SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-53929
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)
430 First Avenue North, Suite 620
(Address of principal executive offices)
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (#232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller reporting company:
|Large accelerated filer|
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). ¨ Yes x No
Indicate the number of the registrant's shares of common stock outstanding, as of the latest practicable date: 31,425,021 shares of common stock are outstanding as of June 30, 2016.
Table of Contents
Corporate Contact Information
Our executive, sales and marketing offices, as well as our software development spaces and equipment, are located at 430 First Avenue North, Minneapolis, MN 55401; our telephone number is (612) 927-3700; and we maintain a website at www.FisionOnline.com.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents
Accounts receivable, net
Total Current Assets
Property and equipment, net
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses
Note payable and accrued interest - related party
Total Current Liabilities
Preferred Stock, $0.0001 Par value, 20,000,000 shares authorized, No shares issued and outstanding
Common Stock, $0.0001 Par value, 500,000,000 shares authorized 31,425,021 and 27,797,950 shares issued and outstanding, respectively
Additional paid in capital
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Six Months Ended
COST OF SALES
Sales and Marketing
Development and Support
General and Administrative
TOTAL OPERATING EXPENSES
OTHER INCOME / (EXPENSE)
Net loss per common share - basic and diluted
Weignted average common shares outstanding: Basic and diluted
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) for the Period
Adjustments to reconcile net loss to net cash provided by operating activities:
Common stock issued for services
Stock warrants issued for services
Changes in Operating Assets and Liabilities
(Increase) decrease in:
Increase (decrease) in:
Accounts payable & accrued expenses
Net Cash Used in Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Net Cash Used In Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on note payable
Proceeds from note payable
Proceeds from related party notes
Proceeds from (Repayments on) line of credit
Proceeds from issuance of common stock
Net Cash Provided by Financing Activities
Net (Decrease) Increase in Cash
Cash at Beginning of Period
Cash at End of Period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period:
Franchise and Income Taxes
Noncash operating and financing activities:
Common Stock Issued for Services
Common Stock Warrants Issued for Services
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016 AND 2015
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Fision Corporation, (formerly DE 6 Acquisition, Inc.), a Delaware corporation (the "Company") was incorporated on February 24, 2010, and was inactive until December 2015 when it merged with Fision Holdings, Inc., a Minnesota operating business based in Minneapolis, Minnesota. As a result of the merger, Fision Holdings, Inc. became a wholly-owned subsidiary of the Company. Fision Holdings, Inc. was incorporated under the laws of the State of Minnesota in 2010, and has developed and successfully commercialized a unique cloud-based software platform which automates and integrates digital marketing assets and marketing communications to "bridge the gap" between marketing and sales of any enterprise. The Company generates its revenues primarily from software licensing contracts typically having terms of from one to three years and requiring monthly subscription fees based on the customer's number of users and the locations where used. The Company's business model provides a consistent and recurring revenue stream resulting in a high percentage of recurring revenues.
The terms "Fision," "we," "us," and "our," refer to FISION Corporation, a Delaware corporation and its wholly-owned operating subsidiary Fision Holdings, Inc., a Minnesota corporation.
Basis of Presentation
The accompanying consolidated financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to the rules and regulations of the SEC. Certain information and note disclosures which are included in annual financial statements have been omitted pursuant to these rules and regulations. We believe the disclosures made in these interim unaudited financial statements are adequate to make the information not misleading.
Although these interim financial statements as and for the three-month and six-month periods ended June 30, 2016 and 2015 are unaudited, in the opinion of our management, such statements include all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods presented. The results for these interim periods are not necessarily indicative of the results to be expected for the year ended December 31, 2016 or for any future period.
These unaudited interim financial statements should be read and considered in conjunction with our audited financial statements and the notes thereto for the year ended December 31, 2015, included in our annual report on Form10-K filed with the SEC on April 15, 2016.
Principles of Consolidation
These consolidated interim financial statements include the accounts of Fision Corporation, a Delaware corporation, and its wholly-owned Minnesota subsidiary, and all material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
GAAP accounting principles require our management to make estimates and assumptions in the preparation of these interim financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates and assumptions.
The most significant areas requiring management judgment and which are susceptible to possible later change include our revenue recognition, cost of revenue, allowance for doubtful accounts, valuations of property and equipment, stock-based compensation, fair value of financial instruments, derivative securities, goodwill and other intangible assets, research and development, impairment of long-lived assets, and income taxes. Certain accounting policies for these areas are discussed following these Notes in the Item 2 section of this quarterly report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Cash and Cash Equivalents
We consider all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. At June 30, 2016 we had no cash equivalents.
Concentration of Credit Risk and Customers
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. During the quarter ended June 30, 2016, we may have had cash deposits in our bank that exceeded FDIC insurance limits. We maintain any bank accounts at high quality institutions and in demand accounts to mitigate this risk. Regarding our customers, we perform ongoing credit evaluations of them, and generally we do not require collateral from them to do business with us.
For the six months ended June 30, 2016, only two customers exceeded 10% of our revenues, with revenue from the largest one, a new customer, being primarily based on one-time implementation and set-up fees. We do not believe that currently we face any material customer concentration risks, although a significant reduction for any reason in the use of our software solutions by one or more of our major customers could harm our business materially.
Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding and potential common shares under the treasury stock method. Diluted net loss per common share is not shown, since the assumed exercise of stock options and warrants using the treasury stock method are anti-dilutive.
NOTE 2 – GOING CONCERN
These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company's ability to continue as a going concern is contingent upon its future ability to achieve and maintain profitable operations, and to raise substantial additional capital as required until it attains profitable operations.
At June 30, 2016 the Company had a working capital deficiency of approximately $1.6 million and an accumulated deficit of approximately $12.6 million. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These unaudited interim financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
We are in the process of raising funds, increasing our marketing activities, and otherwise addressing our ability to continue as a going concern, and our management believes that our actions being taken to raise needed capital and implement our business plan will enable us to continue as a going concern.
