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: June 30, 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 August 14, 2017, there were 38,842,729 shares outstanding of the registrant’s common stock.

 

 

 

TABLE OF CONTENTS

 

	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32
Item 4.	Controls and Procedures		32
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		33
Item 1A.	Risk Factors		33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3.	Defaults Upon Senior Securities		33
Item 4.	Mine Safety Disclosures		33
Item 5.	Other Information		33
Item 6.	Exhibits		34
Signatures			35

 

 

Jerrick Media Holdings, Inc.

 

June 30, 2017 and 2016

 

Index to the Condensed Consolidated Financial Statements

 

Contents		Page(s)
Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (unaudited)		2
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)		3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)		4
Notes to the Condensed Consolidated Financial Statements (unaudited)		5

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Balance Sheet

(Unaudited)

 

		June 30, 2017				December 31, 2016
Assets
Current Assets
Cash		$	5,277			$	174,494
Prepaid expenses			-				10,000
Total Current Assets			5,277				184,494
Property and equipment, net			53,125				71,829
Security deposit			38,445				38,445
Minority investment in business			83,333				83,333
Total Assets		$	180,180			$	378,101
Liabilities and Stockholders’ Deficit
Current Liabilities
Accounts payable and accrued liabilities		$	1,099,471			$	1,387,068
Accrued dividends			360,555				259,170
Demand loan			10,366				10,366
Convertible Notes - related party, net of debt discount			48,904				-
Convertible Notes, net of debt discount and Issuance costs			453,028				268,823
Current portion of capital lease payable			4,732				3,524
Note payable - related party, net of debt discount			1,522,467				1,365,325
Note payable, net of debt discount and Issuance costs			738,405				15,579
Derivative liability			945,403				-
Line of credit - related party			130,000				-
Line of credit			204,943				235,141
Total Current Liabilities			5,518,274				3,544,996
Non-current Liabilities:
Capital lease payables			-				1,208
Total Non-current Liabilities			-				1,208
Total Liabilities			5,518,274				3,546,204
Commitments and contingencies
Stockholders’ Deficit
Series A Preferred stock, $0.001 par value, 32,166 and 33,314 shares issued and outstanding, respectively			32				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; 38,401,322 and 33,894,582 issued and outstanding as of June 30, 2017 and December 31, 2016 respectively			38,402				33,895
Additional paid in capital			10,855,781				10,075,941
Accumulated deficit			(16,232,318	)			(13,277,981	)
			(5,338,094	)			(3,168,103	)
Total Liabilities and Stockholders’ Deficit		$	180,180			$	378,101

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

		For the Three Months Ended				For the Three Months Ended				For the Six Months Ended				For the Six Months Ended
		June 30, 2017				June 30, 2016				June 30, 2017				June 30, 2016
Net revenue		$	52,259			$	63,932			$	94,101			$	184,640
Cost of revenue			-				8,923				-				43,321
Gross margin			52,259				55,009				94,101				141,319
Operating expenses
Compensation			709,296				327,548				1,091,407				713,439
Consulting fees			37,565				405,889				341,570				515,007
General and administrative			253,017				338,020				636,754				547,857
Total operating expenses			999,878				1,071,457				2,069,731				1,776,303
Loss from operations			(947,619	)			(1,016,448	)			(1,975,630	)			(1,634,984	)
Other income (expenses)
Interest expense			(87,318	)			(4,364,460	)			(144,705	)			(4,397,614	)
Accretion of debt discount and issuance cost			(620,586	)			(15,974	)			(951,484	)			(15,974	)
Derivative expense			-				-				(254,470	)
Change In derivative liability			360,244				-				584,011				-
Settlement of vendor liabilities			-				-				(110,674	)			-
Other income (expenses), net			(347,660	)			(4,380,434	)			(877,322	)			(4,413,588	)
Loss before income tax provision			(1,295,279	)			(5,396,882	)			(2,852,952	)			(6,048,572	)
Income tax provision			-				-				-				-
Net loss		$	(1,295,279	)		$	(5,396,882	)		$	(2,852,952	)		$	(6,048,572	)
Per-share data
Basic and diluted loss per share		$	(0.03	)		$	(0.17	)		$	(0.08	)		$	(0.20	)
Weighted average number of common shares outstanding			38,014,509				31,682,537				37,247,125				29,879,099

 

 

