Attached files

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EX-32.2 - CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 AS A - Creatd, Inc.f10q0317ex32ii_jerrickmedia.htm
EX-32.1 - CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 AS A - Creatd, Inc.f10q0317ex32i_jerrickmedia.htm
EX-31.2 - CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER OF REGISTRANT PURSUANT TO SECTI - Creatd, Inc.f10q0317ex31ii_jerrickmedia.htm
EX-31.1 - CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER OF REGISTRANT PURSUANT TO SECTI - Creatd, Inc.f10q0317ex31i_jerrickmedia.htm
EX-10.3 - PROMISSORY NOTE ISSUED IN FAVOR GRAWLIN, LLC, DATED MAY 12, 2017. - Creatd, Inc.f10q0317ex10iii_jerrickmedia.htm
EX-10.2 - LINE OF CREDIT AGREEMENT, DATED MAY 9, 2017, BY AND BETWEEN THE COMPANY AND ARTH - Creatd, Inc.f10q0317ex10ii_jerrickmedia.htm
EX-10.1 - ASSIGNMENT AND ASSUMPTION AGREEMENT, DATED MAY 12, 2017 - Creatd, Inc.f10q0317ex10i_jerrickmedia.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2017

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File No. 000-33383

 

JERRICK MEDIA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   87-0645394
(State or other jurisdiction
of incorporation)
  (IRS Employer
Identification No.)

 

202 S Dean Street

Englewood, NJ 07631

(Address of principal executive offices)

 

(201) 258-3770

(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 past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 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 filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of May 15, 2017, there were 33,894,582 shares outstanding of the registrant’s common stock.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION    
       
Item 1. Financial Statements    F-1
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   1
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   4
       
Item 4. Controls and Procedures   4
       
PART II – OTHER INFORMATION
       
Item 1. Legal Proceedings   5
       
Item 1A. Risk Factors   5
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   5
       
Item 3. Defaults Upon Senior Securities   5
       
Item 4. Mine Safety Disclosures   5
       
Item 5. Other Information   5
       
Item 6. Exhibits   6
       
Signatures   7

 

 

 

 

Jerrick Media Holdings, Inc.

 

March 31, 2017 and 2016

 

Index to the Condensed Consolidated Financial Statements

 

Contents   Page(s)
     
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)   F-2
     
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (unaudited)   F-3
     
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)   F-4
     
Notes to the Condensed Consolidated Financial Statements (unaudited)   F-5

 

 F-1 

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Balance Sheet

(Unaudited)

 

   March 31,
2017
   December 31,
2016
 
         
Assets        
         
Current Assets        
Cash  $53,963   $174,494 
Prepaid expenses   -    10,000 
Total Current Assets   53,963    184,494 
           
Property and equipment, net   62,528    71,829 
           
Security deposit   38,445    38,445 
           
Minority investment in business   83,333    83,333 
           
Total Assets  $238,269   $378,101 
           
Liabilities and Stockholders' Deficit          
           
Current Liabilities          
Accounts payable and accrued liabilities  $990,108   $1,387,068 
Accrued dividends   302,888    259,170 
Demand loan   10,366    10,366 
Convertible Notes, net of debt discount and Issuance costs   271,958    268,823 
Current portion of capital lease payable   4,732    3,524 
Note payable - related party, net of debt discount   1,389,441    1,350,325 
Note payable, net of debt discount and Issuance costs   198,559    30,579 
Derivative liability   1,289,187    - 
Line of credit   215,935    235,141 
           
Total Current Liabilities   4,673,174    3,544,996 
           
Non-current Liabilities:          
Capital lease payables   -    1,208 
           
Total Non-current Liabilities   -    1,208 
           
Total Liabilities   4,673,174    3,546,204 
           
Commitments and contingencies          
           
Stockholders' Deficit          
Series A Preferred stock, $0.001 par value, 33,414 and 33,314 shares issued and outstanding, respectively   33    33 
Series B Preferred stock, $0.001 par value, 8,063 and 7,000 shares issued and outstanding, respectively   8    8 
Series D Preferred stock, $0.001 par value, 914 and 0 shares issued and outstanding, respectively   1    1 
Common stock par value $0.001: 300,000,000 shares authorized; 37,701,322 and 33,894,582 issued and outstanding as of March 31, 2017 and December 31, 2016 respectively   37,702    33,895 
Additional paid in capital   10,406,723    10,075,941 
Accumulated deficit   (14,879,372)   (13,277,981)
    (4,434,905)   (3,168,103)
           
Total Liabilities and Stockholders' Deficit  $238,269   $378,101 

 

 

 F-2 

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   For the Three Months Ended   For the Three Months Ended 
   March 31, 2017   March 31, 2016 
         
Net revenue  $41,842    120,708 
           
Cost of revenue   -    34,398 
           
Gross margin   41,842    86,310 
           
Operating expenses          
Compensation   359,134    337,442 
Consulting fees   140,005    109,118 
Share based payments   186,976    48,449 
General and administrative   383,738    209,837 
           
Total operating expenses   1,069,853    704,846 
           
Loss from operations   (1,028,011)   (618,536)
           
Other income (expenses)          
Interest expense   (642,755)   (33,154)
Change In derivative liability   223,767    - 
Settlement of vendor liabilities   (110,674)   - 
           
Other income (expenses), net   (529,662)   (33,154)
           
Loss before income tax provision   (1,557,673)   (651,690)
           
Income tax provision   -    - 
           
Net loss  $(1,557,673)  $(651,690)
           
Per-share data          
Basic and diluted loss per share  $(0.04)  $(0.02)
           
Weighted average number of common shares outstanding   36,462,497    29,879,099 

 

 F-3 

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Three Months Ended   For the Three Months Ended 
   March 31, 2017   March 31, 2016 
         
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(1,557,673)  $(651,690)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   9,301    9,971 
Accretion of debt issuance costs   16,224    - 
Accretion of debt discount   314,673    24,425 
Share-based compensation   186,977    48,449 
Loss on settlement of vendor liabilities   110,674    - 
Change in fair value of derivative liability   (223,766)   - 
Derivative expense   254,470    - 
Changes in operating assets and liabilities:          
Prepaid expenses   10,000    (10,000)
Security deposit   -    (11,330)
Accounts payable and accrued expenses   (43,231)   5,989 
Net Cash Used In Operating Activities   (922,351)   (584,186)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid for property and equipment   -    (43,957)
Net Cash Used In Investing Activities   -    (43,957)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment of loans   -    (1,415)
Net proceeds from issuance of notes   926,585    106,000 
Net proceeds from issuance of preferred stock   -    94,248 
Proceeds from issuance of note payable - related party   90,000    - 
Repayment of note payable - related party   (120,000)   - 
Repayment of line of credit   (19,206)   - 
Cash paid for debt issuance costs   (75,559)   - 
Net Cash Provided By Financing Activities   801,820    198,833 
           
Net Change in Cash   (120,531)   (429,310)
           
Cash - Beginning of Period   174,494    438,629 
           
Cash - End of Period  $53,963   $9,319 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Year for:          
Income taxes  $-   $- 
Interest  $3,534   $- 
           
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Settlement of vendor liabilities  $353,732   $- 
Conversion of interest  $-   $108,843 
Debt discount on convertible note  $90,470   $24,425 
Debt discount on related party note payable  $10,195   $- 
Accrued dividends  $43,718   $- 
Warrants at issuance of debt  $1,168,014   $- 
Perfered stock and warrant modification  $-   $- 
Conversion of bridge notes  $-   $- 

 

 F-4 

 

 

Jerrick Media Holdings, Inc.

