Loan, with SaaS Capital Funding II, LLC, or SaaS Capital, to borrow up to a maximum of $8,000,000. Initial amounts borrowed accrued interest at the rate of 10.25% per annum with future amounts borrowed bearing interest at the greater of 10.25% or 9.21% plus the three-year treasury rate at the time of advance. Accrued interest on amounts borrowed was payable monthly for the first six months and thereafter 36 equal monthly payments of principal and interest is payable. Prepayments were subject to a 10%, 6% or 3% of principal premium if prepaid prior to 12 months, between 12 and 24 months, or between 24 months and maturity, respectively.
The fair value of the warrants previously issued in connection with the SaaS Capital Loan were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended September 30, 2019 and 2018, $0 and $49,996, respectively, of debt discount was amortized into interest expense. During the nine months ended September 30, 2019 and 2018, $100,867 and $148,410, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.
On May 15, 2019, the Company entered into a consent letter, agreement and waiver of the SaaS Capital Loan to, among other things, provide that upon the closing of the Asset Purchase Agreement with Constellation, the Company will pay to SaaS Capital the outstanding principal balance and accrued but unpaid interest due under the SaaS Capital Loan plus $250,000 in fees, SaaS Capital will release its liens related to the Company’s CAKE Business assets, SaaS Capital’s warrants to purchase an aggregate of 1,733,333 shares of the Company’s common stock will be cancelled, and fees payable under the terms of the SaaS Capital Loan in the aggregate amount of $495,186 will be payable to SaaS Capital from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement in which the Company granted to SaaS Capital a security interest.
All amounts outstanding under the SaaS Capital Loan were paid in full on June 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation. The total amount paid to satisfy the remaining obligation under the SaaS Capital Loan as of the closing date amounted to $4,576,123, consisting of the remaining principal balance outstanding of $4,252,209, as well as interest and fees of $323,914.
Beedie Credit Agreement
On January 25, 2018, the Company entered into a non-revolving term credit agreement, or the Beedie Credit Agreement, with Beedie Investments Limited, or Beedie, to borrow up to a maximum of $7,000,000. Outstanding principal will accrue interest at the rate of 12% per annum increasing to 14% per annum if the Company’s gross margins fall below amounts specified in the Beedie Credit Agreement. Accrued interest on outstanding principal was payable monthly in arrears. The Company paid Beedie a commitment fee of $175,000 and paid to Beedie a monthly standby fee of 0.325% on the unadvanced and available amount.
The fair value of the warrants previously issued in connection with the Beedie Credit Agreement were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended September 30, 2019 and 2018, $0 and $129,727, respectively, of debt discount was amortized into interest expense. During the nine months ended September 30, 2019 and 2018, $1,571,181 and $310,801, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.
On May 15, 2019, the Company entered into a seventh amendment of the Beedie Credit Agreement to, among other things, provide that upon the closing of the Asset Purchase Agreement with Constellation, the Company will pay to Beedie the outstanding principal balance and accrued but unpaid interest due under the Beedie Credit Agreement, Beedie will release its liens related to the Company’s CAKE Business assets, Beedie’s warrants to purchase an aggregate of 7,935,000 shares of the Company’s common stock will be cancelled, and fees payable under the terms of the Beedie Credit Agreement in the aggregate amount of $1,015,862 will be payable to Beedie from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement in which the Company granted to Beedie a security interest.
All amounts outstanding under the Beedie Credit Agreement were paid in full on June 18, 2019 upon the closing date of the Asset Purchase Agreement with Constellation. The total amount paid to satisfy the remaining obligation under the Beedie Credit Agreement as of the closing date amounted to $7,033,208, consisting of the remaining principal balance outstanding of $6,962,379, as well as interest and fees of $70,829.
|
|
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
2018 Promissory Notes | $ | - | $ | 1,450,000 | ||||
August 2018 Promissory Notes | - | 1,500,000 | ||||||
Less: deferred financing costs | - | (676,598 | ) | |||||
Other long-term loans, net | $ | - | $ | 2,273,402 | ||||
2018 Promissory Notes, related party | $ | - | $ | 550,000 | ||||
Less: deferred financing costs | - | (163,314 | ) | |||||
| $ | - | $ | 386,686 | |||||
2018 Promissory Notes
On May 31, 2018, and June 15, 2018, the Company borrowed an aggregate of $2,000,000, respectively, from thirteen lenders, or the 2018 Lenders, and issued promissory notes, or the 2018 Promissory Notes, for the repayment of the amounts borrowed. The 2018 Lenders are all accredited investors, one of the 2018 Lenders is an affiliate of the Company’s director, Greg Akselrud, two of the 2018 Lenders are related to the Company’s Chairman and Chief Executive Officer, Brian Ross, and two of the 2018 Lenders are the Company’s employees. The 2018 Promissory Notes are unsecured, have a maturity date of May 30, 2021 and all principal is due upon maturity. Amounts borrowed accrue interest at 12% per annum and accrued interest is payable monthly. The Company also issued to the 2018 Lenders six-year warrants to purchase an aggregate of 3,000,000 shares of the Company’s Common Stock at an exercise price of $0.35 per share.
All amounts outstanding under the 2018 Promissory Notes were paid in full or settled through the exchange of outstanding amounts into Series A Preferred Stock on June 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation. There was no gain or loss associated with this transaction.
August 2018 Promissory Notes
On August 31, 2018, the Company borrowed an aggregate of $1,500,000 from ten lenders, or the August 2018 Lenders and issued promissory notes, or the August 2018 Promissory Notes, for the repayment of the amounts borrowed. The August 2018 Lenders are all accredited investors. The August 2018 Promissory Notes are unsecured, have a maturity date of August 30, 2021 and all principal is due upon maturity. Amounts borrowed accrue interest at 12% per annum and accrued interest is payable monthly. The Company also issued to the August 2018 Lenders six-year warrants to purchase an aggregate of 1,500,000 shares of the Company’s common stock exercisable for cash at an exercise price of $0.35 per share.
