☒ QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
Or
☐ 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
FISION Corporation
(Exact name of registrant as specified in its charter)
Delaware
27-2205792
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)
1650 West End Boulevard, Suite 100
Minneapolis, Minnesota
55416
(Address of principal executive offices)
(Zip Code)
(612) 927-3700
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (#232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company:
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☒
Emerging growth company
☐
If an emerging growth company, indicated 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 act). ☐ Yes ☒ No
Indicate the number of the registrant’s shares of common stock outstanding, as of the latest practicable date: 346,350,759 shares of common stock are outstanding as of November 20, 2020.
Our executive, administrative and operational offices are now temporarily located at 1650 West End Boulevard, Suite 100, Minneapolis, MN 55416; our telephone number is (612) 927-3700; and we maintain a website at www.FisionOnline.com.
Notes Receivable, net of allowance for doubtful accounts
-
-
Prepaid Expenses
-
533,064
Total Current Assets
$
67,343
$
557,480
Property and equipment, net
$
858
$
2,916
Other Assets:
Goodwill
13,800
13,800
Intellectual property/software code, net of accumulated amortization
35,473
42,813
Deposits
206
25,599
Total Assets
$
117,680
$
642,608
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities
$
934,069
$
2,155,065
Contract liability (customer deposits)
20,000
62,500
Derivative liability
1,333,387
4,156,621
Current portion of long-term debt: SBA/PPP loan
88,600
-
Note payable and accrued interest - related party, net of debt discount of $175,125 and $0 respectively
1,188,735
228,692
Notes payable, net of debt discount of $56,993 and $0 respectively
1,426,872
1,028,845
Total Current Liabilities
$
4,991,663
$
7,631,723
Long-Term Liabilities:
Long-Term SBA-PPP loan
88,600
-
Long-Term Convertible Notes Payable, related party, net of debt discount of $79,489 and $0 respectively
69,289
Long-Term Convertible Notes Payable, net of debt discount of $311,214 and $853,261 respectively
229,656
700,845
Total Long-Term Liabilities
$
387,545
$
700,845
Total Liabilities
$
5,379,208
$
8,332,567
Contingencies and Commitments (Note 6)
Stockholders' Deficit:
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 346,350,759 and 135,685,981 shares issued and outstanding, at September 30, 2020 and December 31, 2019 respectively
34,635
13,569
Additional paid in capital
25,645,306
24,108,264
Accumulated deficit
(30,941,469
)
(31,811,792
)
Total Stockholders' Deficit
$
(5,261,528
)
$
(7,689,959
)
Total Liabilities and Stockholders' Deficit
$
117,680
$
642,608
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 AND 2019
(Unaudited)
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
FISION Corporation, a Delaware corporation (the “Company”) was incorporated under a former name on February 24, 2010, and was inactive until December 2015 when it merged with Fision Holdings, Inc., an operating business based in Minneapolis, Minnesota. As a result of this reverse merger, Fision Holdings, Inc. became a wholly-owned subsidiary of the Company. Fision Holdings, Inc. was incorporated in Minnesota in 2010, and has developed and commercialized a proprietary cloud-based software platform which automates and integrates digital marketing assets and marketing communications to “bridge the gap” between marketing and sales of any enterprise. The Company generates its revenues primarily from software licensing contracts typically having terms of from one to three years and requiring monthly subscription fees based on the customer’s number of users and the locations where used. The Company’s business model provides it with a high percentage of recurring revenues.
The terms “Fision,” “we,” “us,” and “our,” refer to FISION Corporation, a Delaware corporation and its wholly-owned operating subsidiary Fision Holdings, Inc., a Minnesota corporation (including our Volerro software services).
Basis of Presentation
The accompanying consolidated financial statements are unaudited. These unaudited consolidated 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 consolidated financial statements are adequate to make the information not misleading.
Although these interim consolidated financial statements for the three-month and nine-month periods ended September 30, 2020 and 2019 are unaudited, in the opinion of our management, such statements include all adjustments, consisting of normal and recurring accruals, necessary to present fairly our financial position, results of operations and cash flows for the periods presented. The results for the 2020 interim periods are not necessarily indicative of the results to be expected for the year ended December 31, 2020 or for any future period.
These unaudited interim consolidated financial statements should be read and considered in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in our annual report on Form 10-K/A filed with the SEC on June 4, 2020.
These consolidated interim financial statements include the accounts of FISION Corporation, a Delaware corporation, and its wholly-owned Minnesota subsidiary Fision Holdings, Inc. All material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
GAAP accounting principles require our management to make estimates and assumptions in the preparation of these interim financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates and assumptions.
The most significant areas requiring management judgment and which are susceptible to possible later change include our revenue recognition, cost of sales, allowance for doubtful accounts, valuations of property and equipment and intangible assets, stock-based compensation, fair value of financial instruments, derivative liabilities, development costs, impairment of long-lived assets, and the valuation allowance for deferred income taxes.
Cash and Cash Equivalents
We consider all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. At September 30, 2020 and December 31, 2019, 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 year ended December 31, 2019 and the nine months ended September 30, 2020, we may have had cash deposits in our bank that exceeded FDIC insurance limits. We maintain our bank accounts at high quality institutions and in demand accounts to mitigate this risk. Regarding our customers, we perform ongoing credit evaluations of them, and generally we do not require collateral from them to do business with us.
For the nine months ended September 30, 2020, three customers exceeded 10% of our revenues, including one for 12.5% of revenues, one for 22% of revenues, and one for 47% of revenues. We face the material risk factor that a significant reduction for any reason in the use of our software solutions by one of these major customers would harm our business materially.
Revenue recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 606, Revenue From Contracts With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2017. On August 12, 2015, the FASB issued an Accounting Standards Update (“ASU”), Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This new revenue recognition standard (new guidance) has a five-step process: a) Determine whether a contract exists; b) Identify the performance obligations; c) Determine the transaction price; d) Allocate the transaction price; and e) Recognize revenue when (or as) performance obligations are satisfied. The Company adopted the application of ASC 606 and has evaluated the impact of ASC 606, and the application of ASC 606 did not have a material impact on its consolidated financial statements and disclosures, as the Company had already implemented the five-step process in determining revenue recognition from contracts with customers.
Revenue is recognized in the period the services are provided over the contract period, normally one (1) to three (3) years. We invoice one-time startup and implementation costs, such as consolidating and uploading digital assets of the customer, upon completion of those services as one performance obligation and recorded as revenue when completed. Monthly services, such as internet access to software as a service (SaaS), hosting and weekly backups are invoiced monthly as another performance obligation and recorded as revenue over time.
Company Recognizes Contract Liability for Its Performance Obligation
Upon receipt of a prepayment from a customer, the Company recognizes a contract liability in the amount of the prepayment for its performance obligation to transfer goods and services in the future. When the Company transfers those goods and services and, therefore, satisfies its performance obligation to the customer, the Company will then recognize the revenue.
Lease Accounting
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has adopted ASU 2016-02 on leases and has evaluated the impact of ASU 2016-02 on the Company’s financial statements and disclosures, and currently does not believe that its application will have a material impact on its consolidated financial statements. As of September 30, 2020, the Company had no leases, and pays for a virtual office on a month-to-month basis.
