| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant
accounting policies of AiAdvertising is presented to assist in understanding the Company’s Consolidated Financial Statements. The
Consolidated Financial Statements and notes are representations of the Company’s management, which is responsible for their integrity
and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have
been consistently applied in the preparation of the Consolidated Financial Statements. The Consolidated Financial
Statements include the Company and its wholly owned subsidiaries CLWD Operations, Inc a Delaware corporation (“CLWD Operations”),
Parscale Digital, Inc., a Nevada corporation (“Parscale Digital”), WebTegrity, Inc., a Nevada corporation (“WebTegrity”),
Data Propria, Inc., a Nevada corporation (“Data Propria”), and Giles Design Bureau, Inc., a Nevada corporation (“Giles
Design Bureau). All significant inter-company transactions are eliminated in the consolidation of the financial statements. As of June 30, 2022
the Company dissolved Parscale Digital, Inc., Data Propria, Inc., and WebTegrity, Inc. Reclassifications During the quarter ended June 30, 2022
we recognized cost of revenue in the statement of operations. Certain prior periods have been reclassified to reflect current period presentation. Accounts Receivable The Company extends credit to its customers, who are located nationwide. Accounts receivable are customer obligations due under normal trade terms. The Company performs continuing credit evaluations of its customers’ financial condition. Management reviews accounts receivable on a regular basis, based on contractual terms and how recently payments have been received to determine if any such amounts will potentially be uncollected. The Company includes any balances that are determined to be uncollectible in its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The balances of the allowance account at June 30, 2022 and December 31, 2021 are $5,619 and $4,469 respectively. Use of Estimates The preparation of financial statements
in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Estimates are primarily used in our revenue recognition,
the allowance for doubtful account receivable, fair value assumptions in accounting for business combinations and analyzing goodwill,
intangible assets and long-lived asset impairments and adjustments, the deferred tax valuation allowance, and the fair value of stock
options and warrants. Cash and Cash Equivalents The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. As of June 30, 2022, the Company held cash and cash
equivalents in the amount of $1,449,648, which was held in the Company’s operating bank accounts. This amount is held in a
bank account exceeding the FDIC insured limit of $250,000. Property and Equipment Property and equipment
are stated at cost, and are depreciated or amortized using the straight-line method over the following estimated useful lives:
Furniture, fixtures & equipment 7 Years
Computer equipment 5 Years
Commerce server 5 Years
Computer software 3 - 5 Years
Leasehold improvements Length of the lease Depreciation expenses
were $18,434 and $22,025 for the six months ended June 30, 2022 and 2021, respectively. Revenue Recognition The Company recognizes
income when the service is provided or when product is delivered. We present revenue, net of customer incentives. Most of our income is
generated from professional services and site development fees. We provide online marketing services that we purchase from third parties.
The gross revenue presented in our statement of operations includes digital advertising revenue. We also offer professional services such
as development services. The fees for development services with multiple deliverables constitute a separate unit of accounting in
accordance with ASC 606, which are recognized as the work is performed. Upfront fees for development services or other customer services
are deferred until certain implementation or contractual milestones have been achieved. If we have performed work for our clients, but
have not invoiced clients for that work, then we record the value of the work on the balance sheet as costs in excess of billings. The
terms of services contracts generally are for periods of less than one year. The deferred revenue and customer deposits as of June 30,
2022, and December 31, 2021 were $710,391 and $491,635, respectively. The costs in excess of billings as of June 30, 2022 and December
31, 2021 was $23,837 and $27,779, respectively. We always strive to
satisfy our customers by providing superior quality and service. Since we typically bill based on a Time and Materials basis, there are
no returns for work delivered. When discrepancies or disagreements arise, we do our best to reconcile them by assessing the situation
on a case-by-case basis and determining if any discounts can be given. Historically, we have not granted any significant discounts. Included in revenue
are costs that are reimbursed by our clients, including third party services, such as photographers and stylists, furniture, supplies,
and the largest component, digital advertising. We have determined, based on our review of ASC 606-10-55-39, that the amounts classified
as reimbursable costs should be recorded as gross revenue, due to the following factors:
● The
Company is primarily in control of the inputs of the project and responsible for the completion of the client contract;
● We
have discretion in establishing price; and
● We
have discretion in supplier selection. Research and Development Research and development costs are expensed
as incurred. Total research and development costs were $461,038 and zero Advertising Costs The Company expenses the cost of advertising
and promotional materials when incurred. Total advertising costs were $88,705 and $52,963 for the six months ended June 30, 2022
and 2021, respectively. Fair value of financial instruments The Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which approximates
their fair value, due to the relatively short maturity of these instruments. As of June 30, 2022 and December 31, 2021, the Company’s
notes payable have stated borrowing rates that are consistent with those currently available to the Company and, accordingly, the Company