March 31, 2017 and 2016

Notes to the Condensed Consolidated Financial Statements

(unaudited) 

 

Note 1 - Organization and Operations

 

Jerrick Ventures, Inc. (“Ventures”) was incorporated on November 24, 2014 under the laws of the State of Nevada. Ventures develops digital transmedia content, including videos, imagery, articles, e-books, as well as traditional film and television, for each brand in its portfolio.

 

Jerrick Ventures, LLC (“Jerrick LLC”) was incorporated in Delaware in 2013. On December 1, 2014, Jerrick LLC entered into a share exchange agreement whereby the members of Jerrick LLC exchanged all of their membership interests in Jerrick LLC for Common Stock in Ventures (the “Jerrick Share Exchange”). As result of the Jerrick Share Exchange, Jerrick LLC became the operating subsidiary of Ventures.

  

Note 2 - Significant and Critical Accounting Policies and Practices

 

The Company’s significant accounting policies are disclosed in Note 2 - Summary of Significant Accounting Policies in the 2016 Annual Report. Since the date of the 2016 Annual Report, there have been no material changes to the Company’s significant accounting policies. The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions, deferred taxes and related valuation allowances, and the fair values of long lived assets. Actual results could differ from the estimates.

 

Basis of Presentation

 

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).

 

The unaudited condensed consolidated financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented. This report should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2017. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Company’s Form 10-K for the year ended December 31, 2016 has been omitted. The results of operations for the interim periods presented are not necessarily indicative of results for the entire year ending December 31, 2017 or any other period.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:

   

  (i) Assumption as a going concern: Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
  (ii) Fair value of long-lived assets: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes.  The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

 

 F-5 

 

 

  (iii)   Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.  
  (iv) Estimates and assumptions used in valuation of equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.

 

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

 

Actual results could differ from those estimates.

  

Principles of consolidation

 

The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.

 

As of March 31, 2017, the Company's consolidated subsidiaries and/or entities are as follows:

 

Name of combined affiliate  State or other jurisdiction of
incorporation or organization
  Company interest 
        
Astoria Surgical Supplies North LLC  The State of New Jersey   100%
         
Castle 6 Productions LLC  The State of New Jersey   100%
         
Filthy Gorgeous LLC  The State of Delaware   100%
         
Geek Room LLC  The State of Delaware   100%
         
Graphic Expression Corporate Collectibles LLC  The State of Delaware   100%
         
Guccione Stores LLC  The State of New Jersey   100%
         
iLongevity LLC  The State of New Jersey   100%
         
JAJ Enterprises LLC  The State of Delaware   100%
         
Jerrick Ventures LLC  The State of Delaware   100%
         
Miss Filthy LLC  The State of Delaware   100%
         
Next Geek Thing LLC  The State of Delaware   100%
         
No One’s Pet LLC  The State of New Jersey   100%
         
OMNI Reboot LLC  The State of Delaware   100%
         
Romper Zombie LLC  The State of Delaware   100%
         
Steam Wars LLC  The State of Delaware   100%

 

All inter-company balances and transactions have been eliminated.

 

On May 12, 2017, the Company assigned the right, title and interest to all of the membership interests of the above listed subsidiaries, with the exception of Jerrick Ventures, LLC, to the Company’s Chief Executive Officer, Jeremy Frommer, in consideration for Mr. Frommer’s assumption of all liabilities of such subsidiaries, if any, with such assignment and assumption effected entirely in the interest of corporate efficiency.  The Board reviewed the transaction and believes it to be fair in all respects, deeming it to advance the Company’s business interests by allowing the Company to divest non-producing and non-operating subsidiaries at no cost to the Company.  All of the Company’s operations have been, and will continue to be, run through its operating subsidiary, Jerrick Ventures LLC.  

 

 F-6 

 

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1   Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
     
Level 2   Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
     
Level 3   Pricing inputs that are generally observable inputs and not corroborated by market data.

  

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amount of the Company’s financial assets and liabilities, such as cash, prepaid expenses, accounts payable and accrued liabilities and accrued liquidating damages approximate their fair value because of the short maturity of those instruments.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

   

Fair Value of Non-Financial Assets or Liabilities Measured on a Recurring Basis

 

The Company’s non-financial assets include inventory. The Company identifies potentially excess and slow-moving inventory by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.  

 

Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.

 

Inventories

 

Inventory Valuation

 

The Company values inventory, entirely consisting of finished goods, at the lower of cost or market. Cost is determined on the first-in and first-out (“FIFO”) method.

 

Inventory Obsolescence and Markdowns

 

The Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.

 

The Company recorded a markdown of $0 and $0 as of March 31, 2017 and 2016, respectively, due to slow moving inventory.

 

There was no lower of cost or market adjustments for the reporting period ended March 31, 2017 or 2016.

 

 F-7 

 

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:

 

   Estimated Useful
Life (Years)
 
     
Computer equipment and software   3 
      
Furniture and fixture   5 

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations.

 

Investments - Cost Method, Equity Method and Joint Venture

 

In accordance with sub-topic 323-10 of the FASB ASC (“Sub-topic 323-10”), the Company accounts for investments in common stock of an investee for which the Company has significant influence in the operating or financial policies even though the Company holds 50% or less of the common stock or in-substance common stock.

 

On January 2, 2013, the Company purchased a minority interest in a business for proceeds of $83,333. The interest is accounted for under the cost method. The Company tests the carrying value annually for impairment.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 FASB Accounting Standards, the related parties include (a) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15 FASB Accounting Standards, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company and members of their immediate families; (e) management of the Company and members of their immediate families; (f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

Pursuant to ASC Paragraphs 850-10-50-1 and 50-5 financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated. 

 

Derivative Liability

 

The Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.

  

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

 F-8 

 

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock.  Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  

 

The Company utilizes an option pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the condensed consolidated statements of operations.

 

Revenue Recognition

 

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Stock-Based Compensation

 

The Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation". Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

 

Restricted stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a five year period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.

 

The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is benchmarked against similar companies in a similar industry over the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate.