All amounts outstanding under the August 2018 Promissory Notes were paid in full or settled through the exchange of outstanding amounts into Series A Preferred Stock on June 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation. There was no gain or loss associated with this transaction.
The fair value of the warrants previously issued in connection with the 2018 Promissory Notes and the August 2018 Promissory Notes were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended September 30, 2019 and 2018, $0 and $69,124, respectively, of debt discount was amortized into interest expense. During the nine months ended September 30, 2019 and 2018, $839,912 and $89,602, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Current liabilities of discontinued operations | ||||||||
Accounts payable and accrued expenses | $ | 79,823 | $ | 99,695 | ||||
Total current liabilities of discontinued operations | $ | 79,823 | $ | 99,695 | ||||
In accordance with the provisions of ASC 205-20, the Company has excluded the results of discontinued operations from its results of continuing operations in the accompanying unaudited condensed consolidated statements of operations. The results of the discontinued operations of the CAKE Business for the three and nine months ended September 30, 2019 and 20182020 have been reflected as discontinued operations in the consolidated statements of operations, and consist of the following:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Net revenues | $ | - | $ | 5,292,304 | $ | 9,001,307 | $ | 16,682,730 | $ | - | $ | - | $ | - | $ | 9,001,307 | ||||||||||||||||
Cost of revenue | - | 2,042,435 | 3,863,471 | 6,865,431 | - | - | - | 3,863,471 | ||||||||||||||||||||||||
Gross profit | - | 3,249,869 | 5,137,836 | 9,817,299 | - | - | - | 5,137,836 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | - | 1,033,707 | 1,263,808 | 3,144,106 | - | - | - | 1,263,808 | ||||||||||||||||||||||||
Sales and marketing | - | 1,127,055 | 2,016,637 | 3,359,247 | - | - | - | 2,016,637 | ||||||||||||||||||||||||
General and administrative | (1,113 | ) | 2,058,823 | 3,085,692 | 5,262,154 | (3,507 | ) | (1,113 | ) | (3,507 | ) | 3,085,692 | ||||||||||||||||||||
Total operating expenses | (1,113 | ) | 4,219,585 | 6,366,137 | 11,765,507 | (3,507 | ) | (1,113 | ) | (3,507 | ) | 6,366,137 | ||||||||||||||||||||
Loss from operations | 1,113 | (969,716 | ) | (1,228,301 | ) | (1,948,208 | ) | 3,507 | 1,113 | 3,507 | (1,228,301 | ) | ||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Gain on sale of discontinued operations | - | - | 19,473,080 | - | - | - | - | 19,473,080 | ||||||||||||||||||||||||
| Loss on foreign currency translation | (83,929 | ) | - | (83,929 | ) | , | ||||||||||||||||||||||||||
Interest income | - | (247 | ) | 34 | 503 | - | - | - | 34 | |||||||||||||||||||||||
Interest expense | - | (679,663 | ) | (3,773,651 | ) | (1,819,628 | ) | - | - | - | (3,773,651 | ) | ||||||||||||||||||||
Total other income (expense) | - | (679,910 | ) | 15,699,463 | (1,819,125 | ) | (83,929 | ) | - | (83,929 | ) | 15,699,463 | ||||||||||||||||||||
Net income (loss) from discontinued operations before provision for income taxes | 1,113 | (1,649,626 | ) | 14,471,162 | (3,767,333 | ) | (80,422 | ) | 1,113 | (80,422 | ) | 14,471,162 | ||||||||||||||||||||
Provision for (benefit from) income taxes | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net income (loss) from discontinued operations | $ | 1,113 | $ | (1,649,626 | ) | $ | 14,471,162 | $ | (3,767,333 | ) | $ | (80,422 | ) | $ | 1,113 | $ | (80,422 | ) | $ | 14,471,162 | ||||||||||||
The following is a summary of the gain on sale of discontinued operations of the CAKE Business reflected above during the nine months ended September 30, 2019.
Gross proceeds received | $ | 20,892,667 | ||
Less: value of net assets sold | ||||
Accounts receivable | 1,979,342 | |||
Prepaid and other current assets | 51,363 | |||
Property and equipment | 20,986 | |||
ROU lease asset | 1,458,922 | |||
Other assets | 39,702 | |||
Accounts payable and accrued expenses | (344,787 | ) | ||
Deferred revenue | (138,112 | ) | ||
ROU lease liability | (1,612,412 | ) | ||
Other liabilities | (35,417 | ) | ||
Total net assets sold | 1,419,587 | |||
Gain on sale of CAKE Business | $ | 19,473,080 |
NOTE 8: COMMITMENTS AND CONTINGENCIES
Leases
On June 20, 2019, the Company entered into a Lease Agreement with Emerging Growth LLC for the lease of office space in Whitefish, Montana, for a period of one year at a rate of $1,500 per month. On August 5, 2020, the Company entered into a lease agreement with Emerging Growth for additional office space in Whitefish, Montana, replacing its previous lease from June 20, 2019. The term of the lease commenced on September 1, 2020 for a period of one year at a rate of $4,500 per month. The lease contains an option for the Company to renew the lease for a period of one additional year at a monthly rent subject to a 3% increase. Management has elected a policy to exclude leases with an initial term of 12 months or less from the balance sheet presentation required under ASC 842. As a result, the office lease has been excluded from balance sheet presentation as it has an original term of 12 months or less.
The Company leasesleased office space in Santa Monica, California under a short-term lease expiring on July 31, 2019 forat $1,000 per month. The Company has renewed the terms of the lease for a period of one year through July 31, 2020.