believes the carrying value of these debt instruments approximates their fair value. Fair value is defined as the price to
sell an asset or transfer a liability, between market participants at the measurement date. Fair value measurements assume that the asset
or liability is (1) exchanged in an orderly manner, (2) the exchange is in the principal market for that asset or liability,
and (3) the market participants are independent, knowledgeable, able and willing to transact an exchange. Fair value accounting and
reporting establishes a framework for measuring fair value by creating a hierarchy for observable independent market inputs and unobservable
market assumptions and expands disclosures about fair value measurements. Considerable judgment is required to interpret the market data
used to develop fair value estimates. As such, the estimates presented herein are not necessarily indicative of the amounts that could
be realized in a current exchange. The use of different market assumptions and/or estimation methods could have a material effect on the
estimated fair value. ASC Topic 820 established
a nine-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable
inputs (level 3 measurements). These tiers include:
● Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
● Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices
for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
● Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions,
such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Impairment of Long-Lived Assets The Company reviews
its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the estimated future undiscounted
net cash flows from the asset are less than its carrying amount. If impairment is indicated, the long-lived asset would be written down
to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold, including
quoted market prices, if available, or the present value of the estimated future cash flows based on reasonable and supportable assumptions. Indefinite Lived Intangibles and Goodwill
Assets The Company accounts
for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on
their estimated fair values. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected
cash flows from acquired customer lists, acquired technology, and trade names from a market participant perspective, useful lives and
discount rates. Management’s estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates. The purchase price is allocated using the information
currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other
things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of
the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The Company tests
for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate
that the carrying amount of the asset exceeds its fair value and may not be recoverable. The impairment
test conducted by the Company includes a two-step approach to determine whether it is more likely than not that impairment exists. If
it is determined, after step one, that it is not more likely than not, that impairment exists, then no further analysis is conducted.
The steps are as follows:
1. Based on the totality of qualitative factors, determine whether the carrying amount of the intangible asset may not be recoverable. Qualitative factors and key assumptions reviewed include the following:
● Increases in costs, such as labor, materials or other costs that could negatively affect future cash flows. The Company assumed that costs associated with labor, materials, and other costs should be consistent with fair market levels. If the costs were materially higher than fair market levels, then such costs may adversely affect the future cash flows of the Company or reporting units.
● Financial performance, such as negative or declining cash flows, or reductions in revenue may adversely affect recoverability of the recorded value of the intangible assets. During our analysis, the Company assumes that revenues should remain relatively consistent or show gradual growth month-to-month and quarter-to-quarter. If revenue declines, instead of increases or flat levels, then such condition may adversely affect the future cash flows of the Company or reporting units.
● Legal, regulatory, contractual, political, business or other factors that could affect future cash flows. During our analysis, the Company assumes that the legal, regulatory, political or business conditions should remain consistent, without placing material pressure on the Company or any of its reporting units. If such conditions were to become materially different than what has been experienced historically, then such conditions may adversely affect the future cash flows of the Company or reporting units.
● Entity-specific events such as losses of management, key personnel, or customers, may adversely affect future cash flows. During our analysis, the Company assumes that members of management, key personnel, and customers will remain consistent period-over-period. If not effectively replaced, the loss of members of management and key employees could adversely affect operations, culture, morale and overall success of the company. In addition, if material revenue from key customers is lost and not replaced, then future cash flows will be adversely affected.
● Industry or market considerations, such as competition, changes in the market, changes in customer dependence on our service offerings, or obsolescence could adversely affect the Company or its reporting units. We understand that the markets we serve are constantly changing, requiring us to change with them. During our analysis, we assume that we will address new opportunities in service offering and industries served. If we do not make such changes, then we may experience declines in revenue and cash flow, making it difficult to re-capture market share.
● Macroeconomic conditions such as deterioration in general economic conditions or limitations on accessing capital could adversely affect the Company. During our analysis, we acknowledge that macroeconomic factors, such as the economy, may affect our business plan because our customers may reduce budgets for our services. If there are material worsening in economic conditions, which lead to reductions in revenue then such conditions may adversely affect the Company.