Income (Loss) Per Common Share
Earnings per Share - Basic earnings per share are calculated by dividing net income (loss) 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. Under ASC 260-10-45-16, the calculation of diluted earnings per share, the numerator should be adjusted to add back any convertible dividends and the after-tax amount of interest recognized in the period associated with any convertible debt. The denominator should include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Please refer to the below table for additional details:
For the nine months
ended September 30,
2020
2019
Net income (loss)
$
870,323
$
(5,007,181
)
Adjustments for diluted earnings:
Income (Loss) per share:
Basic
$
0.00
$
(0.05
)
Diluted
$
0.00
$
(0.05
)
Weighted average shares outstanding:
Basic
264,107,373
103,438,883
Diluted
470,955,981
103,438,883
For the nine months ended September 30, 2020 and September 30, 2019, there were 206,848,608 and 57,726,412 potentially dilutive securities respectively, included in the calculation of weighted-average shares outstanding.
Property and equipment are capitalized and stated at cost, and any additions, renewals or betterments are also capitalized. Expenditures for maintenance and repairs are charged to earnings as incurred. If property or equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from our accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method with estimated lives as follows:
Furniture and fixtures
5 years
Computer and office equipment
5 years
Stock-Based Compensation
We record stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, which requires us to measure the cost for any stock-based employee compensation at fair value and recognize the expense over the related service period. We recognize the fair value of stock options, warrants and any other equity-based compensation issued to employees and non-employees as of the grant date. We use the Black Scholes model to measure the fair value of options and warrants.
Recently Issued Accounting Pronouncements
See above “Revenue Recognition” and “Lease Accounting” sections in this Note 1.
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 our present or future financial statements.
NOTE 2 -- GOING CONCERN
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is contingent upon our future ability to achieve and maintain profitable operations, and to raise substantial additional capital as required until we attain profitable operations.
At September 30, 2020 we had a working capital deficiency of $4,924,320 and an accumulated deficit of $30,941,469, and the Company had an operating loss of $1,099,043 for the nine months ended September 30, 2020. These conditions raise substantial doubt about our ability to continue as a going concern for a period of 1 year from the issuance date of this report. 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 to support activities to obtain increased revenues, and otherwise addressing our ability to continue as a going concern. Our management believes that if we can succeed in raising substantial additional capital to implement increased funding for substantial marketing and sales support, we will be able to generate material increased revenues and continue as a going concern. Unless we can raise significant additional working capital, however, we most likely will not be able to continue our current business as a going concern.
NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC Topic 820 requires disclosure of and defines fair value of financial instruments, and also establishes a three-level valuation hierarchy for these disclosures. The carrying amounts reported in a balance sheet for receivables and current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between their origination and their expected realization and their current market rate of interest. The three levels of valuation hierarchy for fair value determinations are defined as follows:
Level 1 inputs include quoted prices for identical assets or liabilities in active markets.
Level 2 inputs include observable quoted prices for similar assets and liabilities in active markets, and quoted prices for identical assets or liabilities in inactive markets.
Level 3 inputs include one or more unobservable inputs which we have assessed and assumed that market participants would use in pricing the asset or liability.
The following table represents the Company’s assets and liabilities by level measured at fair value on a recurring basis at September 30, 2020:
Level 1
Level 2
Level 3
Derivative liability
$
-
$
-
$
1,333,387
The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following table provides a reconciliation of the beginning and ending balances of the liabilities:
Fair Value
Dec 31,
2019
Additions
Change in
fair
Value
Extinguishment
Fair Value
Sept 30,
2020
Derivative liability
$
4,156,621
$
276,876
$
(2,826,397
)
$
(273,713
)
$
1,333,387
All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy are recognized in other income and expensed in these financial statements.
The significant unobservable inputs used in the fair value measurement of the liabilities described above are as follows;
Exercise price
$.
0049-.00165
Expected Volatility
354
%
Expected Term
Due on demand to 36 mos.
Risk free interest rate
0.16%-0.18
%
Expected dividends
-
Derivative Instruments
The Company accounts for derivative instruments in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.
At September 30, 2020, we were indebted under various Notes Payable with interest rates of 1% to 15% in the total amount of $3,714,573, including a COVID-related PPP SBA loan of $177,200, related-party Notes payable of $1,258,024, net of debt discount of $254,614 (of which $272,504 is in default), short-term convertible Notes mostly in default of $1,426,872 net of debt discount of $56,993, and long-term convertible notes of $229,656 net of debt discount of $311,214.
During the period ending September 30, 2020, related parties converted outstanding accrued expenses into some of the notes described above. Michael Brown, a director and our former CEO, converted accrued salaries and funds put into the Company into new convertible Notes of $491,356. Capital Market Solutions, LLC converted its $600,000 of accrued and unpaid consulting fees into a new short-term convertible note, 5% simple interest rate, maturing on July 31, 2021, for a total of $600,000. These related party notes have conversion terms of the greater of $.05 or a 10-day Volume Weighted Average Price (VWAP). (See Footnote 8). Other creditors converted outstanding accrued expenses into notes described above, including accrued salaries and outsourced development and technology consulting fees of $527,554 with conversion terms of the greater of $.05 or a 10-day Volume Weighted Average Price (VWAP).
NOTE 5 – NOTES RECEIVABLE
The Company had no notes receivable balance, due to an allowance for doubtful accounts, at September 30, 2020 and December 31, 2019.
Sept. 30,
2020
Dec. 31,
2019
Notes receivable
$
804,300
$
804,300
Accrued interest
89,135
52,942
Total
$
893,435
$
857,242
Less allowance for doubtful accounts
(893,435
)
(857,242
)
Notes receivable, net
$
-
$
-
While the failed Continuity Logic merger was pending, the Company made various bridge loans to Continuity Logic for working capital purposes, of which a total balance including accrued interest of $893,435 is still outstanding and in default as of September 30, 2020. These loans matured on August 31, 2019, bear interest at 6% per annum, and a portion of the Notes for these loans are secured by a first-priority perfected security interest on the accounts receivable of Continuity Logic, pursuant to a Security Agreement dated November 27, 2018. On February 4, 2019, the merger with Continuity Logic LLC was terminated. The termination of the merger does not change or affect the continuing obligation of Continuity Logic to satisfy the future payment of these loans to the Company, and in 2019 the Company commenced a Complaint against Continuity Logic LLC regarding the unpaid balance of these Notes Receivable.