 

Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the equity–based compensation could be significantly different from what the Company has recorded in the current period.

 

The Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over the requisite service period.

  

Income Taxes

 

Income taxes are provided in accordance with ASC No. 740, “Accounting for Income Taxes”. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the period of deferred tax assets and liabilities.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

 F-9 

 

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. 

 

Loss Per Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the three months ended March 31, 2017 and 2016 presented in these condensed consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

The Company had the following common stock equivalents at March 31, 2017 and 2016:

 

   March 31,
2017
   March 31,
2016
 
Options   2,259,090    550,000 
Warrants   21,813,281    12,541,667 
Totals   24,072,371    13,091,667 

 

Subsequent Events

 

The Company has evaluated events that occurred subsequent to March 31, 2017 and through the date the financial statements were issued.

 

Recently Issued Accounting Pronouncements

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016 and for annual and interim periods thereafter. The Company has adopted the methodologies prescribed by ASU 2014-15, the adoption of ASU 2014-15 did not have a material effect on its financial position or results of operations. 

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

Note 3 – Going Concern

 

The Company's condensed consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit at March 31, 2017, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private offering, there can be no assurance to that effect. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds by way of a public or private offering.

 

The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 F-10 

 

  

Note 4 – Property and Equipment

 

Property and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:

 

  

March 31,

2017

   December 31,
2016
 
Computer Equipment  $219,653   $219,653 
Furniture and Fixtures   61,803    61,803 
    281,456    281,456 
Less: Accumulated Depreciation   (218,928)   (209,627)
   $62,529   $71,829 

 

Depreciation expense was $9,301 and $1,395 for the three months ended March 31, 2017 and 2016, respectively.

 

Note 5 – Line of Credit

 

On March 19, 2009 Astoria Surgical Supplies North LLC signed a revolving note (the “Note”) at PNC Bank (the “Bank”). The outstanding balance of this Note is limited to $200,000 and expired March 19, 2010. The outstanding balance accrues interest at a variable rate. The interest rate is subject to change based on changes in an independent index which is the highest Prime Rate as published in the “Money Rates” section of the Wall Street Journal. Interest is payable monthly and the rate as of December 31, 2016 and 2015 was 3.75% and 4.50%, respectively.

 

The Company has been in payment default since March 19, 2010. The Company does not believe it is probable that the loan will be called or that the interest rate shall be increased to the default interest rate due to the fact that the Company is current and has been current since the maturity date with its monthly installment payment obligation.

 

The balance outstanding on the revolving note at March 31, 2016 and December 31, 2015 was $215,935 and $235,141, respectively.

 

Note 6 –Note Payable

 

On October 24, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with an individual (the “Lender”), pursuant to which on October 24, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $15,000 (the “Loan”).

 

The maturity date of the Loan is July 1, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 9% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 30,000 shares of the Company’s common stock with an exercise price of $0.30 per share (the “Warrant”). The Warrant has a term of five (5) years

 

On October 25, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with an individual (the “Lender”), pursuant to which on October 25, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $25,000 (the “Loan”).

 

The maturity date of the Loan is July 1, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 9% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 50,000 shares of the Company’s common stock with an exercise price of $0.30 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

On February 7, 2017, the Company entered into a loan agreement (the “Loan Agreement”) with an individual (the “Lender”), pursuant to which on October 25, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $10,000 (the “Loan”).

 

The maturity date of the Loan is May 7, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 10% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 10,000 shares of the Company’s common stock with an exercise price of $0.30 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

Private Placement Offering:

 

On February 22, 2017, the Company conducted the initial closing (the “Initial Closing”) of a private placement offering (the “Offering”) of the Company’s securities by entering into a subscription agreement (the “Subscription Agreement”) for gross proceeds of $140,605.

 

On March 17, 2017, the Company conducted the final closing of the Offering by entering into Subscription Agreements with eight accredited investors for additional gross proceeds of $775,980. In the aggregate, the Company entered into Subscription Agreements offering up to $1,000,000 of face value in secured promissory notes with an original issue discount of six percent (6%) and warrants to purchase the Company’s common stock. Pursuant to the Subscription Agreements, the Company issued $975,511 aggregate principal amount of the Notes due on September 1, 2017 and warrants to purchase shares of the Company’s common stock for aggregate gross proceeds of $916,585.

 

 F-11 

 

 

The Notes are convertible into shares of the Company’s common stock at the time of Company’s next round of financing (the “Subsequent Offering”) at a price equal to eighty-five percent (85%) of the price per share offered in the Subsequent Offering (the “Conversion Price”). The Warrants have a five-year term. Investors received Warrants in the following amounts: (i) Investors purchasing $150,000 or more of the Offering received a Warrant equal to one hundred thirty percent (130%) of the dollar amount invested in the Offering; (ii) Investors purchasing at least $100,000 but less than $150,000 of the Offering received a Warrant equal to one hundred percent (100%) of the dollar amount invested in the Offering; and (iii) Investors purchasing less than $100,000 of the Offering received to a Warrant equal to seventy percent (70%) of the dollar amount invested in the Offering. The Warrants entitle the holder to purchase shares of the Company’s common stock at $0.20 per share (the “Exercise Price”).

 

The Conversion Price and the Exercise Price are subject to adjustments for issuances of (i) the Company’s common stock, (ii) any equity linked instruments or (iii) securities convertible into the Company’s common stock, at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustments shall result in the Conversion Price or Exercise Price being reduced to such lower purchase price, as described in the Notes and Warrants.

 

As of March 31, 2017, the total outstanding balance of notes payable was $198,559, net of debt discount of $697,747 and debt issuance costs of $129,203.

 

Note 7 – Convertible Note Payable

 

During the months of November and December 2016, the Company issued convertible notes to third party lenders totaling $400,000. The note accrues interest at 10% per annum and mature with interest and principal both due on November 1, 2017. In addition, the Company issued a warrant to purchase 400,000 shares of Company common stock. The note and accrued interest are convertible at a conversion price as defined.

 

The warrant entitles the holder to purchase the Company’s common stock at a purchase price of $0.30 per share for a period of five years from the issue date.

 

On December 27, 2016, the Company issued a convertible note to a third party lender totaling $100,000. The note accrues interest at 10% per annum and matures with interest and principal both due on December 27, 2017. In addition, the Company issued a warrant to purchase 100,000 shares of Company common stock. The note and accrued interest are convertible at a conversion price of $0.30 per share subject to adjustment.

 

The warrant entitles the holder to purchase the Company’s common stock at a purchase price of $0.40 per share for a period of five years from the issue date.

 

As of March 31, 2017, the total outstanding balance of convertible notes payable was $ 271,958, net of debt discount and debt issuance costs of $ 195,066 and $32,976, respectively.