2. Compare the carrying amount of the intangible asset to the fair value.
3. If the carrying amount is greater than the fair value, then the carrying amount is reduced to reflect fair value. Goodwill and Intangible
assets are comprised of the following, presented as net of amortization:
June 30, 2022
AiAdvertising Total
Domain name 20,202 20,202
Total $ 20,202 $ 20,202
December 31, 2021
AiAdvertising Total
Domain name 20,202 20,202
Total $ 20,202 $ 20,202 Business Combinations The acquisition of
subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair value,
at the acquisition date, of assets received, liabilities incurred or assumed, and equity instruments issued by the Company in exchange
for control of the acquiree. Any costs directly attributable to the business combination are expensed in the period incurred. The
acquiree’s identifiable assets and liabilities are recognized at their fair values at the acquisition date. Goodwill arising on
acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over the
Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. Concentrations of Business and Credit
Risk The Company operates in a single industry
segment. The Company markets its services to companies and individuals in many industries and geographic locations. The Company’s
operations are subject to rapid technological advancement and intense competition. Accounts receivable represent financial instruments
with potential credit risk. The Company typically offers its customers credit terms. The Company makes periodic evaluations
of the credit worthiness of its enterprise customers and other than obtaining deposits pursuant to its policies, it generally does not
require collateral. In the event of nonpayment, the Company has the ability to terminate services. As of June 30, 2022, the Company
held cash and cash equivalents in the amount of $1,449,648, which was held in the operating bank accounts. Of this amount, none
was held in any one account, in amounts exceeding the FDIC insured limit of $250,000. For further discussion on concentrations see
footnote 13. Stock-Based Compensation The Company addressed the accounting
for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the
enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the
issuance of such equity instruments. The transactions are accounted for using a fair-value-based method and recognized as expenses in
our statement of operations. Stock-based compensation
expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to
vest. Stock-based compensation expense recognized in the consolidated statement of operations during the six months ended June 30,
2022, included compensation expense for the stock-based payment awards granted prior to, but not yet vested, as of June 30, 2022 based
on the grant date fair value estimated. Stock-based compensation expense recognized in the consolidated statement of operations
for the six months ended June 30, 2022 is based on awards ultimately expected to vest or has been reduced for estimated forfeitures. Forfeitures
are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The stock-based compensation expense recognized in the consolidated statements of operations during the six months ended June 30,
2022 and 2021 were $894,117 and $491,473, respectively. Basic and Diluted Net Income (Loss) per
Share Calculations Income (Loss) per
Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing
income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The shares for
employee options, warrants and convertible notes were used in the calculation of the income per share. For the six months
ended June 30, 2022, the Company has excluded 258,424,694 shares of common stock underlying options, 18,025 Series B Preferred shares
convertible into 450,625,000 shares of common stock, 14,425 Series C Preferred shares convertible into 144,250,000 shares of common stock,
86,021 Series D Preferred shares convertible into 215,052,500 shares of common stock, 10,000 Series E Preferred shares convertible into
20,000,000 shares of common stock, 2,597 Series G Preferred shares convertible into 136,684,211 shares of common stock and 162,703,869
shares of common stock underlying warrants, because their impact on the loss per share is anti-dilutive. During the six months ended
June 30, 2022, the above mentioned shares are included in the calculation for diluted earnings per share, resulting in 1,387,740,274 shares
being added to the weighted average common and common equivalent shares outstanding. For the six months
ended June 30, 2021, the Company has excluded 226,701,174 shares of common stock underlying options, 18,025 Series B Preferred shares
convertible into 450,625,000 shares of common stock, 14,425 Series C Preferred shares convertible into 144,250,000 shares of common stock,
86,021 Series D Preferred shares convertible into 215,052,500 shares of common stock, 10,000 Series E Preferred shares convertible into
20,000,000 shares of common stock, 2,597 Series G Preferred shares convertible into 136,684,211 shares of common stock and 184,632,441
shares of common stock underlying warrants, because their impact on the loss per share is anti-dilutive. During the six months ended
June 30, 2021, the above mentioned shares are included in the calculation for diluted earnings per share, resulting in 1,377,945,326 shares
being added to the weighted average common and common equivalent shares outstanding. Dilutive per share amounts are computed
using the weighted-average number of common shares outstanding and potentially dilutive securities, using the treasury stock method if
their effect would be dilutive. Recently Adopted Accounting Pronouncements The Company does not
elect to delay complying with any new or revised accounting standards, but to apply all standards required of public companies, according
to those required application dates. Management reviewed
accounting pronouncements issued during the quarter ended June 30, 2022, and no pronouncements were adopted during the period. Management reviewed accounting pronouncements