During August 2017, the Company entered into an amendment to its original January 2014 lease for certain office space in Newport Beach. Pursuant to the lease amendment, effective March 1, 2018, the premises shall be expanded to include an additional 1,332 usable square feet such that the premises shall consist of 11,728 usable square feet in the aggregate. In addition, pursuant to the terms of the lease amendment, the Company extended the term of the lease agreement until June 30, 2023. Commencing on March 1, 2018, the initial base rent for the premises will be $38,702 per month for the first year and increasing to $44,566 per month by the end of the term. This lease was transferred to Constellation uponterminated in March 2020 and the sale of the CAKE Business that closed on June 18, 2019. The Company has no further obligations under this lease.
During July 2014,
Term Sheet
On April 3, 2020, the Company entered into a five-year leaseterm sheet, or the Term Sheet, for certain office space in a business center in London, England, which commenced on July 30, 2014. The base rent is GBP 89,667 (approximately $115,000) per yearjoint venture and the estimated service chargesmarketing agreement with BlockCerts Blockchain Limited BVI for the lease are GBP 45,658 (approximately $56,000) per year. This lease expired ondevelopment of proprietary websites, an ecommerce platform and market place dedicated to CBD products, services and lifestyle. On July 30, 2019. The17, 2020, the Company has discontinued its operations associated withterminated the CAKE Business it conducted at the Subsidiary in London and has vacated the office upon the expiration of the lease.Term Sheet.
Legal Proceedings
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any legal proceedings that it currently believes, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.
NOTE 9: SUBSEQUENT EVENTS
Effective October 22, 2019,13, 2020, the Company filed a certificateand the holder of amendment withits $500,000 promissory note payable issued on September 10, 2019 (see Note 5) reached an agreement whereby the SecretaryCompany agreed to issue 1.65 million shares of Stateits common stock to the noteholder in lieu of the State$41,192 of Delaware pursuant to which the corporate name was changed from Accelerize Inc. to CFN Enterprises Inc. In connection with the name change, the trading symbol of CFN Enterprises Inc.accrued interest on the OTCQB was changed from ALCZ to CNFN with the symbol change effective on October 24, 2019.
promissory note through December 31, 2020.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements. See “Cautionary Statement Regarding Forward Looking Information’’ elsewhere in this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We owned and operated CAKE and getcake.com, a marketing technology company that provided a proprietary solution for advanced analytics, attribution and campaign optimization for digital marketers, and we sold this business on June 18, 2019. We contemporaneously acquired assets from Emerging Growth LLC related to its cannabis industry focused sponsored content and marketing business, or the CFN Business. Our initial ongoing operations will consist primarily of the CFN Business and we will continue to pursue strategic transactions and opportunities. We are currently in the process of launching an e-commerce network focused on the sale of general wellness CBD products.
The CFN Business generates revenue through sponsored content, including articles, press releases, videos, podcasts, advertisements and other media, email advertisements and other marketing campaigns run on behalf of public and private companies in the cannabis industry, helping them reach accredited, retail and institutional investors. Most revenue is generated through contracts involving a monthly cash payment.
The CFN Business’ primary expenses come from advertising on platforms like Twitter and Facebook and from employee salaries and contractor fees. The CFN Business’ content is primarily produced by a team of freelance writers and video content is produced through various vendors. The CFN Business also incurs hosting and development costs associated with maintaining and improving its website, web applications, and mobile applications. The CFN Business operates several media platforms, including CannabisFN.com, the CannabisFN iOS app, the CFN Media YouTube channel, the CFN Media podcast, and other venues. These properties are designed to educate and inform investors interested in the cannabis industry, as well as provide a platform for the clients of the CFN Business to reach investors. The CFN Business distributes content across numerous online platforms, including the CannabisFN.com website, press releases, financial news syndicates, search engines, YouTube, iTunes, Twitter, Instagram, Facebook, LinkedIn, and others.
The CFN Business targets the legal cannabis industry. According to Grand View Research, the global cannabis industry is expected to reach $146.4 billion by 2025, driven by the legalization of medical and adult-use cannabis across a growing number of jurisdictions. According to the Marijuana Index, there are approximately 400 public companies involved in the cannabis industry, which represents the primary target market of the CFN Business. The CFN Business’ services are designed to help private companies prepare to go public and public companies grow their shareholder base through sponsored content and marketing outreach. The success of the CFN Business depends on the legal status of cannabis, investor demand for cannabis investments, and numerous other external factors.
The CFN Business competes with other public relations firms for clients, as well as online publishers for investors. Public relations competition includes investor awareness firms like Stockhouse Publishing, Catalyst Xchange, Stonebridge Partners and Midan Ventures. Online publisher competition includes firms like New Cannabis Ventures, Leafly and High Times. The CFN Business is regulated by rules established by the SEC, FINRA, and certain federal and state cannabis regulations.
Our principal offices are located at 2601 Ocean Park Boulevard, Suite 310, Santa Monica, California 90405. Our telephone number there is: (310) 314-8804. Our corporate website is: www.cfnenterprisesinc.com, the contents of which are not part of this quarterly report.
Our Common Stock is quoted on the OTCQB Marketplace under the symbol "CNFN."