NOTE 3 – NOTES PAYABLE
At June 30, 2016 the Company was indebted under various Notes Payable in the total amount of $961,520 including accrued interest, the majority amount of which was matured and past due as of June 30, 2016. Following is a summary of our outstanding Notes Payable indebtedness as of June 30, 2016:
Description of Notes Payable
Decathlon Alpha LP, Senior Secured Note, due 12/31/16, interest at 15%
Forte Ventures LP, Secured Note, past due, interest at 15-21%
Hawkins Ventures Inc., Secured Note, past due, interest at 18%
Nottingham Securities Inc., due 9/30/16, interest at 10%
Finquest Capital Inc., due 9/30/16/, interest at 10%
Notes payable to two principal officers, due on demand, interest at 6%
Note payable to individual, past due, interest at 10%
Note payable to individual, past due, interest at 12%
Note payable to individual, past due, interest at 6%
(1) Includes accrued interest.
NOTE 4 – COMMITMENTS AND CONTINGENCIES
We lease 4,427 square feet of office, development and operational spaces in Minneapolis, Minnesota on a month-to-month basis for $7,142 per month including utilities, maintenance and cleaning. Rent paid for the six-month periods ended June 30, 2016 and 2015 were respectively $42,852 and $42,851.
We have three written employment agreements in effect with our three principle executive officers, including provisions for base salary, discretionary bonuses, severance provisions and other employee benefits. The salary terms of these agreements include aggregate monthly salaries of $49,167 per month.
In May 2016 we settled a material legal action involving a former employee who alleged a breach of his former employment agreement as well as other allegations of damages, in total in excess of $200,000. We settled this litigation for $145,000 in cash plus issuance to the plaintiff of 135,000 shares of our common stock. We have issued the 135,000 shares and paid $75,000 of this settlement, with the balance of $70,000 payable $20,000 in August 2016, $20,000 in September 2016, $20,000 in October 2016, and $10,000 in November 2016. Upon full payment by us of the $145,000, the plaintiff will release us from any and all claims or obligations to him.
From time to time, we become subject to legal proceedings, claims and litigation arising in the ordinary course of business. We currently are not a party to any material legal proceedings, nor are we aware of any other pending or threatened litigation that would have a material effect on our business, operating results or financial condition should such litigation be resolved unfavorably against our Company.
NOTE 5 – 2016 PLAN AND STOCK AWARDS
In March 2016, the Board of Directors of the Company adopted our 2016 Equity Incentive Plan ("2016 Plan") which was registered with the SEC pursuant to a Registration Statement on Form S-8 effective on March 30, 2016. This 2016 Plan reserved 2,500,000 shares of our common stock for grants of incentive awards from time to time to eligible participants, including option awards, restricted stock awards, or stock payment awards. Eligible participants under the 2016 Plan include employees, directors and certain consultants or advisors of the Company. In March-April 2016, our Board of Directors granted stock payment awards under the 2016 Plan for the issuance of an aggregate of 1,330,000 common shares.
NOTE 6 – STOCKHOLDERS' EQUITY
The Company is authorized to issue 500,000,000 shares of common stock and 20,000,000 shares of preferred stock, both having $.0001 par value per share. At June 30, 2016 there were 31,425,021 outstanding shares of common stock and no outstanding shares of preferred stock.
Common Shares Issued
As stated in the foregoing Note 5, the Company issued a total of 1,330,000 common shares as stock payment awards under its 2016 Plan valued in total at $864,500. These stock payment awards were issued for management bonuses, development and support services, marketing services, and professional services based on a valuation of $.65 per share. The valuation was based on the most recent sale of our common stock in a private placement.
During the first six months of 2016, the Company also sold and issued a total of 1,559,615 unregistered common shares in private placement transactions to raise working capital, and incident thereto raised net proceeds of $670,000 at an average price of approximately $0.43 per share.
In February 2016, the Company issued 25,000 unregistered common shares for marketing services valued at $10,000 ($0.40 per share); in March 2016, the Company issued 250,000 unregistered common shares for financial services valued at $100,000 ($0.40 per share); and in June 2016 the Company issued 115,000 unregistered common shares for financial services valued at $46,000 ($0.40 per share).
In June 2016, the Company issued 135,000 unregistered common shares, valued at $.65 per share, to a former employee incident to settlement of a lawsuit.
In June 2016, the Company satisfied and converted $75,000 of an outstanding Note through the issuance of 187,500 unregistered common shares to the Noteholder ($0.40 per share).
Stock Options Granted
In April 2016, the Company granted stock options to a new executive officer for the purchase of up to 1,600,000 common shares vesting quarterly over a 4-year period and exercisable (including cashless exercise) at $0.35 per share. This stock option grant was valued at $208,000 pursuant to our Black Scholes valuation model.
In March 2016, pursuant to a one-year marketing agreement, the Company issued a five-year Warrant for marketing services to purchase 120,000 common shares exercisable at $.50 per share anytime in whole or in part until expiration of the Warrant, and which Warrant was valued at $30,000 pursuant to our Black Scholes valuation model.
In June 2016, the Company issued a five-year Warrant for financial services to purchase up to 25,000 common shares exercisable at $.40 per share anytime until expiration, and also issued a five-year Warrant for operational services to purchase 25,000 common shares exercisable at $.50 per share anytime until expiration. These two Warrants were valued at $30,000 pursuant to our Black Scholes valuation model.
NOTE 7 – RELATED PARTY TRANSACTIONS
Our Notes Payable as of June 30, 2016 include $91,399 owed to our two principal executive officers incident to their conversion of unpaid past salary compensation into Notes payable on demand having an interest rate of 6% per annum.