issued during the year ended December 31, 2021, and the following pronouncements were adopted during the period. In January 2017, the
FASB issued 2017-04, Intangibles - Goodwill and Other Recently Issued Accounting Pronouncements
Not Yet Adopted In June 2016, the
FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets
held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will
result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within
those years, beginning after December 15, 2022. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13
on our consolidated financial statements. In August 2020, the
FASB issued Accounting Standards Update (ASU) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The intention of ASU 2020-06 update
is to address the complexity of accounting for certain financial instruments with characteristics of liabilities and equity, including
convertible instruments and contracts in an entity’s own equity. Under ASU 2020-06, the number of accounting models for convertible
notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for computing diluted Earnings
Per Share. ASU 2020-06 is effective for fiscal years and interim periods beginning after December 15, 2021 and may be adopted through
either a modified or fully retrospective transition. Early adoption is permitted. The Company is currently evaluating the impact of this
ASU on its consolidated financial statements and related disclosures. Discontinued Operations On June 11, 2021,
the Company entered into and closed an asset purchase agreement (the “Asset Purchase Agreement”) with Liquid Web, LLC (“Buyer”)
under which it sold the web hosting and maintenance revenue stream (the “Asset Sale”) to the Buyer for a Purchase Price of
$251,966 which included the “Indemnity Holdback” amount of $25,197. The Buyer agreed to pay the Company the “Indemnity
Holdback” amount within 45 days following the six-month anniversary of the closing date (June 11, 2021) in accordance with the Asset
Purchase Agreement. As of June 30, 2022 the “Indemnity Holdback” amount was paid by the Buyer and is recorded as a Gain on
Sale of Discontinued Operations in our statement of operations. The Company did not
classify any assets or liabilities specific to the Purchased Assets. Therefore, the purchase price from the Purchased Assets is
recorded as a Gain on Sale of Discontinued Operations in our statement of operations for the year ended December 31, 2021. As a
result of the Company entering into the Asset Purchase Agreement, the Company’s web hosting revenue stream has been characterized
as discontinued operations in its financial statements as disclosed within the disaggregated revenue schedule in footnote 3. Pursuant to the Asset
Purchase Agreement, the Company agreed to continue to maintain, support, and deliver on all customer services during the transition period
of 90 days following the closing date. The Company agreed to continue to invoice the hosting customers in the ordinary course of
business. Any payments received from the customers, on or after the closing date are the property of Liquid Web. The Company
agreed to remit the payment for collected revenue less taxes collected and net of hosting expenses to the Buyer no later than the 15 th The following table summarizes the results
of operations for the three months ended June 30, 2022 and 2021.
Three months ended June 30, 2022 Three months ended June 30, 2021
Third Related Total Third Related Total
Hosting Revenue - - - $ 55,014 - $ 55,014
Cost of Sales - - - 27,256 - 27,256
Net Income from Discontinued Operations $ - $ - $ - $ 27,758 $ - $ 27,758 The following table
summarizes the results of operations for the six months ended June 30, 2022 and 2021.
Six months ended June 30, 2022 Six months ended June 30, 2021
Third Related Total Third Related Total
Hosting Revenue - - - $ 128,336 - $ 128,336
Cost of Sales - - - 56,641 - 56,641
Net Income from Discontinued Operations $ - $ - $ - $ 71,695 $ - $ 71,695 Income Taxes The Company uses the
asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to financial statements carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. The measurement of deferred tax assets and liabilities is based on provisions of applicable
tax law. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits
that, based on available evidence, the Company does not expect to realize. For the six months
ended June 30, 2022, we used the federal tax rate of 21% in our determination of the deferred tax assets and liabilities balances.
For the
Current tax provision:
Federal
Taxable income $ -
Total current tax provision $ -
Deferred tax provision:
Federal
Loss carryforwards $ 4,810,516
Change in valuation allowance (4,810,516 )
Total deferred tax provision $ - | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of
significant accounting policies of AiAdvertising is presented to assist in understanding the Company’s Consolidated Financial Statements.
The Consolidated Financial Statements and notes are representations of the Company’s management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America
and have been consistently applied in the preparation of the Consolidated Financial Statements. The Consolidated
Financial Statements include the Company and its wholly owned subsidiaries CLWD Operations, Inc a Delaware corporation (“CLWD Operations”),
Parscale Digital, Inc., a Nevada corporation (“Parscale Digital”), WebTegrity, Inc., a Nevada corporation (“WebTegrity”),
Data Propria, Inc., a Nevada corporation (“Data Propria”), and Giles Design Bureau, Inc., a Nevada corporation (“Giles
Design Bureau). All significant inter-company transactions are eliminated in consolidation of the financial statements. Reclassifications During the year
ended December 31, 2021 we recognized cost of revenue in the statement of operations. Certain prior periods have been reclassified to
reflect current period presentation. Accounts Receivable The Company extends
credit to its customers, who are located nationwide. Accounts receivable are customer obligations due under normal trade terms.