Results of Operations for the Three Months Ended September 30, 20192020 and 20182019
The following are the results of our operations for the three months ended September 30, 20192020 as compared to the three months ended September 30, 2018:2019:
For the Three Months Ended | ||||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | Change | ||||||||||
Net revenues | $ | 568,992 | $ | - | $ | 568,992 | ||||||
Cost of revenue | 381,277 | - | 381,277 | |||||||||
Gross profit | 187,715 | - | 187,715 | |||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 600,663 | 313,536 | 287,127 | |||||||||
Total operating expenses | 600,663 | 313,536 | 287,127 | |||||||||
Loss from operations | (412,948 | ) | (313,536 | ) | (99,412 | ) | ||||||
Other income (expense): | ||||||||||||
Interest expense | (2,514 | ) | - | (2,514 | ) | |||||||
Interest income | 19 | 25 | (6 | ) | ||||||||
Total other income (expense) | (2,495 | ) | 25 | (2,520 | ) | |||||||
Net loss before provision for income taxes | (415,443 | ) | (313,511 | ) | (101,932 | ) | ||||||
Provision for income taxes | - | - | - | |||||||||
Net loss from continuing operations | (415,443 | ) | (313,511 | ) | (101,932 | ) | ||||||
Gain (loss) from discontinued operations, net of tax | 1,113 | (1,649,626 | ) | 1,650,739 | ||||||||
Net loss | $ | (414,330 | ) | $ | (1,963,137 | ) | $ | 1,548,807 | ||||
For the Three Months Ended | ||||||||||||
September 30, | September 30, | |||||||||||
2020 | 2019 | Change | ||||||||||
Net revenues | $ | 154,369 | $ | 568,992 | $ | (414,623 | ) | |||||
Cost of revenue | 128,885 | 381,277 | (252,392 | ) | ||||||||
Gross profit (loss) | 25,484 | 187,715 | (162,231 | ) | ||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 307,069 | 600,663 | (293,594 | ) | ||||||||
Total operating expenses | 307,069 | 600,663 | (293,594 | ) | ||||||||
Loss from operations | (281,585 | ) | (412,948 | ) | 131,363 | |||||||
Other income (expense): | ||||||||||||
Interest expense | (13,560 | ) | (2,514 | ) | (11,046 | ) | ||||||
Loss on extinguishment of debt | (30,069 | ) | - | (30,069 | ) | |||||||
Other income | 10,000 | - | 10,000 | |||||||||
Interest income | 2 | 19 | (17 | ) | ||||||||
Total other income (expense) | (33,627 | ) | (2,495 | ) | (31,132 | ) | ||||||
Net loss before provision for income taxes | (315,212 | ) | (415,443 | ) | 100,231 | |||||||
Provision for income taxes | - | - | - | |||||||||
Net loss from continuing operations | (315,212 | ) | (415,443 | ) | 100,231 | |||||||
Gain (loss) from discontinued operations, net of tax | (80,422 | ) | 1,113 | (81,535 | ) | |||||||
Net loss | $ | (395,634 | ) | $ | (414,330 | ) | $ | 18,696 | ||||
Net Revenues
Subsequent to the closing of the Asset Purchase Agreement with Constellation on June 18, 2019, which resulted in the sale of our CAKE Business and discontinuation of our operations previously recorded under this line of business, our net revenues from continuing operations consists of revenue generated from customer contracts acquired in the Emerging Growth Agreement which closed on June 20, 2019. Subsequent to this date, our revenues are generated from the sale of promotional service packages to customers ranging from 3 to 6 months. We offer different packages tailored to the type and stage of the potential customer, such as public companies looking to increase their shareholder base, as well as private companies potentially looking to go public and attract capital and publicity. Our revenue for the three months ended September 30, 2020 and 2019 represents revenue related to this line of business.
Our revenue during the three months ended September 30, 2020 were lower than the same period in 2019 primarily due to the volume of new contracts entered into with customers has decreasing due in-part to COVID-19 and the impacts on our customers and the industry in which we operate. During the three months ended September 30, 2020, we had 10 contracts in progress whereas we had 31 contracts during the same period in 2019. We expect this be our primary source of revenue going forward.these trends to continue for the foreseeable future.
Costs of Revenue
Our cost of revenue represents costs incurred associated with performing services under our customer contracts acquired under the Emerging Growth Agreement. Our cost of revenue for the three months ended September 30, 20192020 related to this line of business. Our cost of revenue decreased due primarily to the decrease in revenues during the three months ended September 30, 2020 as compared to the same period in 2019. We expect for our cost of revenue to increasechange proportionately with increaseschanges in revenues recognized in future periods.
Operating Expenses
Our operating expenses for the three months ended September 30, 2019 increased2020 decreased by $287,127$293,594 as compared to the prior year period due primarily to additionalhigher legal and professional fees associated with regulatory requirements duringin 2019 associated with the Asset Purchase Agreement and the Emerging Growth Agreement.Agreement, as well as $90,000 of transition expenses paid pursuant to the Emerging Growth Agreement which did not re-occur in 2020. Continuing operating expenses presented during the three months ended September 30, 20182020 and 2019 reflect administrative expenses associated with payroll, business insurance, legal and accounting fees that we expect will continue to incur.
Discontinued Operations
Effective June 18, 2019, we sold substantially all of our assets associated with the CAKE Business for total proceeds of $20,892,667. During the three months ended September 30, 2020, we had a loss on discontinued operations resulting primarily from the loss on foreign currency translation associated with dissolving our Subsidiary in the UK. During the three months ended September 30, 2019, we had a small gain from discontinued operations of $1,113 due to adjustments made to certain accrued liabilities associated with ourthe UK Subsidiary. The loss from discontinued operations during the three months ended September 30, 2018 represents the prior year results from the CAKE Business reclassified as discontinued operations.