 

Note 8 – Related Party Loan

 

On May 26, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with Arthur Rosen, an individual (the “Lender”), pursuant to which on May 26, 2016 (the “Closing Date”), the Lender issued the Company a secured term loan of $1,000,000 (the “Loan”). In connection with the Loan Agreement, on May 26, 2016, the Company and Lender entered into a security agreement (the “Security Agreement”), pursuant to which the Company granted to Lender a senior security interest in substantially all of the Company’s assets as security for repayment of the Loan.

  

The maturity date of the Loan is May 26, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 12.5% per annum, compounded annually and payable on the Maturity Date. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 1,000,000 shares of the Company’s common stock with an exercise price of $0.40 per share (the “Warrant”). The Warrant has a term of five (5) years and contains anti-dilution provisions as further described therein.

 

On September 12, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with Arthur Rosen, an individual (the “Lender”), pursuant to which on September 12, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $100,000 (the “Loan”).

 

The original maturity date of the Loan was October 12, 2016 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 12% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date. On October 12, 2016, the Company entered into an amendment to the note. The note’s Maturity Date was extended 90 days. The Company is currently in payment default.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 150,000 shares of the Company’s common stock with an exercise price of $0.40 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

On September 20, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with 202 S Dean LLC, a company partially owned by an officer of the Company, (the “Lender”), pursuant to which on September 20, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $10,000 (the “Loan”).

 

 F-12 

 

 

The maturity date of the Loan is March 20, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 10% per annum. The Company is currently in payment default.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 235,000 shares of the Company’s common stock with an exercise price of $0.40 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

On October 13, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with Chris Gordon, an individual (the “Lender”), pursuant to which on October 13, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $50,000 (the “Loan”).

 

The original maturity date of the Loan was November 12, 2016 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 12% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date. The Company is currently in payment default.

  

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 50,000 shares of the Company’s common stock with an exercise price of $0.40 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

On October 31, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with Arthur Rosen, an individual (the “Lender”), pursuant to which on October 31, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $10,000 (the “Loan”).

 

The original maturity date of the Loan was November 10, 2016 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 10% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date. The Company is currently in payment default.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 10,000 shares of the Company’s common stock with an exercise price of $0.30 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

On December 21, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with Chris Gordon, an individual (the “Lender”), pursuant to which on December 21, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $275,000 (the “Loan”).

 

The original maturity date of the Loan was January 20, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 10% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date. The Company is currently in payment default.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 166,666 shares of the Company’s common stock with an exercise price of $0.40 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

On January 25, 2017, the Company entered into a loan agreement (the “Loan Agreement”) with Arthur Rosen, an individual (the “Lender”), pursuant to which on January 25, 2017 (the “Closing Date”), the Lender issued the Company a promissory note of $50,000 (the “Loan”).

 

The maturity date of the Loan is July 1, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 10% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date. The Company is currently in payment default.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 50,000 shares of the Company’s common stock with an exercise price of $0.30 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

On January 26, 2017, the Company entered into a loan agreement (the “Loan Agreement”) with Chris Gordon, an individual (the “Lender”), pursuant to which on January 26, 2017 (the “Closing Date”), the Lender issued the Company a promissory note of $50,000 (the “Loan”).

 

The maturity date of the Loan is November 22, 2017 (the “Maturity Date”). Pursuant to the Loan Agreement, the Loan bears interest at a rate of 10% per annum. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan are due on the Maturity Date. The Company is currently in payment default.

 

As additional consideration for entering in the Loan Agreement, the Company issued Lender a warrant to purchase 50,000 shares of the Company’s common stock with an exercise price of $0.30 per share (the “Warrant”). The Warrant has a term of five (5) years.

 

As of March 31, 2017, the total outstanding balance of related party notes payable was $1,389,441, net of debt discount of $25,559. As of December 31, 2016, the total outstanding balance of related party notes payable was $1,350,325, net of debt discount of $94,675.

 

 F-13 

 

 

Note 9 – Capital Leases Payable

 

Capital lease obligation consisted of the following:

 

      March 31, 2017   December 31,
2016
 
            
(i)  Capital lease obligation to a financing company for a term of five (5) years, collateralized by equipment, with interest at 10.0% per annum, with principal and interest due and payable in monthly installments of $383.10  $4,732   $4,732 
              
   Less current maturities   (4,732)   (3,524)
              
   Capital lease obligation, net of current maturities   -    1,208 
              
   TOTAL CAPITAL LEASE OBLIGATION  $4,732   $4,732 

 

The capital leases mature as follows:

 

2017:  $3,524   $3,524 
2018:   1,208   $1,208 

 

Note 10 – Derivative Liabilities

 

The Company has identified derivative instruments arising from embedded conversion features in the Company’s convertible notes payable and warrants at March 31, 2017. The Company had no financial assets measured at fair value on a recurring basis as of March 31, 2017.

 

The following summarizes the Black-Scholes assumptions used to estimate the fair value of the derivative liability and warrant liability at the date of issuance and for the convertible notes converted during the three months ended March 31, 2017.

 

   Low   High 
Annual dividend rate   0%   0%
Expected life   0.59    0.83 
Risk-free interest rate   0.01%   0.92%
Expected volatility   92.14%   92.96%

 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.

 

Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

 

Volatility: The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s peer group stock price for a period consistent with the warrants’ expected term. 

 

Remaining term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.

 

The following are the changes in the derivative liabilities during the three months ended March 31, 2017.

 

   Three Months Ended
March 31, 2017
 
   Level 1   Level 2   Level 3 
Derivative liabilities as January 1, 2017  $-   $-   $- 
Addition   -    -    1,512,954 
Conversion   -    -      
Loss on changes in fair value   -    -    (223,767)
Derivative liabilities as March 31, 2017  $-   $-   $1,289,187 

 

Note 10 - Stockholders’ Deficit

 

Shares Authorized

 

Upon incorporation, the total number of shares of all classes of stock which the Company is authorized to issue is One Hundred Million (100,000,000) shares of which Ninety Million (90,000,000) shares shall be Common Stock, par value $0.001 per share and Ten Million (10,000,000) shall be Preferred Stock, par value $0.001 per share. The designations, rights, and preferences of such preferred stock are to be determined by the Board of Directors.

 

 F-14 

 

Preferred Stock

 

Series A Cumulative Convertible Preferred Stock

 

On February 13, 2015, 100,000 shares of preferred stock were designated as Series A Cumulative Convertible Preferred Stock (“Series A”). Each share of Series A shall have a stated value equal to $100.00 (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the "Series A Stated Value").

 

During the year ended December 31, 2015, the Company sold 24,400 shares of Series A for proceeds of $2,450,000. In addition, $800,000 in convertible notes and $91,400 in accrued interest were converted into 8,914 shares of the Company’s Series A.