The Company performs continuing credit evaluations of its customers’ financial condition. Management reviews accounts
receivable on a regular basis, based on contracted terms and how recently payments have been received to determine if any such amounts
will potentially be uncollected. The Company includes any balances that are determined to be uncollectible in its allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off. The balance of the
allowance account at December 31, 2021 and 2020 are $4,469 and $742, respectively. During the years ended December 31, 2021 and 2020,
we included $2,274 and $16,868, respectively, in expense related to balances that were written off as bad debt. On November 30,
2016, CLWD Operations entered into a 12-month agreement wherein amounts due from our customers were pledged to a third party, in exchange
for a borrowing facility of up to $400,000. The agreement was amended on March 23, 2017, which increased the allowable borrowing
amount by $100,000, to $500,000. On November 30, 2017, the agreement renewed automatically for another twelve months. The proceeds
from the facility were determined by the amounts we invoiced our customers. We recorded the amounts due from customers in accounts
receivable and the amount due to the third party as a liability, presented under “Lines of credit” on the Balance Sheet. During
the term of this facility, the third-party lender had a first priority security interest in CLWD Operations’ assets, and therefore,
we would have needed to obtain such third-party lender’s written consent to obligate CLWD Operations’ further or pledge its
assets against additional borrowing facilities. The cost of this secured borrowing facility was 0.05% of the daily balance. This
borrowing facility had an expiration date of January 14, 2021 and was not renewed. As of December 31, 2021, the balance due from
this arrangement was zero. On October 19,
2017, Parscale Digital entered into a 12-month agreement wherein amounts due from our customers were pledged to a third party, in exchange
for a borrowing facility of up to $500,000. The proceeds from the facility were determined by the amounts we invoiced our customers. The
Company evaluated this facility in accordance with ASC 860, classifying it as a secured borrowing arrangement. We recorded the amounts
due from customers in accounts receivable and the amount due to the third party as a liability, presented as a “Lines of credit”
on the Balance Sheet. During the term of this facility, the third-party lender had a first priority security interest in Parscale
Digital, and therefore, we would have needed to obtain such third-party lender’s written consent to obligate Parscale Digital further
or pledge its assets against additional borrowing facilities. The cost of this secured borrowing facility was 0.05% of the daily
balance. On April 12, 2018, the Company amended the secured borrowing arrangement, which increased the maximum allowable balance by $250,000,
to $750,000 . This borrowing facility had an expiration date of November 11, 2020 and was not renewed. As of December 31,
2021, the balance due from this arrangement was zero. On August 2, 2018,
Giles Design Bureau, WebTegrity, and Data Propria entered into 12-month agreements wherein amounts due from our customers were pledged
to a third-party, in exchange for borrowing facilities of up to $150,000, $150,000 and $600,000, respectively. The proceeds from
the facility were determined by the amounts we invoiced our customers. We evaluated these facilities in accordance with ASC 860,
classifying as secured borrowing arrangements. We recorded the amounts due from customers in accounts receivable and the amount due to
the third party as a liability, presented under “Lines of credit” on the Balance Sheet. During the term of these facilities,
the third-party lender had a first priority security interest in the respective entities, and, therefore, we would have needed to obtain
such third-party lender’s written consent to obligate the entities further or pledge our assets against additional borrowing facilities.
The cost of this secured borrowing facilities was 0.056%, 0.056% and 0.049%, respectively, of the daily balance. These three borrowing
facilities had an expiration date of August 22, 2020 and were not renewed. As of December 31, 2021, the combined balance due from
these arrangement was zero. Use of Estimates The preparation
of financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported
amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are primarily used in
our revenue recognition, the allowance for doubtful account receivable, fair value assumptions in accounting for business combinations
and analyzing goodwill, intangible assets and long-lived asset impairments and adjustments, the deferred tax valuation allowance, and
the fair value of stock options and warrants. Cash and Cash Equivalents The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2021, the Company held cash and
cash equivalents in the amount of $3,431,455 which was held in the Company’s operating bank accounts. This amount is held
in a bank account exceeding the FDIC insured limit of $250,000. Revenue Recognition The Company recognizes
income when the service is provided or when product is delivered. We present revenue, net of customer incentives. Most of
the income is generated from professional services and site development fees. We provide online marketing services that we purchase
from third parties. The gross revenue presented in our statement of operations includes digital advertising revenue. We also
offer professional services such as development services. The fees for development services with multiple deliverables constitute
a separate unit of accounting in accordance with ASC 606, which are recognized as the work is performed. Upfront fees for
development services or other customer services are deferred until certain implementation or contractual milestones have been achieved.
If we have performed work for our clients, but have not invoiced clients for that work, then we record the value of the work in
an asset in costs in excess of billings. The terms of services contracts generally are for periods of less than one year. The deferred
revenue and customer deposits as of December 31, 2021 and 2020 was $491,635 and $841,290, respectively. The costs in excess of billings
as of December 31, 2021 and 2020 was $27,779 and zero, respectively. See footnote 3 for a disclosure of our use of estimates and judgement,
as it relates to revenue recognition. We always strive
to satisfy our customers by providing superior quality and service. Since we typically bill based on a Time and Materials basis,
there are no returns for work delivered. When discrepancies or disagreements arise, we do our best to reconcile those by assessing the
situation on a case-by-case basis and determining if any discounts can be given. Historically, no significant discounts have been
granted. Included in revenue
are costs that are reimbursed by our clients, including third party services, such as photographers and stylists, furniture, supplies,
and the largest component, digital advertising. We have determined, based on our review, that the amounts classified as reimbursable
costs should be recorded as gross, due to the following factors:
● The
Company is primarily in control of the inputs of the project and responsible for the completion of the client contract;
● We
have discretion in establishing price; and
● We
have discretion in supplier selection. During the years
ended December 31, 2021 and 2020, we included $3,448,153 and $5,155,079, respectively, in revenue, related to reimbursable costs. The Company records revenue
into the following five categories:
● Data
Sciences – Includes polling, research, modeling, data fees, consulting and reporting.