Results of Operations for the Nine Months Ended September 30, 20192020 and 20182019
The following are the results of our operations for the nine months ended September 30, 20192020 as compared to the nine months ended September 30, 2018:2019:
For the Nine Months Ended | ||||||||||||
September 30, | September 30, | |||||||||||
2019 | 2018 | Change | ||||||||||
Net revenues | $ | 631,712 | $ | - | $ | 631,712 | ||||||
Cost of revenue | 414,726 | - | 414,726 | |||||||||
Gross profit | 216,986 | - | 216,986 | |||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 1,495,492 | 1,016,368 | 479,124 | |||||||||
Total operating expenses | 1,495,492 | 1,016,368 | 479,124 | |||||||||
Loss from operations | (1,278,506 | ) | (1,016,368 | ) | (262,138 | ) | ||||||
Other income (expense): | ||||||||||||
Interest expense | (2,514 | ) | - | (2,514 | ) | |||||||
Interest income | 131 | 61 | 70 | |||||||||
Total other income (expense) | (2,383 | ) | 61 | (2,444 | ) | |||||||
Net loss before provision for income taxes | (1,280,889 | ) | (1,016,307 | ) | (264,582 | ) | ||||||
Provision for income taxes | - | - | - | |||||||||
Net loss from continuing operations | (1,280,889 | ) | (1,016,307 | ) | (264,582 | ) | ||||||
Gain (loss) from discontinued operations, net of tax | 14,471,162 | (3,767,333 | ) | 18,238,495 | ||||||||
Net income (loss) | $ | 13,190,273 | $ | (4,783,640 | ) | $ | 17,973,913 | |||||
For the Nine Months Ended | ||||||||||||
September 30, | September 30, | |||||||||||
2020 | 2019 | Change | ||||||||||
Net revenues | $ | 349,071 | $ | 631,712 | $ | (282,641 | ) | |||||
Cost of revenue | 414,154 | 414,726 | (572 | ) | ||||||||
Gross profit (loss) | (65,083 | ) | 216,986 | (282,069 | ) | |||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 906,739 | 1,495,492 | (588,753 | ) | ||||||||
Total operating expenses | 906,739 | 1,495,492 | (588,753 | ) | ||||||||
Loss from operations | (971,822 | ) | (1,278,506 | ) | 306,684 | |||||||
Other income (expense): | ||||||||||||
Interest expense | (38,055 | ) | (2,514 | ) | (35,541 | ) | ||||||
Loss on extinguishment of debt | (30,069 | ) | - | (30,069 | ) | |||||||
Other income | 10,000 | - | 10,000 | |||||||||
Interest income | 17 | 131 | (114 | ) | ||||||||
Total other income (expense) | (58,107 | ) | (2,383 | ) | (55,724 | ) | ||||||
Net loss before provision for income taxes | (1,029,929 | ) | (1,280,889 | ) | 250,960 | |||||||
Provision for income taxes | - | - | - | |||||||||
Net loss from continuing operations | (1,029,929 | ) | (1,280,889 | ) | 250,960 | |||||||
Gain from discontinued operations, net of tax | (80,422 | ) | 14,471,162 | (14,551,584 | ) | |||||||
Net income (loss) | $ | (1,110,351 | ) | $ | 13,190,273 | $ | (14,300,624 | ) | ||||
Net Revenues
Subsequent to the closing of the Asset Purchase Agreement with Constellation on June 18, 2019, which resulted in the sale of our CAKE Business and discontinuation of our operations previously recorded under this line of business, our net revenues consistfrom continuing operations consists of revenue generated from customer contracts acquired in the Emerging Growth Agreement which closed on June 20, 2019. Subsequent to this date, our revenues are generated from the sale of promotional service packages to customers ranging from 3 to 6 months. We offer different packages tailored to the type and stage of the potential customer, such as public companies looking to increase their shareholder base, as well as private companies potentially looking to go public and attract capital and publicity. Our revenue for the nine months ended September 30, 2020 and 2019 represents revenue recognized forrelated to this line of business.
Our revenue during the period from June 21, 2019 throughnine months ended September 30, 2020 was lower than the same period in 2019, as the volume of new contracts entered into with customers has decreased in 2020 due in-part to COVID-19 and the impacts on our customers and the industry in which we operate. During the nine months ended September 30, 2020, we had 22 contracts in progress, whereas we had 31 contracts during the same period in 2019. We expect this be our primary source of revenue going forward.these trends to continue for the foreseeable future.
Costs of Revenue
Our cost of revenue represents costs incurred associated with performing services under our customer contracts acquired under the Emerging Growth Agreement. Our cost of revenue for the nine months ended September 30, 2019 represents2020 related to this line of business. Our cost of revenue recognized fordecreased due primarily to the period from June 21, 2019 throughdecrease in revenues during the nine months ended September 30, 2020 as compared to the same period in 2019. We expect for our cost of revenue to increasechange proportionately with increaseschanges in revenues recognized in future periods.
Operating Expenses
Our operating expenses for the nine months ended September 30, 2019 increased2020 decreased by $479,124$588,753 as compared to the prior year period due primarily to additionalhigher legal and professional fees in 2019 associated with the closing of the Asset PurcahsePurchase Agreement and the Emerging Growth Agreement, andas well as $120,000 of compensation expense during the reporting regulatory requirements associated with these transactions.nine months ended September 30, 2019 related to our board of directors which did not re-occur in 2020. We also had higher transition expenses paid pursuant to the Emerging Growth Agreement of $60,00 during 2019 as compared to 2020. Continuing operating expenses presented during the nine months ended September 30, 20182020 and 2019 reflect administrative expenses associated with payroll, business insurance, legal and accounting fees that we expect will continue to incur.
Discontinued Operations
Effective June 18, 2019, we sold substantially all of our assets associated with the CAKE Business for total proceeds of $20,892,667. Accordingly, we had a gain from discontinued operations during the nine months ended September 30, 2019 of $14,471,162, which includes the gain on sale of the CAKE Business of $19,473,080 offset by losses from the CAKE business through June 18, 2019. The loss from discontinued operations duringDuring the nine months ended September 30, 2018 represents the prior year results2020, we had a loss on discontinued operations resulting primarily from the CAKE Business reclassified as discontinued operations.loss on foreign currency translation associated with dissolving our Subsidiary in the UK.