 

The holders of the Series A shall be entitled to receive preferential dividends at the rate of 6% per share per annum on the Series A Stated Value, but before any dividend or other distribution will be paid or declared and set apart for payment on any shares of any Junior Stock, as defined. Such dividends shall compound annually and be fully cumulative, and shall accumulate from the date of original issuance of the Series A and shall be payable quarterly, in arrears, commencing on the first day of the calendar quarter following the date on which the Series A is issued. Upon the occurrence of an Event of Default (as defined below) and while such Event of Default is outstanding, such dividend rate shall be increased to 15% per annum on the Series A Stated Value. At the Company's option, such dividend payments may be made in (i) cash (ii) additional shares of Series A valued at the Series A Stated Value thereof, in an amount equal to 150% of the cash dividend otherwise payable or (iii) a combination of cash and additional shares of Series A, provided there is not an existing current Event of Default on the date on which a dividend payment is payable, in which event the Holder entitled to receive such dividend may elect to receive such dividends in cash or additional shares of Series A Preferred.

 

The dividends on the Series A shall be cumulative whether or not declared so that, if at any time full cumulative dividends at the rate aforesaid on all shares of the Series A then outstanding from the date from and after which dividends thereon are cumulative to the end of the annual dividend period next preceding such time shall not have been paid or declared and set apart for payment, or if the full dividend on all such outstanding Series A for the then current dividend period shall not have been paid or declared and set apart for payment, the amount of the deficiency shall be paid or declared and set apart for payment before any sum shall be set apart for or applied by the Corporation or a subsidiary of the Corporation to the purchase, redemption or other acquisition of the Series A or any shares of any other class of stock ranking on a parity with the Series A and before any dividend or other distribution shall be paid or declared and set apart for payment on any Junior Stock and before any sum shall be set aside for or applied to the purchase, redemption or other acquisition of any Junior Stock.

 

Holder of Series A shall have the right at any time after the issuance, to convert such shares, accrued but unpaid declared dividends on the Series A and any other sum owed by the Corporation arising from the Series A into fully paid and non-assessable shares of Common Stock (the "Conversion Shares") of the Corporation determined in accordance with the applicable conversion price (the "Conversion Price"). 

 

The number of Conversion Shares issuable upon conversion shall equal (i) the sum of (A) the Series A Stated Value being converted and/or (B) at the Holder's election, accrued and unpaid dividends or any other component of the Conversion Amount, divided by (ii) the Conversion Price. The Conversion Price of the Series A shall be $0.25, subject to adjustment.

 

The Corporation and the Holder may not convert that amount of the Conversion Amount on a Conversion Date in amounts that would result in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its Affiliates on such Conversion Date, and (ii) the number of Conversion Shares issuable upon the conversion of the Conversion Amount with respect to which the determination of this proviso is being made on such Conversion Date, which would result in the aggregate beneficial ownership by the Holder and its Affiliates of more than 4.99% of the outstanding shares of Common Stock of the Corporation. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more than 4.99%. The Holder may allocate which of the equity of the Corporation deemed beneficially owned by the Holder shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. The Holder may waive the conversion limitation described in this Section in whole or in part, upon and effective after sixty one (61) days' prior written notice to the Corporation.

 

The holders of our Series A do vote together with the holders of our Common Stock on an as converted basis on each matter submitted to a vote of holders of Common Stock. The number of votes that may be cast by a holder of Series A shall be equal to the number of shares of Common Stock issuable upon conversion of such Holder's Series A on the record date for determining those stockholders entitled to vote on the matter. In addition, the affirmative vote of the holders of a majority of our outstanding Series A is required to for the following actions:

 

(a) amending the Corporation's certificate of incorporation or by-laws if such amendment would adversely affect the Series A

 

(b) purchasing any of the Corporation's securities other than required redemptions of Series A and repurchase under restricted stock and option agreements authorizing the Corporation's employees;

 

(c) effecting a Liquidation Event;

 

(d) declaring or paying any dividends other than in respect of the Series A; and

 

(e) issuing any additional securities having rights senior to or on parity with the Series A.

 

During the three months ended March 31, 2017, the Company accrued $0 for liquidating damages on the Series A and $0 on the warrants associated with the Series A.

 F-15 

 

 

Series B Cumulative Convertible Preferred Stock

 

On December 21, 2015, 20,000 shares of preferred stock were designated as Series B Cumulative Convertible Preferred Stock (“Series B”). Each share of Series B shall have a stated value equal to $100.00 (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the "Series B Stated Value").

 

During the year ended December 31, 2015, the Company sold 7,000 shares of Series B for proceeds of $700,000.

 

The holders of outstanding shares of Series B shall be entitled to receive preferential dividends at the rate of 6% per share per annum on the Series B Stated Value, but before any dividend or other distribution will be paid or declared and set apart for payment on any shares of any Junior Stock as defined. Such dividends shall compound annually and be fully cumulative, and shall accumulate from the date of original issuance of the Series B, and shall be payable quarterly, in arrears, commencing on the first day of the calendar quarter following the date on which the Series B is issued. Upon the occurrence of an Event of Default as defined below and while such Event of Default is outstanding, such dividend rate shall be increased to 15% per annum on the Series B Stated Value. At the Corporation's option, such dividend payments may be made in (i) cash (ii) additional shares of Series B valued at the Series B Stated Value thereof, in an amount equal to 100% of the cash dividend otherwise payable or (iii) a combination of cash and additional shares of Series B, provided there is not an existing current Event of Default on the date on which a dividend payment is payable, in which event the Holder entitled to receive such dividend may elect to receive such dividends in cash or additional shares of Series B Preferred.

 

The dividends on the Series B shall be cumulative whether or not declared so that, if at any time full cumulative dividends at the rate aforesaid on all shares of the Series B then outstanding from the date from and after which dividends thereon are cumulative to the end of the annual dividend period next preceding such time shall not have been paid or declared and set apart for payment, or if the full dividend on all such outstanding Series B for the then current dividend period shall not have been paid or declared and set apart for payment, the amount of the deficiency shall be paid or declared and set apart for payment before any sum shall be set apart for or applied by the Corporation or a subsidiary of the Corporation to the purchase, redemption or other acquisition of the Series B or any shares of any other class of stock ranking on a parity with the Series B and before any dividend or other distribution shall be paid or declared and set apart for payment on any Junior Stock and before any sum shall be set aside for or applied to the purchase, redemption or other acquisition of any Junior Stock.

 

Holders of shares of Series B shall have the right at any time commencing after the issuance to convert such shares, accrued but unpaid declared dividends on the Series B into fully paid and non-assessable shares of Common Stock (the "Conversion Shares") of the Corporation determined in accordance with the applicable conversion price (the "Conversion Price"). All declared or accrued but unpaid dividends may be converted at the election of the Holder together with or independent of the conversion of the Series B Stated Value of the Series B.