The Stock Payment Awards granted by us in March 2016 under our 2016 Equity Incentive Plan included executive bonus awards of 375,000 common shares to our CEO valued at $243,750 ($0.65 per share) and 225,000 common shares to our CFO valued at $146,250 ($0.65 per share).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
There are many statements in this Quarterly Report on Form 10-Q that are not historical facts. These "forward-looking statements" can be identified by terminology such as "believe," "may," "intend," "plan," "will," "could," "expect," estimate," "strategy," and similar expressions. These forward-looking statements are subject to material risks and uncertainties that are beyond our control. Although our management believes that the assumptions underlying these forward-looking statements are reasonable, they do not assure or guarantee our future performance. Our actual results could differ materially from those contemplated by these forward-looking statements. The assumptions used for these forward-looking statements require considerable exercise of judgment, since they represent estimates of future events and are thus subject to material uncertainties involving possible changes in economic, governmental, industry, marketplace, and other circumstances. To the extent any assumed events do not occur, the outcome may vary materially and worse from our anticipated or projected results. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by these forward-looking statements will in fact transpire. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements. Before determining to make an investment in any of our securities, you should read and consider the specific Risk Factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
At the effective time of the December 2015 Merger of our Delaware Corporation with our wholly-owned Minnesota corporation, each common share of Fision Holdings, Inc., the Minnesota corporation, was converted automatically into one share of common stock of FISION Corporation, the Delaware corporation. In addition, all pre-merger outstanding derivative securities of the Minnesota corporation that were exercisable, convertible or exchangeable into its common stock were exchanged automatically for similar derivative securities of the Delaware corporation based upon equivalent share amounts, exercise or conversion prices, and other terms as existed under the pre-merger derivative securities of the Minnesota corporation.
As a result of the Merger, pre-merger shareholders plus pre-merger holders of derivative securities of the Delaware corporation owned as of the closing of the Merger less than five percent (5%) of our total combined post-merger outstanding common stock plus reserved stock for derivative securities.
Also effective with the closing of the Merger, the former sole officer and sole director of the Delaware corporation resigned from all management positions, and the following persons were appointed to serve for the parent FISION Corporation immediately in the following capacities:
Chief Executive Officer (CEO), Board Chairman and Director
Executive Vice President, Chief Financial Officer (CFO) and Director
Messrs. Brown and Lowenthal formerly held and currently hold the same management positions with our operating subsidiary Minnesota corporation.
At the effective time of the Merger, (i) a change of control of the Delaware parent corporation occurred, and (ii)the parent Delaware corporation assumed and agreed to carry on and operate the business of the Minnesota corporation as its sole line of business. Following the Merger, the Company continued to be a "smaller reporting company" as defined in Regulation S-K of the SEC.
The Merger has been accounted for as a "reverse merger" and recapitalization. Accordingly, for financial reporting purposes, our Minnesota subsidiary was the acquirer and the Delaware parent was the acquired company. Consequently, the assets and liabilities and operations reflected in our historical financial statements prior to the Merger are those of our Minnesota subsidiary and will be recorded at their historical cost basis; and the consolidated financial statements after the Merger will include assets and liabilities of both the Delaware and Minnesota corporations as well as the post-merger combined historical operations of both corporations.
The tax treatment of the Merger is intended to constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as relating to such tax free reorganization exemption.
Recent Employment of Key Executive Officer
On April 20, 2016, we hired Wade Anderson as our Chief Technology Officer (CTO) and entered into an Employment Agreement with him containing the following material provisions:
i) Duties -- Mr. Anderson shall serve as our Chief Technology Officer (CTO) (and also as Chief Product Officer) and shall report directly to our Chief Executive Officer, and have direct responsibility for all Fision platform/software existing and future development and its ongoing maintenance and successful daily operation. Mr. Anderson shall devote his best efforts and fulltime work on behalf of the Company, provided that he is entitled to perform non-competitive consulting and freelance work during weekends and evenings provided it doesn't interfere with his duties and performance for the Company.
ii) Term of Employment – An initial term of twenty-four (24) months, and thereafter to renew automatically for additional one-year terms unless terminated prior thereto by the Company.
iv) Compensation -- Mr. Anderson receives the following compensation under the terms of his Employment Agreement:
|a)||Monthly base salary of $16,666.67.|
|b)||Performance pay bonuses up to $60,000 annually.|
|c)||Twenty (20) days personal paid-time-off (PTO) annually.|
|d)||Eligibility to participate in all Fision benefit plans available to other employees.|
|e)||Future increase to base salary to be reviewed at least annually.|
|f)||5% sales commission for three years on new customer recurring revenue from sales obtained by him.|
|g)||Five-year stock option grant, vesting quarterly over 4 years after the first 6 months, to purchase up to 1,600,000 shares of our common stock at $0.35 per share as long as he is an employee of the Company, and providing for cashless exercise.|
|h)||A stock award of 50,000 common shares as a signing bonus.|
v) Confidential Information and Trade Secrets – Mr. Anderson agrees not to directly or indirectly use or divulge any of Fision's confidential information, trade secrets or any other proprietary information for his or any third party's benefit, including without limitation our software development applications and know-how, our customer and vendor lists and relationships, our finances and product pricing, our strategic and marketing plans, and our proprietary processes and methods of doing business
vi) Inventions and Intellectual Property – Mr. Anderson agrees that all product developments, designs, computer software, trademarks, and any other intellectual property (IP) developed or conceived by him in the course of his employment, whether solely or jointly with others, shall inure to and be the property of the Company.
vii) Non-Solicitation – During the term of his employment and for one year thereafter, Mr. Anderson will not directly or indirectly solicit employees, customers, vendors, referral sources or other strategic allies of Fision for any purpose other than to benefit Fision, including he will take no action whatsoever to induce any person to terminate their employment or business arrangement with Fision.
viii) Termination -- If Mr. Anderson is terminated for cause as defined in the Employment Agreement, he will not be entitled to any severance payments. If he is terminated without cause, he shall receive severance pay after the first year of employment in the amount of six months' pay based on his base salary, and after two years and more of employment, he shall be entitled to severance pay of an additional two months per year up to a maximum of twelve months of severance pay. In the event of a change of control of the Company resulting in his termination, he shall be entitled to from twelve to fifteen months of severance pay. Upon termination for any reason, he would have up to 90 days from the date of termination to exercise any vested stock options.
ix) Legal Matters -- The Employment Agreement is governed by and interpreted under the laws of the State of Minnesota. Any unresolved disputes between the parties shall be resolved through binding arbitration through the American Arbitration Association with venue in Minneapolis.