Liquidity and Capital Resources
On May 15, 2019, we entered into the Asset Purchase Agreement to sell substantially all of our assets related to the CAKE Business. We received gross cash proceeds of $20,892,667 for the sale of this business, less payments totaling $20,190,869 for the payoff of existing debt, transaction costs, and certain vendor payables, leaving us with a net increase to cash of $701,798. Concurrent with this agreement, we also entered into the Emerging Growth Agreement where we acquired certain assets from Emerging Growth, LLC related to its sponsored content and marketing business for purchase price consideration consisting in part of $420,000 in cash. In September 2019, we received proceeds of $500,000 from a note payable. On May 6, 2020, we received $263,000 in the form of a loan from the PPP, as well $150,000 in proceeds from a loan with the SBA on June 24, 2020. Our plan to continue as a going concern includes raising additional capital in the form of debt or equity, growing the business acquired under the Emerging Growth Agreement and managing and reducing operating and overhead costs. We cannot provide any assurance that unforeseen circumstances that could occur at any time within the next twelve months or thereafter will not increase the need for us to raise additional capital on an immediate basis.
These matters, among others, raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
The following is a summary of our cash flows from operating, investing and financing activities for the nine months ended September 30, 20192020 and 2018.2019.
Nine Months Ended | ||||||||
September 30, | September 30, | |||||||
2019 | 2018 | |||||||
Cash flows used in operating activities | $ | (6,153,982 | ) | $ | (2,769,540 | ) | ||
Cash flows provided by (used in) investing activities | $ | 20,470,916 | $ | (1,155,829 | ) | |||
Cash flows provided by (used in) financing activities | $ | (13,407,514 | ) | $ | 5,587,198 | |||
Nine Months Ended | ||||||||
September 30, | September 30, | |||||||
2020 | 2019 | |||||||
Cash flows provided by (used in) operating activities | $ | (326,119 | ) | $ | (6,153,982 | ) | ||
Cash flows provided by investing activities | $ | (6,633 | ) | $ | 20,470,916 | |||
Cash flows provided by (used in) financing activities | $ | 353,000 | $ | (13,407,514 | ) | |||
As of September 30, 2019,2020, we had unrestricted cash of $975,434.$107,519.
Net cash used in operating activities was approximately $6.2 million$326,119 during the nine months ended September 30, 2019,2020, compared with approximately $2.8 millionto cash used in operating activities of $6,153,982 during the same period in 2018.2019. The increase in cash used in operating activities in 2020 was primarily due to a decreasethe result of the net loss during the period, offset by an increase in accounts payable and accrued expenses due toexpenses. During the nine months ended September 30, 2019, our net cash used in operations was primarily the result of the payment of a large number of accounts payable and other operating liabilities being paid at the time of closing of the Asset Purchase Agreement on June 18, 2019, as well as a higher loss from continuing activities during 2019.
Net cash provided by investing activities amounted to approximately $20.5 million during the nine months ended September 30, 2019, compared with cash used in investing activities of approximately $1.2 million during the same period in 2018. Cash provided by investing activities in 2019 consisted primarily of proceeds from the sale of the CAKE Business of approximately $20.9 million, offset by cash used of $420,000 for the acquisition of assets pursuant to the Emerging Growth Agreement. DuringOur cash flows used in investing activities during the nine months ended September 30, 2018, our cash used in investing activities consisted primarily2020 was $6,633 from the acquisition of expenditures for software capitalized for internal use. These expenditures related to the discontinued operations of the CAKE Businessproperty and will not be recurring.equipment.
Net cash used inprovided by financing activities was approximately $13.4 million forduring the nine months ended September 30, 2019, compared to net2020 of $353,000 was the result of proceeds from notes payable of $413,000, offset by the payment of preferred stock interest of $60,000. Net cash provided by financing activities of approximately $5.6 million for the same period in 2018. Cash used in financing activities in 2019 consisted of payments of approximately $11.8 million to repay the principal amounts outstanding under our credit facilities, repayment of promissory notes of $2.7 million and repayment of related party notes of $300,000. These repayments occurred at the time of closing of the Asset Purchase Agreement on June 18, 2019 for the sale of the CAKE Business. The cash used in financing activities in 2019 was offset by proceeds from credit facility borrowings of $900,000, as well as proceeds of $500,000 from a note payable in September 2019. During the nine months ended September 30, 2018, our cash provided by financing activities was approximately $5.6 million, which consisted of proceeds from borrowings under the credit facility of approximately $5.5 million and borrowings under promissory notes of $3.5 million, offset by repayments of principal under the credit facility of approximately $2.4 million and repayments of promissory notes of $1 million.
Description of Indebtedness
As of June 18, 2019, upon the closing of the Asset Purchase Agreement for the sale of the CAKE Business, all existing debt at the time was either paid off or settled through the exchange of outstanding principal into Series A Preferred Stock.
On September 10, 2019, we entered into a promissory note payable whereby we borrowed $500,000 bearing interest at 8% per annum. Interest on the note is payable quarterly on the first business day of December, March, June and September commencing December 1, 2019. Outstanding principal on the note is due in full on September 30, 2022.
In connection with the promissory note payable on September 10, 2019, wethe Company issued warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The warrants expire on September 10, 2024 and are fully vested upon issuance. The note was discounted by $17,624 allocated from the valuation of the warrants issued. The discount recorded on the note is being amortized as interest expense through the maturity date, which amounted to $322$1,479 and $4,405 for the three and nine months ended September 30, 2019.2020. As of September 30, 2019,2020, the net book value of the promissory note amounted to $482,698$488,582 including the principal amount outstanding of $500,000 net of the remaining discount of $17,302.
The following is a summary of our outstanding debt prior to the closing of the Asset Purchase Agreement on June 18, 2019, and the related transactions during the nine months ended September 30, 2019.
SAAS Capital Loan$11,418.