 

The number of Conversion Shares issuable upon conversion of the Conversion Amount shall equal (i) the sum of (A) the Series B Stated Value being converted and/or (B) at the Holder's election, accrued and unpaid dividends or any other component of the Conversion Amount, divided by (ii) the Conversion Price. The Conversion Price of the Series B shall be $0.30, subject to adjustment.

 

The Corporation and the Holder may not convert that amount of the Conversion Amount on a Conversion Date in amounts that would result in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its Affiliates on such Conversion Date, and (ii) the number of Conversion Shares issuable upon the conversion of the Conversion Amount with respect to which the determination of this proviso is being made on such Conversion Date, which would result in the aggregate beneficial ownership by the Holder and its Affiliates of more than 4.99% of the outstanding shares of Common Stock of the Corporation. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more than 4.99%. The Holder may allocate which of the equity of the Corporation deemed beneficially owned by the Holder shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. The Holder may waive the conversion limitation described in this Section in whole or in part, upon and effective after sixty one (61) days' prior written notice to the Corporation.

 

The holders of our Series B do vote together with the holders of our Common Stock on an as converted basis on each matter submitted to a vote of holders of Common Stock. The number of votes that may be cast by a holder of Series B shall be equal to the number of shares of Common Stock issuable upon conversion of such Holder's Series B on the record date for determining those stockholders entitled to vote on the matter. In addition, the affirmative vote of the holders of a majority of our outstanding Series B is required to for the following actions:

 

(a) amending the Corporation's certificate of incorporation or by-laws if such amendment would adversely affect the Series B

 

(b) purchasing any of the Corporation's securities other than required redemptions of Series B and repurchase under restricted stock and option agreements authorizing the Corporation's employees;

 

(c) effecting a Liquidation Event;

 

(d) declaring or paying any dividends other than in respect of the Company's Series A or Series B; and

 

(e) issuing any additional securities having rights senior to the Series B.

 

 F-16 

 

 

During the three months ended March 31, 2017, the Company accrued $0 for liquidating damages on the Series B and $0 on the warrants associated with the Series B.

 

During the three months ended March 31, 2017, the Company issued 0 shares of Series B upon conversion of interest totaling $0.

 

Series D Convertible Preferred Stock

 

On January 29, 2016, 2,100,000 shares of preferred stock were designated as Series D Convertible Preferred Stock (“Series D”). Each share of Series A shall have a stated value equal to $100.00 (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the "Series D Stated Value").

 

Holders of shares of Series D shall have the right at any time commencing after the issuance to convert such shares into fully paid and non-assessable shares of Common Stock (the "Conversion Shares") of the Corporation determined in accordance with the applicable conversion price (the "Conversion Price").

 

The number of Conversion Shares issuable upon conversion of the Conversion Amount shall equal (i) the sum of (A) the Series D Stated Value being converted and/or (B) at the Holder's election, accrued and unpaid dividends or any other component of the Conversion Amount, divided by (ii) the Conversion Price. The Conversion Price of the Series B shall be $0.25, subject to adjustment.

 

The Corporation and the Holder may not convert that amount of the Conversion Amount on a Conversion Date in amounts that would result in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its Affiliates on such Conversion Date, and (ii) the number of Conversion Shares issuable upon the conversion of the Conversion Amount with respect to which the determination of this proviso is being made on such Conversion Date, which would result in the aggregate beneficial ownership by the Holder and its Affiliates of more than 4.99% of the outstanding shares of Common Stock of the Corporation. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more than 4.99%. The Holder may allocate which of the equity of the Corporation deemed beneficially owned by the Holder shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. The Holder may waive the conversion limitation described in this Section in whole or in part, upon and effective after sixty one (61) days' prior written notice to the Corporation.

 

The holders of Series D Preferred shall not be entitled to a vote on matters submitted to a vote of the stockholders of the Company. Also, as long as any shares of Series D Preferred are outstanding, the Company shall not, without the affirmative vote of all of the Holders of the then outstanding shares of the Series D Preferred,

 

(a) alter or change adversely the powers, preferences or rights given to the Series D Preferred or alter or amend this Certificate of Designation,

 

(b) amend its articles of incorporation or other charter documents in any manner that adversely affects any rights of the Holders,

 

(c) increase the number of authorized shares of Series D Preferred, or

 

(d) enter into any agreement with respect to any of the foregoing.

 

On August 31, 2016, a holder of Series D converted 1,099 shares of Series A into 1,098,933 shares of the Company’s common stock.

  

Common Stock

 

On January 30,2017, the Company issued 2,946,740 shares of its restricted common stock to settle outstanding vendor liabilities of $353,732. In connection with this transaction the company also recorded a loss on settlement of vendor liabilities of $110,674. 

 

On February 1, 2017, the Company issued 800,000 shares of its restricted common stock to its Placement Agent. Such shares were issued pursuant to a Placement Agent Agreement with the Company and services rendered in connection with a private placement of the Company’s securities.

 

 F-17 

 

  

Stock Options

 

The Company applied fair value accounting for all share based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.

 

The assumptions used for options granted during the three months ended March 31, 2017 and December 31, 2016 are as follows:

 

   March 31,
2017
   December 31,
2016
 
Exercise price   0.25-0.40     0.25-0.40 
Expected dividends   0%   0%
Expected volatility   92.14%   73.44%-90.05
Risk free interest rate   2.10%   1%-1.39
Expected life of option   5 years    4.68-5 years 

 

The following is a summary of the Company’s stock option activity:

 

   Options  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining Contractual Life (in years)

 
Balance – December 31, 2016   2,250,000   $0.34    4.38 
Granted   99,990   $0.40    4.96 
Exercised   -    -    - 
Cancelled/Modified   (100,000)  $0.40    - 
Balance – March 31, 2017 – outstanding   2,249,990   $0.34    4.38 
Balance –  March 31, 2017 – exercisable   2,249,990   $0.34    4.38 
                
Outstanding options held by related party – March 31, 2017   2,249,990   $0.34    4.38 
Exercisable options held by related party – March 31, 2017   2,249,990   $0.34    4.38 

 

At March 31, 2017, the aggregate intrinsic value of options outstanding and exercisable was $22,976 and $0, respectively.

 

Stock-based compensation for stock options has been recorded in the condensed consolidated statements of operations and totaled $ and $0, for the three months ended March 31, 2016 and 2015, respectively.

 

The following is a summary of the Company’s stock options granted during the year ended March 31, 2017:

 

   Options   Value   Purpose for Grant
   99,990   $22,976   Service Rendered

  

Warrants

 

The Company applied fair value accounting for all share based payments awards. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model.