Business of Company
Our business is conducted through our operating Minnesota subsidiary which is based in Minneapolis. Fision was founded and incorporated in Minnesota in 2010 by our current management to develop and create proprietary software solutions to support marketing and sales operations of both private businesses and public entities. Since then, we have developed and successfully commercialized a unique cloud-based software platform which automates and integrates digital marketing assets and marketing communications, and thus "bridges the gap" between marketing and sales of an enterprise. We believe that our innovative Fision platform, proprietary technology, forward-looking strategy, and experienced management have now positioned us to become a leader in the software marketing and sales enablement segment of the rapidly-growing software-as-a-service (SaaS) industry.
We are a global cloud-based software development and licensing company offering a proprietary software platform to automate many marketing functions in order to promote and improve sales enablement of any entity. Our innovative software system is readily scalable to adapt to fast business growth of any customer, regardless of size. Since our founding, we have been engaged primarily in the development of our software platform along with commercializing, servicing and supporting our initial customer base. Except for future customary software enhancements and periodic upgrades, the development of our automated marketing platform has been completed.
Our Fision software platform enables our customers to easily and quickly create and implement marketing campaigns to support their sales personnel while still emphasizing, protecting and enhancing their valuable brand assets. Use of our software solutions by our customers reduces substantially the time and cost incurred by them to produce and present marketing and sales campaigns and presentations for specific products or services.
Our proprietary marketing software enables every member of our customers' marketing and sales teams, by having easy and automated access to all their digital marketing and media assets, to leverage the full power of their distinctive brands and marketing assets in every interaction with their consumers or buyers, while at the same time assuring that central marketing maintains control of the brands and related corporate integrity. Fision automated software enables our customers easily and quickly to create and implement professional marketing campaigns and other presentations for distribution to and support of sales force personnel regardless of their location.
The Fision software platform offers three major benefits to our customers, (i) accelerating their revenues, (ii) improving and protecting their marketing and brand effectiveness, and (iii) reducing significantly their marketing and sales costs.
The Fision Platform - Our Fision marketing software centrally collects, stores, prioritizes, organizes, streamlines, integrates and distributes the numerous digital marketing assets of our customers including videos, images, logos and other brand materials, presentations, social content and any other material marketing assets. Using Fision's automated software technology, these digital assets then become readily available for user access as determined by our customers. Our system is designed to allow any corporate marketing department the ability to instantly and seamlessly update its users with the latest digital marketing content and materials, while providing them with a simple, intuitive software interface to quickly find what they need on any digital device, anytime and anywhere. Even customers with extensive global sales networks have the ability to quickly and efficiently create and deliver customized sales campaigns or presentations to selectively targeted consumer audiences while conveying a positive, personalized and consistent brand experience.We believe that the use of our software marketing solutions by our customers results in a substantial increase in their return on investment (ROI) and their profitability.
Our Customers - Our current and targeted customer base ranges across diverse industries of all sizes, including banks and other financial institutions, insurance companies, hotels and other hospitality enterprises, healthcare and fitness companies, telecommunications companies, software and other technology companies, and numerous other companies selling familiar branded products or services.
Our potential customer base is global and virtually unlimited, since our automated marketing software solutions are totally cloud-based and scalable, and provide a multitude of digital tools and solutions which can benefit any company selling products or services, regardless of their size. Our customers typically "stick" with us and our Fision platform, and accordingly we have received substantial recurring revenues from them on a consistent basis. Certain key customers have maintained written contracts with us for years, including Renewal by Andersen, PostNet, Vitality Group USA/Discovery, Grand Casino, IronPlanet, Summit Reinsurance, Frontier Communications, and VitalityHealth UK.
Our current ongoing commercial negotiations with prospective customers include a considerable number of potential new clients, and we expect to close material contracts with 6-7 of them during the remainder of 2016.
Cloud-Based Platform - Since 2011, storage and operation of our software solutions along with the digital marketing assets and related data of our customers have been outsourced by us to take place in the "cloud." Providers of cloud services are typically referred to as "virtual servers" since they provide all digital data storage and software application services to their clients. The cloud-based service provider used by us now and for the past couple years is an established Minneapolis-based company, which offers readily scalable and secure cloud services capable of satisfying any increasing demand or changing circumstances in the needs of our customers or us. We do not have a formal long-term contract with our cloud service provider, but rather we pay $6,100 monthly on a month-to-month basis for these services and our position in their cloud.
We regard the hosting of our software applications, the ready digital interface with our customers, the storage of unlimited customer data with our cloud provider, and the overall flexibility of the cloud model as being crucial to our operating strategy. Moreover, our major savings in expensive computer equipment, high salaried technology personnel, and costly security measures through our use of the cloud is vital to our cost of doing business. In any event, we believe that our highly qualified and experienced cloud provider is more effective in delivering our automated software solutions to our customers than we could perform.
Employees - We currently have eleven (11) full-time employees, including our Chief Executive Officer, Chief Financial Officer, Chief Technical Officer, Senior Vice President of Sales, Controller/Office Manager, Customer Support Specialist, Client Services Manager, Marketing Manager and three Programmer/Developers. None of our employees are subject to a collective bargaining agreement. We believe that our relations with our employees are good.
Properties - Our corporate headquarters and development and operational facilities are located in a large office building in downtown Minneapolis, Minnesota, and since 2010 we have occupied 4,427 square feet of this building. We lease these spaces on a month-to-month basis for $7,142 per month including rent, utilities, maintenance and cleaning services. We do not own any real estate.