Court action is ongoing, while we also pursue reasonable collection activities. Due to the uncertainty of obtaining payment for these Notes, however, the Company has created an allowance for doubtful accounts of the entire amount of this Continuity Logic receivable, resulting in no balance being recorded in our outstanding Notes Receivable. Continuity Logic, LLC is not a related party to the Company. Further court action is ongoing, while the Company pursues aggressive collection activities, including our law firm contacting Continuity Logic LLC customers requesting all payments to be sent directly to the law firm, on our behalf. Additionally, the Company commenced an involuntary bankruptcy petition for Continuity Logic LLC, as to expedite the collection efforts, whereby a Trustee in the United States Bankruptcy Court, District of New Jersey will be appointed to oversee all collection matters.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In 2019, we entered into a consulting contract with Capital Market Solutions LLC, a Delaware limited liability company (“CMS”), an affiliate, providing that for a term of one year, CMS will provide us with management, operational, and financial services in consideration for our payments to CMS of $50,000 monthly along with issuance to CMS of 30 million shares of our common stock which we valued at $1,797,000 based on the closing stock price on the date of the transaction, which was recorded as a pre-paid expense and amortized over one year. This consulting contract also provided for a five-year warrant providing CMS the right to purchase an additional 30 million shares of our common stock exercisable at $.20 per share, which warrant we valued at $1,297,570 with the warrant expense amortized as consulting expense on a straight-line basis over the term of the consulting agreement of one year. As of March 31, 2020, the one-year term and all other provisions of this CMS consulting agreement expired.
COVID-19 -- Management of the Company has concluded that the COVID-19 outbreak in 2020 may have a significant impact on business in general, but the potential impact on the Company is not currently measurable. Due to the level of risk this virus may have on the global economy, it is at least reasonably possible that it could have an impact on the operations of the Company in the near term that could materially impact the Company’s financials. Management has not been able to measure the potential financial impact on the Company but will review commercial and federal financing options, if any are available. The Company continues to monitor the impact of this pandemic closely, although the extent to which the COVID-19 outbreak will impact our operations, financing ability or future financial results is uncertain.
The Company was involved in litigation with its former office landlord involving a dispute over the amount of past due rent, which has now been settled requiring the Company to pay $12,000 to the landlord during this fourth quarter of 2020. The Company has booked this liability in Accounts Payable on the balance sheet.
NOTE 7 -- STOCKHOLDERS’ DEFICIT
The Company is authorized to issue 500,000,000 shares of common stock and 20,000,000 shares of preferred stock, both having $.0001 par value per share. At September 30, 2019 there were 124,453,545 outstanding shares of common stock and no outstanding shares of preferred stock. At September 30, 2020 there were 346,350,759 outstanding shares of common stock and no outstanding shares of preferred stock.
During the nine months ended September 30, 2019, we completed the following equity transactions:
In February 2019 we issued 300,000 common shares valued at $26,730 for advisory services to be provided to us during February-April 2019.
In February 2019 we also issued 62,500 common shares to our independent director, John Bode for his service as a director in the fourth quarter of his first year of service, and we also granted him $12,500 worth of our common stock vesting at the end of each quarter of his second year as a director, in consideration for his agreement to serve as a director for the year commencing March 1, 2019.
During January-March 2019 we received proceeds of $350,000 from certain accredited investors who made payments of their second tranche under our recent private placement, for which we issued to them a total of 1,750,000 purchased common shares and 175,000 advisory common shares, pursuant to the terms of a Securities Purchase Agreement as an Advisory Fee based on ten percent of the shares purchased in this private placement.
During February-March 2019 we issued an aggregate of 8,622,087 common shares and two-year warrants to purchase an aggregate of 3,182,834 common shares (exercisable at $.20 per share and valued at $63,502 under Black-Scholes pricing) to noteholders who converted their outstanding notes in the amount of $742,391, with the conversion prices and warrant terms based on specific terms contained in the notes.
In March 2019, we also issued three-year warrants to purchase an aggregate of 1,750,000 common shares exercisable at $.20 per share (with a Black-Scholes model value of $59,121 and recorded as a debt discount), in connection with a convertible debt offering of $350,000 to five accredited investors and bearing interest at 6% per annum during the five-year term of these notes, and also being convertible into our common stock at a conversion price equal to the lower of $.20 per share or the Volume Weighted Average Price (VWAP) of our common shares during the ten days prior to conversion.
In March 2019, we recognized an option and warrant expense of $148,199 for certain employee stock options previously granted to our employees.
In April 2019 we entered into a one-year consulting contract in consideration for our payment to the consultant of $50,000 monthly, 30 million shares of our common stock, and a five-year warrant to acquire an additional 30 million shares for $.20 per share. See foregoing Note 8.
In April-May 2019, we issued an aggregate of 3,284,284 shares of our common stock to two noteholders who converted total outstanding Notes in the amount of $51,500, with the conversion price based on specific terms contained in the Notes. In addition, we issued an aggregate of 5,000,000 common shares valued at $222,000 for advisory services to be provided to us during one year advisory agreements.
In May 2019 we issued 245,098 restricted common shares valued at $12,500 to our independent director for three months service on our Board of Directors.
In June 2019, three noteholders converted $176,000 of outstanding Notes owed to them into an aggregate of 1,760,000 common shares, with the conversion prices based on specific terms contained in these Notes.
In July 2019, we issued 100,000 restricted common shares valued at $3,900 to an individual accredited investor in consideration for making a loan to us in the amount of $75,000, having an interest rate of 6% per annum, and maturing on January 18, 2020.
In August 2019 a Noteholder who is an accredited investor converted $80,162 of outstanding Notes into an aggregate of 2,676,771 common shares, with the conversion price based on specific terms contained in the Note.
In August 2019, we issued 490,196 restricted common shares valued at $12,500 to our independent director for three months service on our Board of Directors.
In September 2019 a Noteholder who is an accredited investor converted $19,000 of outstanding Notes into an aggregate of 2,533,333 common shares, with the conversion price based on specific terms contained in the Note.
During the nine months ended September 30, 2020, we completed the following equity transactions:
Pursuant to independent director agreements, in February 2020 we issued 2,083,333 restricted common shares valued at $12,500 to John Bode, an independent director, for three months service as a director, and in June 2020 we issued him 2,604,167 restricted common shares valued at $12,500 for three months service as a director.
In March 2020 we issued an aggregate of 9,625,000 restricted common shares to twelve accredited investors, which represented True-Up and Penalty shares owed to them pursuant to a 2018-2019 private placement of the Company in which they invested a total of $1,750,000.
In May 2020, we issued 5,000,000 restricted common shares valued at $14,500 to two accredited investors for advisory services to the Company.
In August-September 2020 we issued the following restricted common shares for services as a director pursuant to independent director agreements:
i)
675,676 shares valued at $12,500 to John Bode for three months services from June-September 2020, and
ii)
4,791,667 shares valued at $25,000 to Gregory Nagel for six months services from April-September 2020.
Note Conversions --- During the first nine months of 2020 ended September 30, 2020, Noteholders who are accredited investors converted outstanding Notes to restricted common stock as follows, with the conversion prices based on specific terms contained in the Notes:
In January 2020, a Noteholder converted $37,000 of outstanding Notes into 4,933,333 shares; another Noteholder converted a $52,000 portion of an outstanding Note into 6,933,333 shares; and a third Noteholder converted $33,452 of outstanding Notes into 4,401,591 shares.
In February 2020, two Noteholders converted a total of $26,472 of outstanding Notes into an aggregate of 9,662,622 shares.