 

The assumptions used for warrants granted during the three months ended March 31, 2017 are as follows:

 

    March 31,
2017
  December 31, 2016  
Exercise price   $ 0.40-0.20   $ 0.40  
Expected dividends     0 %   0 %
Expected volatility     92.24-92.96 %   73.44-91.54 %
Risk free interest rate     1.93-2.03 %   1.13%-1.39 %
Expected life of warrant     years     5 years  

 

 F-18 

 

 

Warrant Activities

 

The following is a summary of the Company’s warrant activity:

 

   Warrants   Weighted Average
Exercise
Price
 
         
Outstanding – December 31, 2016   15,541,666   $0.36 
Granted   6,271,615   $0.20 
Exercised   -   $- 
Forfeited/Cancelled   -   $- 
Outstanding – March 31, 2017   21,813,281   $0.36 
Exercisable – March 31, 2016   21,813,281   $0.36 

  

Warrants Outstanding  Warrants Exercisable
Exercise price  Number Outstanding   Weighted Average Remaining Contractual Life (in years)   Weighted Average Exercise Price   Number
Exercisable
  Weighted Average Exercise Price 
$   0.20 – 0.40    21,813,281    3.93   $0.36   21,813,281  $0.36 

 

During the three months ended March 31, 2017, a total of 6,161,615 warrants were issued with promissory notes (See Note 6 above). The warrants have a grant date fair value of $771,158 using a Black-Scholes option-pricing model and the above assumptions.

 

During the three months ended March 31, 2017, a total of 0 warrants were issued with convertible notes (See Note 7 above). The warrants have a grant date fair value of $0 using a Black-Scholes option-pricing model and the above assumptions.

 

During the three months ended March 31, 2017, a total of 110,000 warrants were issued with notes payable – related party (See Note 8 above). The warrants have a grant date fair value of $10,195 using a Black-Scholes option-pricing model and the above assumptions.

 

Note 11 - Subsequent Events

 

The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported.

 

On May 9, 2017, the Company entered into a Revolving Line of Credit (the “LOC”) with Grawlin, LLC, an LLC controlled by Arthur Rosen, a related party. The LOC is was established for a period of twelve months in which the Company can borrow principal up to $130,000. The LOC bears interest at a rate of 18%. The Company shall repay the LOC and any accrued interest from any net revenue derived from the sale future sales of Guccione artwork and memorabilia as well as certain other products through Everything But The House ("EBTH") based on its auction revenue sharing model, immediately upon receipt (the "EBTH Repayments") used to repay first, any unpaid accrued interest and second, any unpaid principal balance. Failure to pay the EBTH Repayments within 3 business days of receipt shall constitute an Event of Default.

 

On May 12, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $56,000 in favor Grawlin, LLC.

 

 F-19 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This quarterly report on Form 10-Q and other reports filed by Jerrick Media Holdings, Inc. (the “Company”) from time to time with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

 

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

 

Overview

 

We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our financial statements and accompanying notes for the three months ended March 31, 2017 and 2016, included elsewhere in this report.

  

We are an Internet technology company that has developed Vocal, a proprietary software publishing platform, to enable creators of long form content to reach an engaged audience through our growing portfolio of genre-specific branded websites. By creating communities of engaged, topically focused users through our content creation process, we help advertisers and marketers find innovative ways to target and engage customers. Through Vocal, and other associated social media channels and outlets, we produce and distribute a variety of digital media content. The content for each branded website in our portfolio and for distribution through other media channels, is derived from internal generation, user contributions, and external collaborations. The content includes, but is not limited to: videos, imagery, articles, e-books, film, and television projects. Revenue is generated in a variety of ways, including: (i) the sale of advertising and marketing services related to our content, including but not limited to pre-roll videos, text and image advertisements, native advertisements, and affiliate marketing; (ii) the sale of genre-specific products related to our brands and, licensing of our content for download-to-own services; and (iii) royalties and production fees for original content, created for either film, television, or digital end-markets. Demand and pricing for our advertising depends on our user base and overall market conditions. We also drive additional demand through integrated sales of digital advertising inventory, through our marketing services, and by providing unique branded entertainment and custom sponsorship opportunities to our advertisers. Our advertising and e-commerce revenues may be affected by the strength of advertising markets and general economic conditions and may fluctuate depending on the success of our content, as measured by the number of people visiting our websites at any given time. 

 

 1 

 

 

Results of Operations

 

Summary of Statements of Operations for the Three-Month Period Ended March 31, 2017 and 2016:

 

   Three Month Period Ended 
   March 31,
2017
   March 31,
2016
 
Net revenue  $41,842   $120,708 
Gross margin  $41,842   $86,310 
Operating expenses  $1,069,853   $704,846 
Loss from operations  $(1,028,011)   (618,536)
Other expenses  $(529,662)   (33,154)
Net loss  $(1,557,673)   (651,690)
Loss per common share – basic and diluted  $(0.04)   (0.02)

   

Net Revenue

 

Net revenue was $41,842 for the three-month period ended March 31, 2017, as compared to $120,708 for the comparable three-month period ended March 31, 2016, a decrease of $78,866. The decrease in net revenue is primarily attributable to the Company's transitioning its ecommerce business from direct sale of products and Company owned memorabilia, through various web-based distribution channels, toward generating revenue through native advertising, branded marketing, and affiliate sales, resulting from the creation of genre specific, user generated content community websites. As part of that transition, the Company focused its efforts throughout 2016 on the development of its proprietary Vocal software platform to support the scalability of its business model. Revenue was also negatively impacted by management's decision to reduce its marketing efforts in selling artwork and memorabilia related to the Guccione Acquisition in the second half of 2016, while it negotiated an agreement to conduct future sales of Guccione artwork and memorabilia as well as certain other products through Everything But The House ("EBTH"), a premier online marketplace for estate sales. The Company reached an agreement with EBTH in the fourth quarter of 2016 and resumed sales through EBTH based on an auction revenue sharing model in December 2016. The Company expects revenue derived from its Vocal platform websites as well as its EBTH relationship to increase in 2017.

 

Gross Profit

 

Gross profit percentage increased from a gross profit of 72% during the three-month period ended March 31, 2016, to a gross profit of 100% during the three-month period ended March 31, 2017. The increase in gross margin is primarily attributable to the Company's higher margin advertising and branded content revenue resulting from increased traffic on its websites. The Company expects its gross margins to fluctuate as its business model continues to evolve in 2017.

 

Operating Expenses

 

Operating expenses for the three-month period ended March 31, 2017 were $1,069,853 as compared to $704,846 for the three-month period ended March 31, 2016. The increase of $365,007 in operating expenses is a result of a $173,901 increase in G&A expenses related to the development and launch of its Vocal platform, a $21,692 increase in employee compensation, and a $30,887 increase in consulting and professional fees related to becoming a publicly traded company and a $138,527 increase in stock based compensation.

 

Loss from Operations

 

Loss from operations for the three-month period ended March 31, 2017 was $1,028,011 as compared to loss of $618,536 for the three-month period ended March 31, 2016. The increase in net loss is primarily attributable to a decrease in revenue and the increase in operating expenses associated with the development and launch of its Vocal platform and the operating as a publicly traded company.