On May 5, 2016, we6, 2020, the Company entered into a promissory note, or the SaaS CapitalNote, with Pacific Western Bank, evidencing an unsecured loan, or the Loan, in the amount of $263,000 made to the Company under the Paycheck Protection Program, or the PPP. The PPP is a program of the U.S. Small Business Administration, or SBA, established under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. Under the PPP, the proceeds of the Loan may be used to pay payroll and make certain covered interest payments, lease payments and utility payments, or the Qualifying Expenses. The Company intends to use the entire Loan amount for Qualifying Expenses under the PPP. Under the terms of the CARES Act, PPP loan recipients can be granted forgiveness for all or a portion of the loan granted under the PPP, with SaaS Capitalsuch forgiveness to borrow upbe determined, subject to a maximumlimitations, based on the use of $8,000,000. Initial amounts borrowedthe loan proceeds for payment of Qualifying Expenses and the Company maintaining its payroll levels over certain required thresholds under the PPP. The terms of any forgiveness also may be subject to further requirements in any regulations and guidelines the SBA may adopt. No assurance can be provided that the Company will obtain forgiveness of the Note in whole or in part.
The interest rate on the Loan is 1.0% per annum. The Note matures on May 6, 2022. On December 1, 2020 and on the first day of each month thereafter until May 1, 2022, the Company must make monthly payments of $14,727 under the Loan that is not forgiven in accordance with the terms of the PPP and related accrued interest thereon. The Note contains events of default and other conditions customary for a Note of this type. As of September 30, 2020, the current portion of the Loan due within the next 12 months amounted to $144,327.
On June 24, 2020, the Company entered into a Loan Authorization and Agreement with the SBA under which the Company borrowed $150,000, and issued to the SBA a note and security agreement for the amount borrowed. Outstanding borrowings accrue interest at thea rate of 10.25%3.75% per annum, with future amounts borrowed bearingand installment payments, including principal and interest, atof $731 are due monthly and begin 12 months from the greaterdate of 10.25% or 9.21% plus the three-year treasury rate at the timeloan agreement. The balance of advance. Accrued interest on amounts borrowed was payable monthly for the first six months and thereafter 36 equal monthly payments ofany remaining principal and interest is payable. Prepayments will be subject to a 10%, 6% or 3% of principal premium if prepaid prior to 12 months, between 12 and 24 months, or between 24 months and maturity, respectively.
The fair value of the warrants previously issued in connection with the SaaS Capital Loan were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended Septemberdue 30 2019 and 2018, $0 and $49,996, respectively, of debt discount was amortized into interest expense. During the nine months ended September 30, 2019 and 2018, $100,867 and $148,410, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.
On May 15, 2019, we entered into a consent letter, agreement and waiver of the SaaS Capital Loan to, among other things, provide that upon the closing of the Asset Purchase Agreement with Constellation, we will pay to SaaS Capital the outstanding principal balance and accrued but unpaid interest due under the SaaS Capital Loan plus $250,000 in fees, SaaS Capital will release its liens related to our CAKE Business assets, SaaS Capital’s warrants to purchase an aggregate of 1,733,333 shares of our common stock will be cancelled, and fees payable under the terms of the SaaS Capital Loan in the aggregate amount of $495,186 will be payable to SaaS Capitalyears from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement in which we granted SaaS Capital a security interest.
All amounts outstanding under the SAAS Credit Loan were paid in full on July 18, 2019 upon the closing date of the Asset Purchase Agreement with Constellation. The total amount paid to satisfyloan agreement. As collateral for the remaining obligation underborrowing, the SaaS Capital Loan asCompany granted the SBA a security interest in substantially all assets of the closing date amounted to $4,576,123, consisting of the remaining principal balance outstanding of $4,252,209, as well as interest and fees of $323,914.Company.
Beedie Credit AgreementFuture scheduled maturities of long-term debt are as follows.
On January 25, 2018, we entered into the Beedie Credit Agreement with Beedie to borrow up to a maximum of $7,000,000. Outstanding principal accrued interest at the rate of 12% per annum increasing to 14% per annum if our gross margins fall below amounts specified in the Beedie Credit Agreement. Accrued interest on outstanding principal was payable monthly in arrears. We paid Beedie a commitment fee of $175,000 and paid to Beedie a monthly standby fee of 0.325% on the unadvanced and available amount.
The fair value of the warrants previously issued in connection with the Beedie Credit Agreement were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended September 30, 2019 and 2018, $0 and $129,727, respectively, of debt discount was amortized into interest expense. During the nine months ended September 30, 2019 and 2018, $1,571,181 and $310,801, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.
On May 15, 2019, we entered into a seventh amendment of the Beedie Credit Agreement to, among other things, provide that upon the closing of the Asset Purchase Agreement with Constellation, we will pay to Beedie the outstanding principal balance and accrued but unpaid interest due under the Beedie Credit Agreement, Beedie will release its liens related to our CAKE Business assets, Beedie’s warrants to purchase an aggregate of 7,935,000 shares of our common stock will be cancelled, and fees payable under the terms of the Beedie Credit Agreement in the aggregate amount of $1,015,862 will be payable to Beedie from the holdback and earnout payments payable by Constellation under the Asset Purchase Agreement in which we granted Beedie a security interest.
All amounts outstanding under the Beedie Credit Agreement were paid in full on July 18, 2019 upon the closing date of the Asset Purchase Agreement with Constellation. The total amount paid to satisfy the remaining obligation under the Beedie Credit Agreement as of the closing date amounted to $7,033,208, consisting of the remaining principal balance outstanding of $6,962,379, as well as interest and fees of $70,829.
2018 Promissory Notes
On May 31, 2018, and June 15, 2018, we borrowed an aggregate of $2,000,000, respectively, from the 2018 Lenders and the 2018 Promissory Notes for the repayment of the amounts borrowed. The 2018 Lenders were all accredited investors, one of the 2018 Lenders is an affiliate of our director, Greg Akselrud, two of the 2018 Lenders are related to our Chairman and Chief Executive Officer, Brian Ross, and two of the 2018 Lenders were our employees. The 2018 Promissory Notes were unsecured, had a maturity date of May 30, 2021 and all principal is due upon maturity. Amounts borrowed accrued interest at 12% per annum and accrued interest was payable monthly. We also issued to the 2018 Lenders six-year warrants to purchase an aggregate of 3,000,000 shares of our common stock at an exercise price of $0.35 per share.