In March 2020, a Noteholder converted a $42,500 portion of an outstanding Note into 6,062,863 shares; another Noteholder converted a $23,000 portion of an outstanding Note into 6,965,743 shares; and a third Noteholder converted $5,048 of outstanding Notes into 4,589,091 shares.
During January-March, 2020 the following debt conversions also took place:
i)
three Noteholders converted a total of $190,000 of outstanding Notes into an aggregate of 29,370,454 shares, which Note amounts were purchased by them in December 2019 from Capital Market Solutions LLC (CMS), an affiliate of the Company, in private transactions;
ii)
four Noteholders converted a total of $107,675.63 of outstanding Notes into an aggregate of 14,195,619 shares, which Notes were originally issued in February 2018.
iii)
three Noteholders converted a total of $129,000 of outstanding Notes into an aggregate of 14,929,577 shares, which Notes were originally issued in March 2019.
In April 2020, Noteholders who are accredited investors converted outstanding Notes to restricted common stock as follows:
i)
A Noteholder converted a $9,500 portion of an outstanding Note into 3,653,846 shares;
ii)
A Noteholder converted $10,042 of outstanding Notes into an aggregate of 7,172,857 shares;
iii)
A Noteholder converted $10,000 of outstanding Notes into an aggregate of 2,702,702 shares, and this Noteholder purchased a portion of a June 2019 Note from Ignition Capital LLC in April 2020 in a private transaction; and.
iv)
A Noteholder converted $20,000 of outstanding Notes into 7,692,307 shares, which represented a portion of an outstanding Note purchased by this Noteholder from affiliate CMS in December 2019 in a private transaction.
In June 2020, a Noteholder converted a $21,000 portion of an outstanding Note into 5,000,000 shares; and another Noteholder converted a $9,137 portion of an outstanding Note into 2,175,574 shares.
In July 2020, seven Noteholders converted a total of $166,832 of outstanding Notes into an aggregate of 33,218,160 shares, which Note amounts were purchased by them in private transactions from Capital Market Solutions, LLC (“CMS”), the original holder of the Notes and its controlling member is an affiliate of the Company.
In August 2020, two Noteholders converted a total of $94,856 of outstanding Notes into an aggregate of 17,225,263 shares.
Private Placement Transaction -- In August 2020, the Company received proceeds of $50,000 from an accredited private investor, for which we issued 5,000,000 restricted common shares along with a fully vested warrant to purchase an additional 5,000,000 common shares at $.10 per share anytime during its two-year term, which warrant was valued at $70,500 under the Black Scholes pricing model.
NOTE 8-- RELATED PARTY
During the nine months ended September 30, 2020 we issued a total of 10,154,843 shares of our restricted common stock to our two independent directors, John Bode and Gregory Nagel, for director services. (See Note 7).
Our Notes Payable as of September 30, 2020 include convertible Notes of $560,646 owed to Michael Brown, a director and our former CEO, related to unpaid past salary compensation and funds put into the Company, payable at maturity on June 30, 2021, 5% interest rate, and convertible into our common stock at the greater of $0.05 per share or a 10-day Volume Weighted Average Price (VWAP).
In 2019, we entered into a consulting contract with affiliate CMS for a term of one year, whereby CMS provided us with management, operational, accounting and financial services in consideration for our payments to CMS of $50,000 monthly along with issuance to CMS of 30 million restricted shares of our common stock and a warrant to purchase an additional 30 million common shares. (See Note 6). This contract has expired.
In May 2019, our largest and also a principal shareholder, Capital Market Solutions, LLC (CMS) entered into a Long Term Convertible Note with us in the principal amount of $250,000 for the conversion of existing short term notes, maturing in three years, bearing interest at 6% per annum payable each six months of its term, and being convertible into our common stock at the lesser of $.20 per share or the Volume Weighted Average Price (VWAP) per share during the 10-day period prior to conversion. The Convertible Note also includes three year warrants to purchase a number of shares equal to the principal amount of the note divided by the conversion price. The exercise price is equal to the conversion price. The Company recorded a derivative liability on the conversion feature in the note and associated warrant liability to the warrants issuable under the agreement. We valued the warrants at $463,174, under our Black Scholes model, to be recorded as a derivative liability for warrants, whereby the associated debt discount is being amortized on a straight-line basis over the term of the warrants, including a cashless exercise provision as defined under the terms of the Note, and CMS also received registration rights related to any future conversion(s) of this Note to equity.
CMS also has additional short-term nonconvertible notes for a total of $76,111, which are in default as of September 30, 2019. CMS also converted its $600,000 of accrued and unpaid consulting fees into a new short-term convertible note, 5% simple interest rate, maturing on July 31, 2021, for a total of $600,000, with conversion terms of the greater of $.05 or a 10-day Volume Weighted Average Price (VWAP).
MGA Holdings, owned and/or controlled by affiliate William Gerhauser, has a nonconvertible Note for $82,500 which is in default as of September 30, 2020.
Ignition Capital LLC, owned and controlled by William Gerhauser, also has convertible long-term Notes in the total amount of $148,778, which mature in 2022.
NOTE 9 – COVID-19 LOAN
In April 2020, we obtained a SBA long-term loan under the federal COVID-19 Payroll Protection Program (PPP) for $177,200, administered by Richfield/Bloomington Credit Union, having a term of 24 months and bearing interest of 1% per annum. The portion of the loan proceeds used for labor, office costs and utilities may be subject to loan forgiveness under the terms of the SBA/PPP program.
NOTE 10 – SUBSEQUENT EVENTS
As of the date of this interim report on Form 10-Q, the Company had the following material event subsequent to September 30, 2020.
Effective November 19, 2020, the Company acquired 100% of the membership interests of both Ft. Myers ASC LLC (“ASC”) and ASC SoftDev LLC (“SoftDev”), both Florida limited liability corporations, from Capital Market Solutions, LLC (“CMS”), a Delaware limited liability corporation, pursuant to the terms of a Transfer Agreement of the same date between the Company and CMS. CMS is the Company’s largest shareholder, and the sole owner of CMS is William Gerhauser, who is a director of the Company. Independent and disinterested directors of the Company approved the terms of the Transfer Agreement. A form 8K was filed with the U.S. Securities and Exchange Commission on November 19, 2020, whereby a copy of the Transfer Agreement was attached as Exhibit No. 10.1 to the 8K filing.
ASC was formed for the purpose of owning and operating an ambulatory surgery center, which is a medical facility that specialize in elective same-day or outpatient surgical procedures, but does not offer emergency and are also known as surgi-centers. ASC has engaged eight different specialist consultants, including, lawyers, tax advisors, software designers, ASC design and operation specialists, and has signed a commercial lease with a Landlord for the building where the ASC will operate, which lease is for approximately 20,000 square feet of space and for a term of 17 years with an option for an additional 15 years. The consideration for part of the lease payments and consulting contracts was the issuance of notes convertible into common shares of the Company stock in the aggregate amount of $700,000.
SoftDev was formed for the purpose engaging in software development relating to ambulatory surgery centers, including without limitation ASC. SoftDev has engaged software development consultants and other experts to assist in the development of the business, including without limitation of Rubicon Software Ltd.