Our computer hardware servers and other technology development equipment as well as considerable office and administrative equipment, furniture and supplies are also located in our Minneapolis facility. We believe that our current facilities and equipment are adequate to satisfy our current operations and to support substantial future growth.
Revenue Model - Our revenue model is primarily based on prescribed software licensing fees received by us on a regular monthly basis from customers which are under written licensing agreements with us. We consistently commit substantial expenses and sales personnel toward targeting, negotiating and procuring significant licensing agreements with new customers. Because of the long-term nature and the substantial expense commitment required by each new customer to enter into a binding licensing agreement with us, the sales cycle involved in our revenue model is quite lengthy. Accordingly, the unpredictable and different timing involved from customer to customer to procure our licensing contracts prevents us from receiving consistent revenues or accurately forecasting our future revenue stream, particularly since each new contract provides substantial one-time start-up revenues from prescribed initial set-up and integration fees. Assuming our business and number of customers under license continue to grow as projected by us, however, we believe that within a couple years the timing and sales cycle involved in closing new customers will not affect materially our current or forecasted revenue stream.
We generate our revenues primarily from customer payments having a license to access and use our proprietary marketing software platform, which payments include consistent monthly fees and a prescribed substantial one-time set-up and integration fee payable to us at the outset of the license. We also receive certain secondary fees from time to time for customized software development projects ordered from us, and for processing emails for certain customers.
A substantial majority of our revenues have been and are "sticky" and thus of a recurring nature. Most of our customers have remained with and consistently used our software platform once they have integrated it into their digital marketing model and experienced the special benefits provided from our cloud-based Fision platform.
Marketing Model - We have marketed, sold and licensed our proprietary software products primarily through our direct sales force including management and other direct sales personnel. We generate our revenues primarily from software licensing contracts obtained by our sales force. These written and binding contracts typically have terms of one to three years and require prescribed monthly fees based on the customer's number of end users and locations where used. We have outstanding licensing contracts with fourteen (14) customers including significant contracts we closed in late 2015 and early 2016, and we currently are engaged in various stages of contract negotiation with or procurement of a substantial number of prospective large new customers.
In late 2014, we implemented a secondary sales channel which involves targeting independent national sales agencies to sell (license) our branded software products as agents paid based on their actual sales. We regard and refer to these sales agencies as our "channel partners." To date we have entered into three channel partner arrangements with experienced agencies, and we have already realized material revenues from their sales efforts.
We operate and sell our products and services in the marketing software segment of the broader software-as-a-service (SaaS) industry, with virtually all our revenues derived from our proprietary cloud-based Fision marketing software platform.
Intellectual Property (IP) Protection - We commit substantial attention and resources toward obtaining patent and trademark rights and otherwise protecting our trade secrets, development know-how technology, trademarks, trade names, patent rights and other proprietary intellectual property (IP). Our IP protection includes written provisions relating to non-compete, non-recruit, confidentiality, and invention assignments as applicable with employees, vendors, sales agents, consultants and others. We currently have three patent claims involving our software technology that we believe are significant, which are filed and pending with the United States Patent and Trademark Office (USPTO), and we expect to obtain final patents on all of them.
Inflation and Seasonality - We do not consider our operations and business to be materially affected by either inflation or seasonality.
Segment Reporting- The Company has determined that it operates in only one segment of its industry.
Critical Accounting Policies
Principles of Consolidation - Regarding our wholly-owned Minnesota Fision subsidiary, as well as any future acquisitions that would become our wholly-owned or majority-owned subsidiaries, our financial statements will be presented on a consolidated basis with all intercompany transactions and balances eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make certain material estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates materially. These accounting estimates and assumptions may be material to us and our financial statements due to the levels of subjectivity and judgment involved.
Certain estimates made in connection with our accompanying financial statements include our estimated reserve for doubtful accounts receivable, valuations used for stock-based compensation, fair value determinations in connection with our analysis of long-lived assets for impairment, and estimated useful lives for intangible assets and property and equipment.
Our revenue model is based on our receiving a consistent and high percentage of recurring revenue from long-term customers under written contract to license and use our Fision software platform. If our future revenues were to include a substantially lower percentage of recurring revenues than has been our experience to date, our anticipated future gross profit margins could be materially lower, which would adversely affect our financial condition and results of operations.
Our estimated valuations for stock-based compensation grants are based primarily on the price at which we have sold common stock in whatever private placement is nearest to the date of grant. Such valuations could vary substantially from quoted prices for our common stock in any future publicly trading market obtained by us.
Accounts Receivable - The Company maintains allowances for potential credit losses on accounts receivable. In connection with the preparation of our financial statements, management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, changes in customer payment patterns, and current economic trends in order to evaluate the adequacy of these allowances. Accounts determined to be uncollectible are charged to operations when that determination is made.
Research and Development - We expense all our research and development operations and activities as they occur. Since inception, we have committed substantial financial, personnel and other resources toward research and development efforts and activities related to the integration, commercialization and improvement of our proprietary software platform. Our development activities are conducted both internally from our Minneapolis headquarters facility by our experienced and well-qualified development programmers and software architects, and externally from outsourced contracts with experienced independent software development companies and individuals. We own considerable servers and other computer equipment located at our Minneapolis facility, which are used by our development personnel to develop and enhance our marketing software platform.
Property and Equipment - Property and equipment are capitalized and stated at cost, and any additions, renewals or betterments are also capitalized. Expenditures for maintenance and repairs are charged to earnings as incurred. If property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from our accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method with estimated lives as follows:
Furniture and fixtures
Computer and office equipment
Goodwill - In the event of any future acquisitions of businesses by us, we most likely will need to account for goodwill. Goodwill represents the excess of the purchase price over the underlying net assets of the acquired business. Under established accounting requirements, we will not amortize any goodwill but rather will subject it to at least annual impairment tests to determine whether any impairment adjustments are necessary.