 

Other Income (Expenses)

 

Other income (expenses) for the three-month period ended March 31, 2017 was $(529,662), as compared to $(33,154) for the three-month period ended March 31, 2016. Other expenses during the three-month period ended March 31, 2017 was comprised of interest expense of $(642,755) on notes payable and the settlement of vendor liabilities of $(110,674) recorded by the Company. These expenses were offset by the gain on derivative liability of $223,767 as recorded during the three-month period ended March 31, 2017. During the three-month period ended March 31, 2016, other expenses were comprised of interest expense of $(33,154).

 

Net Loss

 

Net loss attributable to common shareholder for three-month period ended March 31, 2017, was $1,557,673, or loss per share of $0.04, as compared to a net loss of $651,690, or loss per share of $0.02, for the three-month period ended March 31, 2016.

 

Inflation did not have a material impact on the Company’s operations for the applicable period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.

 

 2 

 

  

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at March 31, 2017 compared to December 31, 2016:

 

  

March 31,

2017

   December 31,
2016
   Increase/(Decrease) 
Current Assets  $53,963   $184,494   $(130,531)
Current Liabilities  $4,673,174   $3,544,996   $1,128,178 
Working Capital Deficit  $(4,619,211)  $(3,360,502)  $(1,258,709)

 

At March 31, 2017, we had a working capital deficit of $4,619,211, as compared to a working capital deficit of $3,360,502 at March 31, 2016, an increase of $1,258,709. The increase is primarily attributable to the derivative liability of $1,289,187 recorded as of March 31, 2017. 

 

Net Cash

 

Net cash used in operating activities for the three-month period ended March 31, 2017 and 2016, was $922,351 and $584,186, respectively. The net loss for the three-month period ended March 31, 2017 and 2016 was $1,557,673 and $651,690, respectively. This change is primarily attributable to the net loss for the current period offset by the change in prepaid expenses of $10,000, depreciation expense of $9,301, share-based compensation of $186,977, the accretion of debt discount and debt issuance costs of $330,897, the loss on settlement of vendor liabilities of $110,674, and the derivative expense of $254,470. These increases were offset by changes in accounts payable and accrued expenses $43,231 and the change in fair value of the derivative liability of $223,766, respectively.

Net cash used in investing activities for the three-month period ended March 31, 2017 and 2016 was $0 and $43,957 for the purchase of property and equipment.

 

Net cash provided by financing activities for the three-month period ended March 31, 2017 and 2016 was $801,820 and $198,833. During the 2017 period, the Company was predominantly financed by issuance of notes and related party notes of $926,585 and $90,000, respectively. These increases were offset by repayment of related party notes and line of credit of $120,000 and $19,206, respectively. The Company also paid $75,559 for debt issuance costs during the 2017 three-month period. During the 2016 period, the Company was predominantly financed by issuance of notes and preferred stock.

 

Off-Balance Sheet Arrangements 

 

As of March 31, 2017, we have no off-balance sheet arrangements. 

 

Critical Accounting Policies

 

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

Use of Estimates

 

We use estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.

  

Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories: 

 

Level 1 – Quoted prices in active markets for identical assets or liabilities;

 

Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and

 

Level 3 – Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

 

The Company recognizes income and expenses based on the accrual method of accounting.

 

 3 

 

 

Income Taxes

 

The Company utilizes the liability method of accounting for income taxes. Under the liability method deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws that will be in effect, when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized.

 

Derivative Liability

 

The Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.

  

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock.  Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  

 

The Company utilizes an option pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.

 

Stock Based Compensation

 

All stock-based payments to employees, non-employee consultants, and to nonemployee directors for their services as directors, including any grants of restricted stock and stock options, are measured at fair value on the grant date and recognized in the statements of operations as compensation or other expense over the relevant service period. Stock-based payments to nonemployees are recognized as an expense over the period of performance. Such payments are measured at fair value at the earlier of the date a performance commitment is reached or the date performance is completed. In addition, for awards that vest immediately and are non-forfeitable the measurement date is the date the award is issued.

 

Recent Accounting Pronouncements

 

The Company does not expect that the adoption of recent accounting pronouncements will have a material impact on its financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We do not hold any derivative instruments and do not engage in any hedging activities.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) are not effective to ensure that information required to be disclosed by us in report that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting.

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, filed with the SEC on March 31, 2017. 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Other than as disclosed in the financial notes above, there were no unregistered sales of the Company’s equity securities during the quarter ended March 31, 2017 that were not previously reported in a Current Report on Form 8-K. 

 

Item 3. Defaults Upon Senior Securities.

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

On May 12, 2017, the Company assigned the right, title and interest to all of the membership interests of the above listed subsidiaries, with the exception of Jerrick Ventures, LLC, to the Company’s Chief Executive Officer, Jeremy Frommer, in consideration for Mr. Frommer’s assumption of all liabilities of such subsidiaries, if any, with such assignment and assumption effected entirely in the interest of corporate efficiency.  The Board reviewed the transaction and believes it to be fair in all respects, deeming it to advance the Company’s business interests by allowing the Company to divest non-producing and non-operating subsidiaries at no cost to the Company.  All of the Company’s operations have been, and will continue to be, run through its operating subsidiary, Jerrick Ventures LLC. 

 

On May 9, 2017, the Company entered into a Revolving Line of Credit (the “LOC”) with Grawlin, LLC, an LLC controlled by Arthur Rosen, a related party. The LOC is was established for a period of twelve months in which the Company can borrow principal up to $130,000. The LOC bears interest at a rate of 18%. The Company shall repay the LOC and any accrued interest from any net revenue derived from the sale future sales of Guccione artwork and memorabilia as well as certain other products through Everything But The House ("EBTH") based on its auction revenue sharing model, immediately upon receipt (the "EBTH Repayments") used to repay first, any unpaid accrued interest and second, any unpaid principal balance. Failure to pay the EBTH Repayments within 3 business days of receipt shall constitute an Event of Default.

 

On May 12, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $56,000 in favor Grawlin, LLC.

 

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Item 6. Exhibits.

  

Exhibit No.   Description
     
10.1*   Assignment and Assumption Agreement, Dated May 12, 2017
     
10.2*   Line of Credit Agreement, dated May 9, 2017, by and between the Company and Arthur Rosen
     
10.3*  

Promissory Note issued in favor Grawlin, LLC, dated May 12, 2017.

     
31.1*   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
     
31.2*   Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
     
32.1*   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GROW SOLUTIONS HOLDINGS, INC.
     
Date: May 15, 2017 By: /s/ Jeremy Frommer
  Name:  Jeremy Frommer
  Title: Chief Executive Officer
    (Principal Executive Officer)
    (Principal Financial Officer)
    (Principal Accounting Officer)

 

 

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