There are certain statements in this Quarterly Report on Form 10-Q that are not historical facts. These “forward-looking statements” can be identified by terminology such as “believe,” “may,” “intend,” “plan,” “will,” “could,” “expect,” estimate,” “strategy,” and similar expressions. These forward-looking statements are subject to material risks and uncertainties that are beyond our control. Although our management believes that the assumptions underlying these forward-looking statements are reasonable, they do not assure or guarantee our future performance. Our actual results could differ materially from those contemplated by these forward-looking statements. The assumptions used for these forward-looking statements require considerable exercise of judgment, since they represent estimates of future events and are thus subject to material uncertainties involving possible changes in economic, governmental, industry, marketplace, and other circumstances. To the extent any assumed events do not occur, the outcome may vary materially and worse from our anticipated or projected results. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by these forward-looking statements will in fact transpire. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements. Before determining to make an investment in any of our securities, you should read and consider specific Risk Factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019.
In order to fund and conduct our business over the past few years, we have relied significantly on working capital obtained from private sales of our equity and convertible debt securities to various accredited investors. Due primarily to our continued substantial operating losses for several years, we recently have been unable to continue raising such working capital as needed to support our business plan for future growth. And unless we are able to raise critically needed substantial additional funding to achieve significant revenue growth, our current business model most likely will not succeed.
During the twelve months ended March 31, 2020, our executive management consisted of two persons who are partners of our major affiliate and principal shareholder, Capital Markets Solutions, LLC (“CMS”), and who served us on an interim basis under the terms of a Consulting Agreement between us and CMS dated April 1, 2019. This Consulting Agreement is described in Note 6 of the financial statements included in this quarterly report. This CMS contract expired as of the end of March 2020, and the two CMS partners acting as our interim executive management resigned as executive officers and directors of the Company. Since April 1, 2020, our management has consisted of four directors, Michael Brown, John Bode (independent), William Gerhauser and Gregory Nagel (independent). Michael Brown also is acting as our principal executive officer and principal financial and accounting officer without compensation.
For the past couple years, we have been unable to conduct any material marketing or sales activities due to lack of working capital. Our primary business operations have been focused on providing adequate software services from our Fision software platform to our existing customer base. We now conduct our operational and technical functions and customer support activities through experienced independent contractors, and we believe that our outsourced independent contractors provide adequate services to our limited current customers.
Because of our recent inability to raise adequate additional capital, we have terminated employment of all our employees. We also no longer have a physical operational office facility in downtown Minneapolis, but rather we now conduct our operations and business from a “virtual” office location in Minneapolis.
Overview
We are an Internet platform technology company providing proprietary cloud-based software solutions to automate and improve the marketing and sales enablement functions and activities of our customers. Our focus is to provide software technology tools through our Fision platform to enable our customers to maximize their marketing assets and initiatives. Our development, management, marketing and other operations have been conducted through our wholly-owned Minnesota corporate subsidiary, Fision Holdings, Inc.
We have developed and commercialized a unique cloud-based software platform which automates and integrates all digital marketing assets and marketing communications of our customers, and thus “bridges the gap” between marketing and sales functions and personnel of an enterprise. Our Fision platform marketing solutions promote and improve sales enablement functions of any entity. This cloud-based software platform is readily scalable to adapt to fast business growth of any customer, regardless of size. Except for future customary periodic upgrades, the basic development of our Fision software marketing platform has been completed.
Our proprietary Fision platform enables every member of the marketing and sales teams of our customers, by having easy and automated access to all their digital marketing and media assets, to leverage the full power of their distinctive brands and digital marketing assets in every interaction with their consumers or buyers.
In May 2017, we acquired substantially all the assets of Volerro Corporation, a company based in Minneapolis and engaged in the development and marketing of proprietary cloud-based “content collaboration” software services. Since this acquisition, we have included these Volerro services with our Fision SaaS platform.
Our Fision software platform enables our customers to easily and quickly create and implement marketing campaigns to support their sales personnel while still emphasizing, protecting and enhancing their valuable brand assets. Use of our software solutions by our customers reduces substantially the time and cost incurred by them to produce and present marketing and sales campaigns and presentations for specific products or services.
We believe that the agile marketing software solutions of our Fision platform provide three major benefits to our customers, which are (i) accelerating their revenues, (ii) improving their marketing and brand effectiveness, and (iii) significantly reducing their marketing and sales costs.
We derive our revenues primarily through recurring revenue payments from customers having software licensing contracts with terms of one to three years, and requiring monthly fees based on the customer’s number of users and locations where used. A substantial majority of our revenues are recurring, due to the nature of our licensing contracts. As of September 30, 2020 we have written license contracts with nine (9) customers actively using our Fision platform in their marketing and sales operations.
Our typical customer implementation process includes integrating our cloud-based Fision platform with the marketing infrastructure of the customer, initiating and conducting customer training, and providing marketing development support while our Fision platform is being actively launched by the customer. We also continue to offer technical and maintenance support after implementation.
Our current and targeted customer base ranges across diverse industries of all sizes, including banks and other financial enterprises, insurance companies, hotels and other hospitality businesses, healthcare and fitness companies, retailers, software and other technology companies, product manufacturers, telecommunications companies, and numerous other companies selling familiar branded products or services.
Our market and potential customer base are global and virtually unlimited, since our Fision platform software solutions provide significant benefits to the marketing and sales departments and personnel of any commercial enterprise, regardless of size and widespread locations. We receive substantial recurring revenues, and certain customers have maintained written contracts with us for years. We regard our high percentage of recurring revenues to be particularly significant to our business strategy which emphasizes long-term relationships with our customers under written contracts. We believe that our ability to realize such recurring revenues is a keystone feature of our business model.
We have marketed and licensed our proprietary software platform both through direct sales obtained by our management and in-house sales personnel, and through utilizing experienced independent national technology sales agencies.
Our Fision Platform - Our Fision marketing software centrally collects, stores, prioritizes, organizes, streamlines, integrates and distributes the numerous digital marketing assets of our customers including videos, images, logos and other brand materials, presentations, social media content and any other digital marketing assets. Using Fision’s automated software technology, these digital assets become readily available for user access as determined by each of our customers. Our Fision platform is designed to provide any corporate marketing department with the ability to instantly and seamlessly update its sales force and other users with the latest digital marketing content and materials, while providing them with a simple, intuitive software interface to quickly find what they need on any digital device, anytime and anywhere. Large enterprise customers with extensive global sales networks have the ability to quickly and efficiently create and deliver customized sales campaigns or presentations to selectively targeted consumer audiences while conveying a positive, personalized and consistent brand experience. We believe that the use of our software marketing solutions by our customers results in a substantial increase in their return on investment (ROI) and their profitability.
Cloud-Based Platform - Storage and operation of our Fision software solutions platform along with the digital marketing and sales assets and related data of our customers are outsourced by us to reside and take place in the digital “cloud.” Providers of cloud services are typically referred to as “virtual servers” since they provide all digital data storage and related software application services to their clients. Our cloud service provider is Microsoft’s Azure Cloud, which leading provider offers readily scalable, high quality and secure cloud services capable of satisfying any increasing demand or changing circumstances in the needs of our customers or of us.