Derivative Securities - We evaluate all of our agreements and financial instruments to determine if they contain features that qualify as embedded derivatives. For any derivative financial instruments accounted for as liabilities, they initially will be accounted for at fair value and if necessary re-valued at each reporting date, with any changes in fair value reported in our statements of operations. For any stock-based derivative financial instruments or securities, we use an option pricing model to value them at inception and on any subsequent valuation dates. The classification of derivative instruments, including whether they should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments - FASB ASC Topic 820 requires disclosure of and defines fair value of financial instruments, and also establishes a three-level valuation hierarchy for these disclosures. The carrying amounts reported in a balance sheet for receivables and current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between their origination and their expected realization and their current market rate of interest. The three levels of valuation hierarchy for fair value determinations are defined as follows:
Level 1 inputs include quoted prices for identical assets or liabilities in active markets.
Level 2 inputs include observable quoted prices for similar assets and liabilities in active markets, and quoted prices for identical assets or liabilities in inactive markets.
Level 3 inputs include one or more unobservable inputs which we have assessed and assumed that market participants would use in pricing the asset or liability.
Revenue Recognition -- A substantial majority of our revenues are derived from our customers having written licensing agreements with us, which revenues are recognized by us on a one-time or monthly basis as specified in these written contracts. Regarding secondary revenues from one-time custom software projects or any other services provided to our customers, we recognize revenue when the specific project or service is completed. The Company recognizes revenues based on these policies because the services have been provided by us, our fees are fixed or determinable, persuasive evidence of the arrangement for our services exists, and collectability of revenues is reasonably assured.
Cost of Revenue -- Cost of revenue primarily represents third-party hosting, data storage and other services provided by our cloud service provider, as well as certain other expenses directly related to customer access and use of our marketing software platform. Cost of revenue relating to our cloud services is recognized monthly under our current month-to-month arrangement with our cloud service provider.
Stock-Based Compensation -- We record stock-based compensation in accordance with FASB ASC Topic 718, which requires us to measure the cost for any stock-based employee compensation at fair value and recognize the expense over the related service period. We recognize the fair value of stock options, warrants and any other equity-based compensation issued to employees and non-employees as of the grant date. We use the Black-Scholes model to measure the fair value of options and warrants.
Income Taxes -- We account for income taxes in accordance with the asset and liability method of accounting for income taxes, whereby any deferred tax assets are recognized for deductible temporary differences and any deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of our management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Basic and Diluted Earnings (Loss) Per Share -- Earnings (loss) per share is calculated in accordance with ASC Topic 260, which provides that basic earnings per share is based on the weighted average number of common shares outstanding, and diluted earnings per share is based on the assumption that all dilutive convertible shares, options, and warrants were exercised. Dilution is computed by applying the treasury stock method, which provides that options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if the funds obtained thereby are used to purchase common stock at the average market price during the period.
Long-lived Assets -- We evaluate the recoverability of our identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. Events and circumstances considered by us in determining whether the carrying value of these assets may not be recoverable include, but are not limited to: significant changes in performance from the assets relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in our business strategy. In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds their fair value.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. This standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard will not be effective for us until 2018, and substantially prior thereto we will evaluate the impact of adoption of this revenue model on our financial statements.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This guidance sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. This guidance indicates that, when preparing interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of events and conditions that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, that it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and all interim and annual periods thereafter. We are currently evaluating the impact of this guidance on our future financial statements after it becomes effective.
Other recent accounting pronouncements issued by the FASB, the AICPA, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.
Results of Operations for the Three Months Ended June 30, 2016 and 2015
Revenue -- Revenue was $111,454 for the quarter ended June 30, 2016 compared to revenue of $183,237 for the comparable quarter ended June 30, 2015, which substantial decrease of $71,783 was attributable to our receiving less non-recurring revenue from set-up and implementation fees in the quarter ended June 30, 2016, as well as the loss of recurring revenue from a material customer which switched its software marketing programs to an internal solution.
Cost of Revenue – Cost of revenue for the quarter ended June 30, 2016 was $33,933 (30.4% of revenue) compared to cost of revenue of $29,246 (16% of revenue) for the comparable quarter ended June 30, 2015, which higher percentage cost of revenue for the quarter ended June 30, 2016 was primarily attributable to the substantially lower revenue received in the 2016 second quarter.
Gross Margin – Gross margin for the quarter ended June 30, 2016 was $77,521 compared to $153,990 for the quarter ended June 30, 2015, which large decrease of $75,469 was attributable primarily to substantially lower revenues in the 2016 second quarter. Gross margin as a percentage of revenue was 69.6% for the second quarter of 2016 compared to 84% for the second quarter of 2015.
Operating Expenses – Operating expenses totaled $742,685 for the quarter ended June 30, 2016 compared to $797,161 for the quarter ended June 30, 2015. This decrease of $54,476 for the second quarter of 2016 was due to substantially lower general and administrative expenses in the second quarter of 2016 compared to the comparable quarter of 2015, offset by higher marketing and development costs in the 2016 quarter to enhance and position the Fision software platform for new customer models.
Interest Expense – Interest expense totaled $35,648 for the quarter ended June 30, 2016 compared to $107,321 for the quarter ended June 30, 2015, which large decrease was due to substantially less outstanding debt in the 2016 quarter.
Net (loss) -- Our net (loss) for the quarter ended June 30, 2016 was $(700,362) compared to $(750,492) for the quarter ended June 30, 2015, which smaller loss in the 2016 second quarter was due primarily to the decreased general and administrative expenses in the 2016 second quarter.
Results of Operations for the Six Months Ended June 30, 2016 and 2015
Revenue -- Revenue was $226,139 for the six months ended June 30, 2016 compared to revenue of $318,375 for the six months ended June 30, 2015, which decrease of $92,236 was attributable primarily to our receiving less non-recurring revenue from new customer set-up and implementation fees in the 2016 six-month period.