● Design
– Includes branding, photography, copyrighting, printing, signs and interior design.
● Development
– Includes website coding.
● Digital
Advertising – Includes ad spend, SEO management and digital ad support.
● The
Platform - Includes our existing clients creative assets and intelligently recommends enhancements to optimize performance by using artificial
intelligence. For the years ended
December 31, 2021 and December 31, 2020, revenue was disaggregated into the five categories as follows:
Year ended December 31, 2021 Year ended December 31, 2020
Third Related Total Third Related Total
Data Sciences $ - $ - $ - $ 596,446 $ - $ 596,446
Design 2,027,152 - 2,027,152 2,390,676 - 2,390,676
Development 225,049 - 225,049 330,404 - 330,404
Digital Advertising 4,525,688 - 4,525,688 6,085,038 3,640 6,088,678
The Platform 90,372 - 90,372 - - -
Total $ 6,868,261 $ - $ 6,868,261 $ 9,402,564 $ 3,640 $ 9,406,204 Research and Development Research and development costs are
expensed as incurred. Total research and development costs were $ 549,628 and zero for the years ended December 31, 2021 and December
31, 2020, respectively. Advertising Costs The Company expenses the cost of advertising
and promotional materials when incurred. Total advertising costs were $145,375 and $119,332, for the years ended December 31, 2021
and December 31, 2020, respectively. Fair Value of Financial Instruments The Company’s financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which approximates
their fair value, due to the relatively short maturity of these instruments. As of December 31, 2021 and December 31, 2020, the
Company’s notes payable have stated borrowing rates that are consistent with those currently available to the Company and, accordingly,
the Company believes the carrying value of these debt instruments approximates their fair value. Fair value is defined as the price
to sell an asset or transfer a liability, between market participants at the measurement date. Fair value measurements assume that the
asset or liability is (1) exchanged in an orderly manner, (2) the exchange is in the principal market for that asset or liability,
and (3) the market participants are independent, knowledgeable, able and willing to transact an exchange. Fair value accounting and
reporting establishes a framework for measuring fair value by creating a hierarchy for observable independent market inputs and unobservable
market assumptions and expands disclosures about fair value measurements. Considerable judgment is required to interpret the market data
used to develop fair value estimates. As such, the estimates presented herein are not necessarily indicative of the amounts that could
be realized in a current exchange. The use of different market assumptions and/or estimation methods could have a material effect on the
estimated fair value. ASC Topic
820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the
lowest priority to unobservable inputs (level 3 measurements). These tiers include:
● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Property and Equipment Property and equipment are stated at
cost, and are depreciated or amortized using the straight-line method over the following estimated useful lives:
As of December 31,
Years 2021 2020
Equipment 5-7 $ 239,641 $ 169,003
Office furniture 7 51,653 23,569
Leasehold improvements Length of lease - -
Less accumulated depreciation (177,045 ) (136,890 )
Net property and equipment $ 114,249 $ 55,682 The following table discloses fixed
asset transactions and recordings during the years ended December 31, 2021 and December 31, 2020:
Year ended Year ended
Depreciation expense $ 40,155 $ 40,993
Gain/(loss) on disposals - -
Cash paid for fixed asset additions 98,722 5,253 Impairment of Long-Lived Assets The Company reviews
its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of a long-lived asset, management evaluates whether the estimated future undiscounted
net cash flows from the asset are less than its carrying amount. If impairment is indicated, the long-lived asset would be written down
to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold, including
quoted market prices, if available, or the present value of the estimated future cash flows based on reasonable and supportable assumptions.
During the year ended December 31, 2020, management reviewed the intangible assets and goodwill of WebTegrity, and determined that
there were indications of impairment. Indefinite Lived Intangibles and Goodwill
Assets The Company accounts
for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on
their estimated fair values. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected
cash flows from acquired customer lists, acquired technology, and trade names from a market participant perspective, useful lives and
discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates. The purchase price is allocated using the information
currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other
things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of
the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The Company tests
for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate
that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, at December
31, 2020 the Company performed a qualitative assessment of indefinite lived intangibles and goodwill related to WebTegrity and determined
there was impairment of indefinite lived intangibles and goodwill. Therefore, an impairment of indefinite lived intangibles and goodwill
was recognized. The impairment
test conducted by the Company includes an assessment of whether events occurred that may have resulted in impairment of goodwill and intangible
assets. Because it was determined that events had occurred which effected the fair value of goodwill and intangible assets, the
Company conducted the two-step approach to determine the fair value and required adjustment. The steps are as follows:
1. Based on the totality of qualitative factors, determine whether the carrying amount of the intangible asset may not be recoverable. Qualitative factors and key assumptions reviewed include the following:
● Increases in costs, such as labor, materials or other costs that could negatively affect future cash flows. The Company assumed that costs associated with labor, materials, and other costs should be consistent with fair market levels. If the costs were materially higher than fair market levels, then such costs may adversely affect the future cash flows of the Company or reporting units.