We regard the hosting of our software applications, the ready digital interface with our customers, and the storage of unlimited customer data with our premier cloud provider as being crucial to our operating strategy. Our major savings in expensive computer equipment, high salaried technology personnel, and costly security measures through our use of Microsoft’s cloud is vital to our cost of doing business. Moreover, we believe that our experienced and leading cloud provider is more effective in delivering our Fision software solutions to our customers than we could perform in any event.
Strategic Marketing Change
During the years prior to 2017 while our Fision software platform was being designed and developed, our marketing and sales efforts were directed toward local or regional small-to-medium sized companies whose operational, management and commercial activities are conducted from one local or a couple regional facilities. Since our Fision platform and its cloud-based marketing software were designed and developed to be readily adaptable to and scalable for any size company, however, in 2017 we revised our marketing strategy and activities to target and sell our software products primarily to large global enterprise corporations having many and widespread national and international branches and operations.
We believe that our past marketing focus toward large enterprises was relatively effective, since during 2018-2019 we closed and implemented material contracts with, and are receiving recurring revenues from, several large enterprise companies. Unfortunately, the increased length of time of our sales cycle necessary to sell to large enterprises has been substantially more expensive and much longer than we earlier incurred while selling primarily to local and regional sized companies. This substantial increase in our sales cycle to negotiate and close contracts with new large enterprise customers resulted in a material decline in our revenues during the past couple years. Accordingly, we failed to raise enough working capital to support and continue the substantial marketing resources and time necessary to secure enough large enterprise customers to achieve material increased revenues. We currently are attempting to raise the substantial capital necessary to launch an effective marketing campaign including whatever personnel and other resources are needed to properly address and sell our software services to additional targeted large enterprise customers. There is no assurance that such funds will be available to us in the future.
Along with our current efforts to raise significant working capital, we are seeking a merger or other business combination with a private software services company which could be complementary with our Fision business structure. We believe our Company would be beneficial to join with such a targeted private entity due to our public status, our large tax loss position, our commercially developed unique software platform, and other benefits.
2017 Asset Acquisition
In May 2017 we acquired substantially all the assets of Volerro Corporation (“Volerro”), a Minneapolis-based company, including its proprietary cloud-based software and development technology and its customer base. Volerro has developed and marketed “content collaboration” software services to enhance and improve the overall sales and marketing activities of its clients. Volerro software enables the marketing, sales and brand personnel of its clients to collaborate in real time in the creation, refinement, and distribution of all types of their strategic content including print, packaging, high quality image and video content. For example, Volerro’s primary application allows all product, brand, marketing and creative teams of a business enterprise the ability to work on and create a document in real-time with integrated chat and voice conferencing. Marketing of Volerro cloud-based software solutions has been primarily focused on large financial and retail enterprises.
Our Employees and Properties
We currently have no employees, and will only be able to hire future employees if we succeed in raising substantial working capital for future operations.
We no longer lease any facilities at Butler Square, our former offices in downtown Minneapolis, Minnesota. Rather we now conduct our current business and operations under a short-term lease from a temporary “virtual” office in Minneapolis which provides us with telephone, mail and basic conference facilities adequate for our current activities, as well as storage of certain computers, hardware servers, software assets and other technology development and office equipment, furniture and supplies owned by us. We do not own any real estate,
Revenue and Marketing Models
Revenue Model -- Our revenue model is primarily based on prescribed software licensing fees received by us on a regular monthly basis from customers which are under written licensing agreements with us. Over the past several years, we consistently committed substantial expenses and sales personnel toward targeting, negotiating and procuring significant licensing agreements with large enterprise customers. Because of the long-term nature and the substantial expense commitment required by each new customer to enter into a binding licensing agreement with us, the sales cycle involved in our revenue model is quite lengthy. Accordingly, the unpredictable and different timing involved from customer to customer to procure our licensing contracts has prevented us from receiving overall consistent revenues or accurately forecasting our future revenue stream.
We generate our revenues primarily from payments from customers having a license from one to three years to access and use our proprietary agile marketing software platform, which payments include monthly fees based on actual usage of the Fision platform, and a prescribed substantial one-time set-up and integration fee payable to us at the outset of the license. We also receive certain secondary fees from time to time for customized software development projects ordered from us, and for processing emails for certain customers.
Marketing Model – In past years, we have marketed, sold and licensed our proprietary software products through a direct sales force including management, and also through independent national sales agencies who sell (license) our branded software products as agents being paid commissions based on their actual sales.
We market and sell our products and services in the agile marketing software segment of the broad software-as-a-service (SaaS) industry, with virtually all our revenues derived from our proprietary cloud-based Fision marketing software platform.
Intellectual Property (IP) Protection
We have committed substantial attention and resources toward obtaining patent and trademark rights and otherwise protecting our trade secrets, development know-how technology, trademarks, trade names, patent rights and other proprietary intellectual property (IP). Our IP protection includes written provisions relating to non-compete, non-recruit, confidentiality, and invention assignments as applicable with employees, vendors, sales agents, consultants and others.
In 2017 we were granted Patent No. US 9,639,551 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations.” In 2018 we were granted another Patent No. US 9,984,094 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations”. And in 2019 we were granted another Patent No. US 10,235,380 B2 from the United States Patent and Trademark Office (USPTO) entitled “Computerized Sharing of Digital Asset Localization Between Organizations”.
Inflation and Seasonality
We do not consider our operations and business to be materially affected by either inflation or seasonality.
Litigation
From time to time, we have been subject to legal proceedings, claims and litigation arising in the ordinary course of business. We currently are not a party to any material legal proceedings, nor are we aware of any material pending or threatened litigation against or involving us.
Significant Accounting Policies
Stock-Based Compensation Valuations - Our estimated valuations for stock-based compensation grants are based primarily on the quoted prices for our common stock in the public trading market.
Accounts Receivable -- We maintain allowances for potential credit losses on accounts receivable. In connection with the preparation of our financial statements, management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, changes in customer payment patterns, and current economic trends in order to evaluate the adequacy of these allowances. Accounts determined to be uncollectible are charged to operations when that determination is made.
Research and Development -- We expense all our research and development operations and activities as they occur. Our development activities have been conducted both internally from our headquarters facility by our former development personnel, and externally from outsourced contracts with experienced independent software development companies and individuals.
Derivative Instrument Liabilities – We evaluate all of our agreements and financial instruments to determine if they contain features that qualify as embedded derivatives. For any derivative financial instruments accounted for as liabilities, they initially will be accounted for at fair value and if necessary revalued at each reporting date, with any changes in fair value reported in our statements of operations. For any stock-based derivative financial instruments or securities, we use an option pricing model to value them at inception and on any subsequent valuation dates. The classification of derivative instruments, including whether they should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in our balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments -- FASB ASC Topic 820 requires disclosure of and defines fair value of financial instruments, and also establishes a three-level valuation hierarchy for these disclosures. The carrying amounts reported in a balance sheet for receivables and current liabilities qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between their origination and their expected realization and their current market rate of interest. The three levels of valuation hierarchy for fair value determinations are defined as follows:
Level 1 inputs include quoted prices for identical assets or liabilities in active markets.