Cost of Revenue -- Cost of revenue for the six months ended June 30, 2016 was $64,596 (28.6% of revenue) compared to $68,554 (21.5% of revenue) for the six months ended June 30, 2015, which considerably higher percentage cost of revenue for the 2016 six-month period was due to the substantially lower revenue received in the 2016 six-month period.
Gross Margin -- Gross margin for the six months ended June 30, 2016 was $161,542 compared to gross margin of $249,821 for the six months ended June 30, 2015, which substantial decrease of $88,279 was attributable primarily to substantially lower revenue in the 2016 six-month period. Gross margin as a percentage of revenue was 71.5% for the six months ended June 30, 2016 compared to 78.5% for the 2015 six-month period.
Operating Expenses -- Operating expenses totaled $2,058,019 for the six months ended June 30, 2016 compared to $1,133,185 for the six months ended June 30, 2015. This substantial increase of $924,834 in operating expenses for the 2016 six-month period was due to substantially greater marketing, development, and support expenses to improve and enhance our Fision platform and provide increased marketing and sales resources to increase our outreach to prospective new customers, as well as for management bonuses, professional fees and one-time general expenses related to successful completion of the Merger.
Interest Expense -- Interest expense was $67,342 for the six months ended June 30, 2016 compared to $162,703 for the six months ended June 30, 2015, which large decrease in the 2016 six-month period was due to substantially less outstanding debt in the 2016 six-month period.
Net (loss) -- Our net (loss) was $(1,963,369) for the six months ended June 30, 2016 compared to a net (loss) of $(1,046,067) for the six months ended June 30, 2015, which substantial increase in net (loss) of $(917,302) for the 2016 six-month period was attributable to lower revenues, increased marketing and development expenses to enhance our software platform and increase our outreach to prospective new customers, and considerable one-time management, administrative, professional and general fees and expenses related to our completion of the Merger.
Liquidity and Capital Resources
Our financial condition and future prospects depend on our access to financing in order to continue funding our operations. Much of our cost structure is based on costs related to personnel and facilities, and not subject to significant variability. In order to fund our operations and working capital needs, we have historically utilized loans from accredited investors (including management), equity sales of common stock to accredited investors, and common stock issued to satisfy outstanding debt and to pay for development, marketing, management, financial, professional and other services.
We will need to raise substantial additional capital through private or public offerings of equity or debt securities, or a combination thereof, and we may have to use a material portion of the capital raised to repay certain past due debt obligations. To the extent any capital raised is insufficient to satisfy operational working capital needs and meet any required debt payments, we will need to either extend, refinance or convert to equity our past due indebtedness.
As of June 30, 2016, we had total current liabilities of $1,767,709, including Notes Payable and related accrued interest of $961,520. Following is a summary of our current outstanding Notes Payable indebtedness as of June 30, 2016:
Description of Notes Payable
Decathlon Alpha LP, Senior Secured Note, due 12/31/16, interest at 15%
Forte Ventures LP, Secured Note, past due, interest at 15-21%
Hawkins Ventures Inc., Secured Note, past due, interest at 18%
Nottingham Securities Inc., due 9/30/16, interest at 10%
Finquest Capital Inc., due 9/30/16, interest at 10%
Notes payable to two principal officers, due on demand, interest at 6%
Note payable to individual, past due, interest at 10%
Note payable to individual, past due, interest at 12%
Note payable to individual, past due, interest at 6%
(1) Includes accrued interest.
As of the date of this quarterly report, we had approximately $29,000 in cash, which we believe along with our projected receipt of accounts receivable will last only until October, 2016. We need to continue raising substantial capital to support our future operations. Our management estimates that based on our current monthly expenses net of expected monthly revenue, we will require approximately $900,000 in additional financing to fund our operational working capital for the next 12 months, which does not include any funds for payment of past due debt. Financing may be sought from a number of sources such as sales of equity or debt (including convertible debt) securities, and loans from affiliates, banks or other financial institutions. We may not be able to sell any securities or otherwise obtain such financing when needed on terms acceptable to us, if at all. If further financing is not available as needed, our business would suffer substantially.
Liquidity represents the ability of a company to generate sufficient cash to provide for its immediate needs for cash, which our continued losses have made it difficult for us to satisfy on a consistent basis. As of June 30, 2016 we had cash and accounts receivable of only $128,636, and a working capital deficiency of $1,613,892. Over the past couple years, we have continued to incur substantial losses without any material increase in revenues or liquid assets, which has caused a serious and harmful effect to our liquidity and a substantial strain on our ongoing business operations.
Along with our revenues, we have financed our operations to date through various means including loans from management and from financial and other lenders; stock-based compensation issued to employees, outsourced software developers, consultants and professionals; common stock issued to satisfy outstanding loans and accounts payable/accrued expenses; and equity sales of our common stock.
In 2014 we raised working capital consisting of debt proceeds from short-term loans of $653,068 and equity proceeds from sales of common stock of $100,000. Also in 2014, we issued common stock to pay for employee and outside services of $1,042,812.
In 2015 we raised working capital consisting of equity proceeds from sales of common stock of $730,000. Also in 2015, we issued common stock to satisfy and convert to equity outstanding loans and accounts payable of $2,640,243, and we issued common stock for consulting, financial and professional services valued at $635,605.
During the first six months of 2016, we raised working capital of $670,000 from sales of common stock. We also issued common stock for management bonus, marketing, development consulting, and financial and professional services valued in the aggregate at $1,107,850, and we issued common stock warrants for services valued at $30,000.
Net Cash Used in Operating Activities – We used $582,578 of net cash in operating activities for the six months ended June 30, 2016 compared to $434,882 of net cash used in operating activities in the six months ended June 30, 2015. This considerable increase in cash used in operating activities during the 2016 six-month period was attributable primarily to the substantially greater loss compared to 2015.