All amounts outstanding under the 2018 Promissory Notes were paid in full or settled through the exchange of outstanding amounts into Series A Preferred Stock on July 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation.
Year Ended | ||||
December 31, | ||||
2020 (remainder of) | $ | 13,221 | ||
2021 | 175,028 | |||
2022 | 574,751 | |||
2023 | 2,262 | |||
2024 | 3,285 | |||
2025 | 3,416 | |||
Thereafter | 141,037 | |||
Total | $ | 913,000 | ||
August 2018 Promissory Notes
On August 31, 2018, we borrowed an aggregate of $1,500,000 from the August 2018 Lenders and issued the August 2018 Promissory Notes for the repayment of the amounts borrowed. The August 2018 Lenders were all accredited investors. The August 2018 Promissory Notes were unsecured, had a maturity date of August 30, 2021 and all principal was due upon maturity. Amounts borrowed accrued interest at 12% per annum and accrued interest was payable monthly. We also issued to the August 2018 Lenders six-year warrants to purchase an aggregate of 1,500,000 shares of our common stock exercisable for cash at an exercise price of $0.35 per share.
All amounts outstanding under the August 2018 Promissory Notes were paid in full or settled through the exchange of outstanding amounts into Series A Preferred Stock on July 18, 2019 upon the closing of the Asset Purchase Agreement with Constellation.
The fair value of the warrants previously issued in connection with the 2018 Promissory Notes and the August 2018 Promissory Notes were recorded as discounts to the notes payable and were being amortized into interest expense over the maturity periods. During the three months ended September 30, 2019 and 2018, $0 and $69,124, respectively, of debt discount was amortized into interest expense. During the nine months ended September 30, 2019 and 2018, $839,912 and $89,602, respectively, of debt discount was amortized into interest expense. At the time the outstanding loan balances were settled in June 2019, any remaining discount balances were recorded as interest expense.
Obligations Under Preferred Stock
On June 20, 2019, existing debtholders with outstanding principal balances totaling $500,000 from the above 2018 Promissory Notes and August 2018 Promissory Notes were issued an aggregate of 500 shares of Series A Preferred Stock, each with a stated value per share of $1,000, as conversion of $500,000 worth of outstanding promissory notes. The Series A Preferred Stock bears interest at 12% per annum, and is convertible into our common stock at the election of the holder at a conversion price per share to be mutually agreed between us and the holder in the future, and be redeemable at our option following the third year after issuance, without voting rights or a liquidation preference.
On June 20, 2019, we issued 3,000 shares of Series B Preferred Stock, each with a stated value of $1,000 per share, to Emerging Growth, LLC as part of the Emerging Growth Agreement. The aggregate fair value of $687,000 was recorded as part of the acquisition price of the net assets acquired from Emerging Growth, LLC. The Series B Preferred Stock bears interest at 6% per annum and is convertible into our common stock at the election of Emerging Growth, LLC at a conversion price per share to be mutually agreed between us and Emerging Growth, LLC in the future, without voting rights or a liquidation preference, except with respect to accrued penalty interest.
Other outstanding obligations at September 30, 20192020
Warrants
As of September 30, 2019, 8,127,1842020, 5,256,944 shares of our common stock are issuable pursuant to the exercise of warrants.
Options
As of September 30, 2019, 6,595,0002020, 3,160,000 shares of our common stock are issuable pursuant to the exercise of options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including each of the areas in which we operate. While to date we have not been required to stop operating, COVID-19 has had and is expected to continue to have an adverse effect on the financial condition of us and our customers. While it is unknown how long these conditions will last and what the complete financial effect will be, it is expected to have a significant adverse impact to our revenue and ability to obtain financing.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer, who is our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2019,2020, our disclosure controls and procedures were not effective.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2019, in order to remediate the segregation of duties and other deficiencies initially created by the departure of our accounting department in June 2019, we hired an outside bookkeeper and accounting consultants to perform our account reconciliations and other day-to-day accounting requirements. The internal control structure was also documented and assessed in the areas of financial reporting and disclosure controls as it relates to our continuing operations. In addition, we revised and improved the use of our systems for getting appropriate approvals for purchases and other activities that require authorization. However, our ability to file timely reports is heavily dependent on having the necessary financial resources to pay consultants and other outside service providers involved with performing key elements of our disclosure and financial reporting controls. Our current financial condition, brought on in-part by COVID-19, has temporarily hindered our ability to file timely reports for this reason. As a result, we have assessed our disclosure controls and controls over financial reporting as not effective.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Effective August 6, 2020, the Company and Emerging Growth reached an agreement whereby the Company issued 4.8 million shares of its common stock with a value of $240,000 to Emerging Growth as payment for outstanding liabilities due to Emerging Growth totaling $209,931. The outstanding liabilities due to Emerging Growth included $104,931 in outstanding accrued interest on the Series B Preferred Stock through August 31, 2020, as well as $105,000 of outstanding payables. The additional $30,069 was recorded as loss on extinguishment of debt during the three and nine months ended September 30, 2020. The shares were issued under the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, as not involving a public offering.
Item 5. Other Information
Given the timing of events, the following information is included in this Form 10-Q pursuant to Item 3.02 “Unregistered Sales of Equity Securities” of Form 8-K in lieu of filing a Form 8-K.
Effective October 13, 2020, the Company and the holder of its $500,000 promissory note payable issued on September 10, 2019 reached an agreement whereby the Company agreed to issue 1.65 million shares of its common stock to the noteholder in lieu of $41,192 of accrued interest on the promissory note through December 31, 2020. The shares were issued under the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, as not involving a public offering.
Item 6. Exhibits
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101. | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, |
* | Filed herewith. |
** | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CFN ENTERPRISES INC. |
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Dated: | By: | /s/ Brian Ross |
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| Brian Ross President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) |
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