Level 2 inputs include observable quoted prices for similar assets and liabilities in active markets, and quoted prices for identical assets or liabilities in inactive markets.
Level 3 inputs include one or more unobservable inputs which we have assessed and assumed that market participants would use in pricing the asset or liability.
Revenue Recognition -- Revenue is recognized in the period the services are provided over the license contract period, normally one (1) to three (3) years. We invoice onetime startup and implementation costs, such as consolidating and uploading digital assets of the customer, upon completion of those services. Monthly services, such as internet access to software as a service (SaaS), hosting and weekly backups are invoiced monthly.
The Company recognizes contract liability for its performance obligation upon receipt of a prepayment from a customer for its performance obligation to transfer goods and services in the future. When the Company transfers those goods and services and, therefore, satisfies its performance obligation to the customer, the Company will then recognize the revenue.
Cost of Sales -- Cost of sales primarily represents third-party hosting, data storage and other services provided by Microsoft’s Azure Cloud service, as well as certain other expenses directly related to customer access and use of our marketing software platform. Cost of sales relating to our cloud services is recognized monthly.
Income Taxes -- We account for income taxes in accordance with the asset and liability method of accounting for income taxes, whereby any deferred tax assets are recognized for deductible temporary differences and any deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of our management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Long-lived Assets -- We evaluate the recoverability of our identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds their fair value.
Recently Issued Accounting Pronouncements
See Note 1 to the interim financial statements included in this quarterly report on Form 10-Q.
Results of Operations for the Three Months Ended September 30, 2020 and 2019
Revenue -- Revenue was $83,935 for the quarter ended September 30, 2020 compared to revenue of $108,021 for the quarter ended September 30, 2019, which decrease in revenue in the 2020 third quarter was primarily due to decreased use of our Fision software platform with a few of our enterprise clients.
Cost of Sales – Cost of sales for the quarter ended September 30, 2020 was $22,275 (26.5% of revenue) compared to cost of sales of $5,135 (4.8% of revenue) for the quarter ended September 30, 2019. The increase in cost of sales for the 2020 third quarter was due primarily to increased costs related to outsourcing the hosting of our customer operations.
Gross Margin – Gross margin for the quarter ended September 30, 2020 was $61,660 compared to $102,886 for the quarter ended September 30, 2019. Gross margin as a percentage of revenue was 73.5% for the third quarter of 2020 compared to 95.2% of revenue for the third quarter of 2019.
Operating Expenses – Operating expenses for the quarter ended September 30, 2020 were $171,996 compared to those of $902,897 for the quarter ended September 30, 2019. Sales and marketing expenses for the quarter ended September 30, 2020 were $2,136 compared to $38,998 for the quarter ended September 30, 2019, which substantial decrease in the third quarter of 2020 was primarily due to having no marketing/sales activities or personnel in the 2020 third quarter. Development and support expenses for the quarter ended September 30, 2020 were $77,404 compared to $58,013 for the quarter ended September 30, 2019, which increase in the third quarter of 2020 was due primarily to certain expenses related to changing our technical operational support functions to our current outsourced service provider. General and administrative expenses for the quarter ended September 30, 2020 were $92,456 compared to $805,886 for the quarter ended September 30, 2019, which substantial decrease in the 2020 third quarter was primarily due to decreased consulting and advisory services with Capital Market Solutions, LLC. Bad debt expense was reclassified in our financial statements for the year ended December 31, 2019 from an operating expense to other income (expenses).
Operating Loss -- Operating loss for the quarter ended September 30, 2020 was $110,336 compared to $800,011 for the quarter ended September 30, 2019, which substantially decreased net loss for the third quarter of 2020 was primarily due to substantial decreases in sales and marketing and general and administrative expenses with the largest decrease in consulting and advisory services with Capital Market Solutions, LLC.
Other Income / (Expenses) – Other income/(expenses) for the quarter ended September 30, 2020 was income of $1,237,541 (consisting of $(144,673) of interest and debt discount expenses, $(94,256) of amortization of debt discount, and $(12,064) of bad debt expense, offset by $1,476,697 change in fair value of derivatives and $11,837 of other income), compared to other income/(expenses) of $(641,413) for the quarter ended September 30, 2019 (consisting of interest and debt amortization expenses of $(478,314), amortization of debt discount of $(293,018), and change in fair value of derivatives of $(53,176), offset by a gain of $172,143 on settlement of debt and other income of $10,952). The substantial increase in other income in the 2020 third quarter was due primarily to a large accounting positive change in fair value of derivatives recorded in the third quarter of 2020.
Net Income (Loss) – Our net income (loss) for the third quarter ended September 30, 2020 was net income of $1,127,205 compared to a net (loss) of $(1,441,424) for the third quarter ended September 30, 2019, which substantial change from a net loss for the 2019 third quarter to net income for the 2020 third quarter was primarily due to the expired CMS consulting contract in 2019 and the large positive change in fair value of derivatives recorded in the third quarter of 2020.
Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Revenue – Revenue was $264,424 for the nine months ended September 30, 2020 compared to revenue of $376,264 for the nine months ended September 30, 2019, which decrease in revenue for the 2020 nine-month period was primarily due to decreased use of ours Fision software platform by a few of our enterprise clients.
Cost of Sales – Cost of sales for the nine months ended September 30, 2020 was $73,996 (28% of revenue) compared to cost of sales of $56,310 (15% of revenue) for the nine months ended September 30, 2019, which increased cost of sales for the 2020 ninth-month period was primarily due to increased operational expenses related to outsourcing Fision platform operations to serve our existing customer base.
Gross Margin – Gross margin for the nine months ended September 30, 2020 was $190,428 compared to $319,954 for the nine months ended September 30, 2019. Gross margin as a percentage of revenue was 72% for the nine-month period of 2020 compared to 85% for the nine-month period of 2019.
Operating Expenses – Operating expenses were $1,289,471 for the nine months ended September 30, 2020 compared to those of $2,668,602 for the nine months ended September 30, 2019. Sales and marketing expenses for the nine months ended September 30, 2020 were $6,535 compared to $363,312 for the nine months ended September 30, 2019, which substantial decrease in the 2020 nine-month period was primarily due to having less sales personnel and sales activities in 2020. Development and support expenses for the nine months ended September 30, 2020 were $273,697 compared to $351,452 for the nine months ended September 30, 2019, which decrease in the 2020 nine-month period was primarily due to our development activities to serve large enterprise clients being substantially completed in 2019. General and administrative expenses for the nine months ended September 30, 2020 were $1,009,239 compared to $1,953,838 for the nine months ended September 30, 2019, which decrease in the 2020 nine-month period was primarily due to decreased consulting and advisory services of the Capital Market Solutions, LLC contract.
Operating Loss -- Our operating loss for the nine months ended September 30, 2020 was $1,099,043 compared to $2,348,648 for the nine months ended September 30, 2019, which decrease in the 2020 nine-month period was primarily due to substantial decreases in both sales/marketing expenses and general/administrative expenses, with the largest decrease in consulting and advisory services of the Capital Market Solutions, LLC contract.