Net Cash Used in Investing Activities -- During the six months ended June 30, 2016, we used $4,319 for investment activities to purchase equipment, compared to $2,499 used for Investment activities to purchase equipment in the six-month period ended June 30, 2015.
Net Cash Provided by Financing Activities -- During the six months ended June 30, 2016, we were provided by financing activities with net cash of $587,782 including sales of common stock of $670,000, proceeds of a Note Payable of $25,000, and $1,780 from a bank line-of-credit, offset by use of $108,997 for repayment on notes payable. In comparison, during the six months ended June 30, 2015, we were provided by financing activities with net cash of $474,204 including sales of common stock of $363,993 and loan proceeds of $224,200 from a note payable, offset by use of $132,866 for repayments on notes payable and $1,123 payment on our bank line of credit.
Our financial statements contained in this quarterly report have been prepared on a going concern basis, which contemplates and implies that the Company will continue to realize its assets and satisfy its liabilities and commitments in the normal course of business. For the year ended December 31, 2015, we incurred a net loss of $2,259,232, and we had an accumulated deficit of $10,620,764 as of December 31, 2015. And for the six months ended June 30, 2016, we continued to incur a substantial net loss of $1,963,369, and our accumulated deficit increased to $12,576,634. As of June 30, 2016, we had outstanding current liabilities of $1,767,709 including Notes and related accrued interest of $961,520, a majority amount of which was in default. These adverse financial conditions raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary if we are unable to continue as a going concern.
Going Concern Strategy
In late 2014, our management formulated the following comprehensive strategy to support our continuance as a going concern:
|1)||Engaging proactively with our various lenders and other creditors (I) to keep them informed and updated on the high quality of our Fision platform and our strategy for future revenue growth and profitability, and (ii) to convince them not to commence any legal proceedings relating to their matured loans or other overdue accounts while we are restructuring and improving our financial position;|
|2)||Negotiating with our principal lenders and other creditors to convert at least $2,500,000 of our outstanding debt to equity in our common stock;|
|3)||Raising substantial additional working capital through equity sales of our common stock; and|
|4)||Obtaining and maintaining public company status to obtain a publicly-traded market for our common stock for the purposes of fostering and supporting our ability to raise capital funds, helping influence our creditors to convert their debt to equity, and providing our shareholders with liquidity for their common shares through a public trading market.|
Based on our activities and transactions over the past eighteen months, we believe that for the most part we have accomplished our general strategy for our continuation as a going concern. We negotiated and converted an aggregate of $2,640,243 of our outstanding loans and accounts payable/accrued expenses to equity for 4,190,522 shares of our common stock effective upon the closing of the Merger on December 28, 2015. During 2015 and the first half of 2016, we raised a total of $1,400,000 through private placement sales of our common stock to provide working capital to support our operations. We completed the Merger in January 2016, resulting in our becoming a public reporting company with the SEC. And we are now undergoing the process necessary to obtain a ticker symbol and approval to enable our common stock to be quoted and publicly-traded in an established over-the-counter (OTC) market.
Off-Balance Sheet Arrangements
We have no off-balance sheet items as of June 30, 2016, as of June 30, 2015, or as of the date of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures -- We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating these disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired objectives. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Moreover, the design of any disclosure controls and procedures is based in large part upon certain assumptions regarding the likelihood of future events, and there can be no assurance than any such design will succeed in achieving its stated goals under all potential future conditions.
Our management will apply its best judgment in evaluating the cost-benefit relationship of any disclosure controls and procedures adopted by us. The design of our disclosure controls and procedures must reflect the fact that we will face personnel and financial restraints for some time, and accordingly the benefit of such controls must be considered relative to their costs.
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2016 (the end of the period covered by this Quarterly Report on Form 10-Q).Based on their evaluation as of the end of the quarterly period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company and required to be disclosed in our SEC reports (I) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure, because of continuing material weaknesses in our internal control over financial reporting as reported in our Annual Report on Form 10-K for the period ended December 31, 2015.
Changes in Internal Control over Financial Reporting -- There have been no changes in our internal control over financial reporting during our last fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2016, we settled an outstanding legal action brought against us and pending in a Minnesota federal district court. The plaintiff is a former employee who alleged the Company owed him substantial damages of at least $200,000 plus statutory penalties and attorney's fees and costs, relating to his past employment contract and services and repayment of a $50,000 Promissory Note of the Company which had been assigned to him by the original lender. We settled this litigation for $145,000 in cash plus issuance to the plaintiff of 135,000 shares of our common stock. We have issued the 135,000 shares and paid $75,000 of this settlement, with the balance of $70,000 payable $20,000 in August 2016, $20,000 in September 2016, $20,000 in October 2016, and $10,000 in November 2016. Upon full payment by us of the $145,000, the plaintiff will release us from any and all claims or obligations to him, and the $50,000 Promissory Note will be deemed rescinded and cancelled.
Other than completion of this recently settled lawsuit, there are no pending or threatened legal proceedings or claims against the Company.
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
In June 2016, we issued 135,000 shares of our common stock, valued at $87,750, to a former employee incident to settlement of an outstanding material legal action against the Company.
In June 2016, we sold and issued 125,000 shares of our common stock to an accredited investor for proceeds of $50,000, which proceeds were used for working capital purposes.
On June 30, 2016, we issued 187,599 shares of our common stock to Nottingham Securities, Inc. to convert to equity and reduce by $75,000 an outstanding Note Payable held by Nottingham Securities, Inc.
Also on June 30, 2016, we issued a total of 115,000 shares of our common stock for financial services valued in the aggregate at $46,000.
The issuances of all of our securities in the foregoing transactions were exempt from registration under the Securities Act of 1933, as amended, in reliance on the exemption under Section 4(a)(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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|Date: August 11, 2016||By:||/s/ Michael Brown|
|Chief Executive Officer|
/s/ Garry Lowenthal
Date: August 11, 2016
Chief Financial Officer