● Financial performance, such as negative or declining cash flows, or reductions in revenue may adversely affect recoverability of the recorded value of the intangible assets. During our analysis, the Company assumes that revenues should remain relatively consistent or show gradual growth month-to-month and quarter-to-quarter. If we report revenue declines, instead of increases or flat levels, then such condition may adversely affect the future cash flows of the Company or reporting units.
● Legal, regulatory, contractual, political, business or other factors that could affect future cash flows. During our analysis, the Company assumes that the legal, regulatory, political or business conditions should remain consistent, without placing material pressure on the Company or any of its reporting units. If such conditions were to become materially different than what has been experienced historically, then such conditions may adversely affect the future cash flows of the Company or reporting units.
● Entity-specific events such as losses of management, key personnel, or customers, may adversely affect future cash flows. During our analysis, the Company assumes that members of management, key personnel, and customers will remain consistent period-over-period. If not effectively replaced, the loss of members of management and key employees could adversely affect operations, culture, morale and overall success of the company. In addition, if material revenue from key customers is lost and not replaced, then future cash flows will be adversely affected.
● Industry or market considerations, such as competition, changes in the market, changes in customer dependence on our service offering, or obsolescence could adversely affect the Company or its reporting units. We understand that the markets we serve are constantly changing, requiring us to change with it. During our analysis, we assume that we will address new opportunities in service offering and industries served. If we do not make such changes, then we may experience declines in revenue and cash flow, making it difficult to re-capture market share.
● Macroeconomic conditions such as deterioration in general economic conditions or limitations on accessing capital could adversely affect the Company. During our analysis, we acknowledge that macroeconomic factors, such as the economy, may affect our business plan because our customers may reduce budgets for our services. If there are material declines in the economy, which lead to reductions in revenue then such conditions may adversely affect the Company.
2. Compare the carrying amount of the intangible asset to the fair value.
3. If the carrying amount is greater than the fair value, then the carrying amount is reduced to reflect fair value. In accordance
with its policies, the Company conducted an impairment assessment during the year ended December 31, 2020 related to the WebTegrity acquisition
and determined that impairment of indefinite lived intangibles and goodwill was necessary. Accordingly, all intangible assets and goodwill
related to the WebTegrity acquisition have been written off, amounting to $560,000. This amount reduced the consolidated balances of WebTegrity,
as outlined below. This amount is included in Operating Expenses on the Income Statement, for the year ended December 31, 2020.
At the time of the impairment analysis, the remaining prior year balance of the Customer List ($71,606) had already been expensed
throughout the year ended December 31, 2020. Goodwill and
Intangible assets are comprised of the following, presented as net of amortization:
December 31, 2021
AiAdvertising Total
Domain name 20,202 20,202
Total $ 20,202 $ 20,202
December 31, 2020
AiAdvertising Total
Domain name 26,582 26,582
Total $ 26,582 $ 26,582 Business Combinations The acquisition of subsidiaries is
accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair value, at the acquisition
date, of assets received, liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the
acquiree. Any costs directly attributable to the business combination are expensed in the period incurred. The acquiree’s
identifiable assets and liabilities are recognized at their fair values at the acquisition date. Goodwill arising
on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over
the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. Concentrations of Business and Credit
Risk The Company operates in a single industry
segment. The Company markets its services to companies and individuals in many industries and geographic locations. The Company’s
operations are subject to rapid technological advancement and intense competition. Accounts receivable represent financial instruments
with potential credit risk. The Company typically offers its customers credit terms. The Company makes periodic evaluations
of the credit worthiness of its enterprise customers and other than obtaining deposits pursuant to its policies, it generally does not
require collateral. In the event of nonpayment, the Company has the ability to terminate services. As of December 31, 2021, the
Company held cash and cash equivalents in the amount of $3,431,455, which was held in the operating bank accounts. Of this amount,
none was held in any one account, in amounts exceeding the FDIC insured limit of $250,000. For further discussion on concentrations
see footnote 14. Stock-Based Compensation The Company addressed the accounting
for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the
enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the
issuance of such equity instruments. The transactions are accounted for using a fair-value-based method and recognized as expenses in
our statement of operations. Stock-based compensation expense recognized
during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based
compensation expense recognized in the consolidated statement of operations during the year ended December 31, 2021, included compensation
expense for the stock-based payment awards granted prior to, but not yet vested, as of December 31, 2021 based on the grant date fair
value estimated. Stock-based compensation expense recognized in the consolidated statement of operations for the year ended December