Other Income / (Expenses) -- Other income (expenses) for the nine months ended September 30, 2020 was net other income of $1,969,366 (consisting of a change in fair value of derivatives of $2,826,397 and other income of $35,966, offset by interest and debt discount expenses of $(617,991), debt amortization expenses of $(198,330), loss on extinguishment of debt of $(40,482) and $(36,194) of bad debt expense), compared to net other (expenses) of $(2,658,533) for the nine months ended September 30, 2019 (consisting of interest and debt discount expenses of $(1,215,400), debt amortization expenses of $(1,434,818), excess derivative expense of $(749,553), settlement of debt expense of $(153,532) and bad debt expense of $(416,026), offset by a gain on extinguishment of derivative liabilities of $1,158,036, a change in fair value of derivatives of $32,826 and other income of $119,114. The substantial change to net other income in the 2020 nine-month period from a large net other (expenses) position in the 2020 nine-month period was due primarily to the decreased amortization, debt discount and other accounting for derivative expenses in 2020, a substantial decrease in bad debt expense in 2020, and a large positive change in fair value of derivatives in 2020.
Net Income / (Loss) – Our net income for the nine months ended September 30, 2020 was $870,323 compared to a net (loss) of $(5,007,181) for the nine months ended September 30, 2019, which net income in the 2020 nine-month period was due primarily to decreased interest, debt discount and derivative expenses for convertible debt, decreased bad debt expense, a substantial increase in change in fair value of derivatives, as well as decreases in sales and marketing, development and support and general and administrative expenses in the 2020 nine-month period.
Liquidity and Capital Resources
Our revenues have decreased over the past few years, and accordingly our financial condition and future prospects critically depend on our access to financing in order to continue our operations. Much of our cost structure is based on costs related to personnel and facilities and our cloud-based service provider, and not subject to material variability. We will need to raise substantial additional capital through private or public offerings of equity or debt securities, or a combination thereof, and we may have to use a material portion of the capital raised to repay certain past due debt obligations. To the extent any capital raised is insufficient to satisfy operational working capital needs and meet any required debt payments, we will need to either extend, refinance or convert to equity our past or soon due indebtedness, which there is no assurance we can accomplish.
As of September 30, 2020, we had total current liabilities of $4,991,663 including accounts payable and accrued expenses of $934,069, contract liability (customer deposits) of $20,000, short-term Notes Payable of $2,615,607 (net of short term debt discount of $232,118), derivative liabilities of $1,333,387, and the current portion of a long-term SBA PPP loan of $88,600. We also had long-term liabilities of $387,545 (net of $390,703 long term debt discount) as of September 30, 2020, consisting primarily of Convertible Notes Payable having varying maturity dates.
Currently, as of the date of this filing, we have negligible cash, which we believe along with our projected receipt of accounts receivable and customer revenues will last only until sometime in November, 2020. Accordingly, we need to continue raising substantial capital to support our operations. Our management estimates that based on our current monthly expenses net of expected revenue, we will require at least $500,000 in additional financing to fund our operational working capital needs for the next 12 months. Financing may be sought from a number of sources such as sales of equity or debt (including convertible debt) securities, and loans from affiliates, banks or other financial institutions. We may not be able to sell any such securities or otherwise obtain such financing when needed on terms acceptable to us, if at all. If further financing is not available as needed, our business would suffer substantially or may even fail.
Liquidity represents the ability of a company to generate sufficient cash to provide for its immediate needs for cash, which our continued losses have made it difficult for us to accomplish. Over the past few 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, affiliates, and other private lenders; stock-based compensation issued to employees, outsourced software developers, consultants and professionals; common stock issued to satisfy outstanding loans and accounts payable/accrued expenses; and sales of our common stock and convertible Notes.
Net Cash Used in Operating Activities – During the nine months ended September 30, 2020, we used net cash in operating activities of $230,962 compared to $1,140,620 of net cash used in operating activities in the nine months ended September 30, 2019, which decrease was primarily due to our decreased operating loss for the 2020 nine-month period.
Net Cash Used in Investing Activities – There were no investing activities in either of the nine-month periods ended September 30, 2020 and September 30, 2019.
Net Cash Provided By Financing Activities-- During the nine months ended September 30, 2020, we were provided net cash by financing activities of $222,565 including proceeds of $50,000 sale and issuance of common stock, proceeds of $177,200 from an SBA PPP loan, and issuance of a note payable of $75,000, offset by repayment of the $75,000 note and repayments on related party notes and a line of credit of $4,635. In comparison, during the nine months ended September 30, 2019, we were provided net cash by financing activities of $1,049,400 including proceeds of $1,037,000 from issuance of notes payable and proceeds of $350,000 from sale and issuance of common stock, offset by $343,000 used for repayments on notes payable and $2,100 paid on a line of credit.
Convertible Note Financing
A majority of our financing during the past couple years has consisted of Convertible Notes sold to various accredited investors. We raised a total of $2,959,500 from such convertible debt financing in 2018; we raised a total of $964,000 from convertible debt financing in 2019; and we raised a total of $75,000 from convertible debt financing for the nine months ending September 30, 2020.
Going Concern
Our financial statements contained in this quarterly report have been prepared on a going concern basis, which contemplates and implies that we will continue to realize our assets and satisfy our liabilities and commitments in the normal course of business. For the nine months ended September 30, 2020, we incurred an operating loss of $1,099,043, and our accumulated deficit as of September 30, 2020 is $30,941,469. These adverse financial conditions raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary if we are unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no off-balance sheet items as of September 30, 2020, or as of the date of this report.
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 principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020 (the end of the period covered by this Quarterly Report on Form 10-Q). Based on his evaluation as of the end of the quarterly period covered by this report, he has 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 and principal officers 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, 2019.
Changes in Internal Control over Financial Reporting -- There have been no changes in our internal control over financial reporting during our last fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Unregistered sales of our equity securities in the third quarter of our fiscal year ended September 30, 2020 are as follows:
Director Services - In August-September 2020 we issued a total of 5,467,343 restricted common shares to two independent directors in consideration for director services provided by them in 2020 valued at $37,500.
Note Conversions – During the three months ended September 30, 2020, Noteholders who are accredited investors converted outstanding Notes in the aggregate amount of $261,688 into a total of 50,443,423 restricted common shares, with conversion prices based on specific terms contained in the Notes.
Private Placement -- In August 2020, we received proceeds of $50,000 from a private accredited investor in consideration for our issuance to the investor of 5,000,000 restricted common shares along with a stock purchase warrant to purchase an additional 5,000,000 common shares for $0.10 per share anytime during the two-year term of the warrant. These proceeds were used for working capital purposes.
The issuances of all of our securities in the foregoing unregistered transactions were exempt from registration under the Securities Act of 1933, as amended, in reliance on the exemption under Section 4(a)(2) of the Securities Act.
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.
FISION Corporation
Dated: November 20, 2020
By:
/s/ Michael Brown
Michael Brown
Principal executive officer and
principal financial and accounting officer
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