31, 2021 is based on awards ultimately expected to vest or has been reduced for estimated forfeitures. Forfeitures are estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based
compensation expense recognized in the consolidated statements of operations during the year ended December 31, 2021 and 2020 were $987,433
and $390,035, respectively. Basic and Diluted Net Income (Loss) per Share Calculations Income (Loss)
per Share dictates the calculation of basic earnings per share and diluted earnings per share. Basic earnings per share are computed by
dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share
is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The
shares for employee options, warrants and convertible notes were used in the calculation of the income per share. For the year ended December 31, 2021,
the Company has excluded 246,618,441 shares of common stock underlying options, 162,703,869 shares of common stock underlying warrants,
18,025 Series B Preferred shares convertible into 450,625,000 shares of common stock, 14,425 Series C Preferred shares convertible into
144,250,000 shares of common stock, 86,021 Series D Preferred shares convertible into 215,052,500 shares of common stock, 10,000 Series
E Preferred shares convertible into 20,000,000 shares of common stock, and 2,597 Series G Preferred shares convertible into 136,684,211
shares of common stock, because their impact on the loss per share is anti-dilutive. For the year ended
December 31, 2020, the Company has excluded 106,489,498 shares of common stock underlying options, 20,912,852 shares of common stock underlying
warrants, 10,000 Series A Preferred shares convertible into 100,000,000 shares of common stock, 18,025 Series B Preferred shares convertible
into 450,625,000 shares of common stock, 14,425 Series C Preferred shares convertible into 144,250,000 shares of common stock, 90,000
Series D Preferred shares convertible into 225,000,000 shares of common stock, 10,000 Series E Preferred shares convertible into 20,000,000
shares of common stock, 2,597 Series G Preferred shares convertible into 136,684,211 shares of common stock and 18,388,400 shares of common
stock underlying $183,884 in convertible notes, because their impact on the loss per share is anti-dilutive. Dilutive per share
amounts are computed using the weighted-average number of common shares outstanding and potentially dilutive securities, using the treasury
stock method if their effect would be dilutive. Accounting for Derivatives The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative
financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is
then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative
financial instruments, the Company uses a probability weighted average series Binomial lattice formula pricing models to value the derivative
instruments at inception and on subsequent valuation dates. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end
of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December
31, 2021, the Company had no derivative liability. Recently Adopted Accounting Pronouncements The Company does not elect to delay
complying with any new or revised accounting standards, but to apply all standards required of public companies, according to those required
application dates. Management reviewed
accounting pronouncements issued during the year ended December 31, 2021, and no pronouncements were adopted during the period. Management reviewed
accounting pronouncements issued during the year ended December 31, 2020, and the following pronouncement was adopted during the period. In January 2017,
the FASB issued 2017-04, Intangibles - Goodwill and Other Recently Issued Accounting
Pronouncements Not Yet Adopted In June 2016,
the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial
assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which
will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within
those years, beginning after December 15, 2022. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13
on our consolidated financial statements. In August 2020,
the FASB issued Accounting Standards Update (ASU) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The intention of ASU 2020-06
update is to address the complexity of accounting for certain financial instruments with characteristics of liabilities and equity, including
convertible instruments and contracts in an entity’s own equity. Under ASU 2020-06, the number of accounting models for convertible
notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for computing diluted Earnings
Per Share. ASU 2020-06 is effective for fiscal years and interim periods beginning after December 15, 2023 and may be adopted through
either a modified or fully retrospective transition. Early adoption is permitted. The Company is currently evaluating the impact of this
ASU on its consolidated financial statements and related disclosures. Discontinued Operations On June 11, 2021,
the Company entered into and closed an asset purchase agreement (the “Asset Purchase Agreement”) with Liquid Web, LLC (“Buyer”)
under which it sold the web hosting and maintenance revenue stream (the “Asset Sale”) to the Buyer for a Purchase Price of,
$251,966 which included the “Indemnity Holdback” amount of $25,197. The Buyer agreed to pay the Company the “Indemnity
Holdback” amount within 45 days following the six-month anniversary of the closing date (June 11, 2021) in accordance with the Asset
Purchase Agreement. As of December 31, 2021 the “Indemnity Holdback” amount has not been paid by the Buyer. The Company did
not classify any assets or liabilities specific to the Purchased Assets. Therefore, the purchase price from the Purchased Assets
are recorded as a Gain on Sale of Discontinued Operations in our statement of operations for the year ended December 31, 2021. As
a result of the Company entering into the Asset Purchase Agreement, the Company’s web hosting revenue stream has been characterized
as discontinued operations in its financial statements as disclosed within the disaggregated revenue schedule in footnote 3. Pursuant to the
Asset Purchase Agreement, the Company will continue to maintain, support, and deliver on all customer services during the transition period
of 90 days following the Closing Date. The Company will continue to invoice the hosting customers in the ordin |