Jerrick Media Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
		For the Six Months Ended				For the Six Months Ended
		June 30, 2017				June 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(2,852,952	)		$	(6,048,572	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			18,704				20,784
Accretion of debt issuance costs			120,332				-
Accretion of debt discount			831,151				40,399
Share-based compensation			627,619				66,174
Loss on settlement of vendor liabilities			110,674				-
Change in fair value of derivative liability			(584,010	)			-
Derivative expense			254,470				-
Changes in operating assets and liabilities:
Prepaid expenses			10,000				(10,000	)
Security deposit			-				(32,775	)
Accounts payable and accrued expenses			77,642				276,268
Accrued liquidating damages			-				4,346,490
Net Cash Used In Operating Activities			(1,386,370	)			(1,341,232	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment			-				(43,956	)
Net Cash Used In Investing Activities			-				(43,956	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans			-				(107,415	)
Net proceeds from issuance of notes			991,585				106,000
Net proceeds from issuance of  preferred stock			-				94,248
Proceeds from issuance of convertible note			121,500				-
Proceeds from issuance of convertible notes - related party			50,000				-
Proceeds from issuance of note payable - related party			185,000				1,000,000
Repayment of note payable - related party			(120,000	)			-
Proceeds from issuance of line of  credit - related party			130,000				-
Repayment of line of credit			(41,706	)			-
Cash paid for debt issuance costs			(99,226	)			-
Net Cash Provided By Financing Activities			1,217,153				1,092,833
Net Change in Cash			(169,217	)			(292,355	)
Cash - Beginning of Period			174,494				438,629
Cash - End of Period		$	5,277			$	146,274
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		$	13,627			$	166,591
Debt discount on note payable		$	5,683			$	-
Accrued dividends		$	101,385			$	-
Warrants at issuance of debt		$	1,184,473			$	-

 

 

Jerrick Media Holdings, Inc.

June 30, 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.

 

Jerrick is a technology company focused on the development of digital communities, marketing branded digital content, and e-commerce opportunities. Jerrick’s content distribution platform, Vocal, delivers a robust long-form, digital publishing platform organized into highly engaged niche-communities capable of hosting all forms of rich media content. Through Jerrick’s proprietary algorithm dynamics, Vocal enhances the visibility of content and maximizes viewership, providing advertisers access to target markets that most closely match their interests.

  

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.
(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 June 30, 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
Jerrick Ventures 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, LLCcertain inactive subsidiaries, 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.

 

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 June 30, 2017 and 2016, respectively, due to slow moving inventory.

 

There was no lower of cost or market adjustments for the reporting period ended June 30, 2017 or 2016. 

 

 

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. 

 

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. 

 

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 June 30, 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 June 30, 2017 and 2016:

 

		June 30, 2017				June 30, 2016
Options			17,549,990				550,000
Warrants			22,073,481				13,541,667
Convertible notes			2,000,000				-
Totals			41,623,471				14,091,667

 

Subsequent Events

 

The Company has evaluated events that occurred subsequent to June 30, 2017 and through the date the financial statements were issued.

 

Reclassifications

 

Certain prior year amounts in the condensed consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation. These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net loss or net cash used in operating activities.

 

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 June 30, 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 of its debt or equity securities, 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. 

  

 

Note 4 – Property and Equipment

 

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

 

		June 30, 2017				December 31, 2016
Computer Equipment		$	219,653			$	219,653
Furniture and Fixtures			61,803				61,803
			281,456				281,456
Less: Accumulated Depreciation			(228,331	)			(209,627	)
		$	53,125			$	71,829

 

Depreciation expense was $9,404 and $10,812 for the three months ended June 30, 2017 and 2016, respectively. Depreciation expense was $18,704 and $20,784 for the six months ended June 30, 2017 and 2016, respectively.

 

Note 5 – Line of Credit

 

Line of credit as of June 30, 2017 and December 31, 2016 is as follows:

 

		Outstanding Balances as of
		June 30, 2017				December 31, 2016
March 19, 2009			193,496				203,988
October 4, 2016			11,447				31,153
		$	204,943			$	235,141

 

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 had been in payment default since March 19, 2010; however, on May 3, 2017, the Company agreed to pay back the line of credit by October 2, 2017.

 

The balance outstanding on the revolving note at June 30, 2017 and December 31, 2016 was $193,496 and $203,988, respectively.

 

On October 4, 2016, the Company signed a revenue based factoring agreement (the “Note) with Imperial Advance, LLC. The company received proceeds of $40,000 and agrees to pay $52,400 of future receivables. The debenture is secured by an officer of the Company.

 

The balance outstanding on the revenue based factoring agreement at June 30, 2017 and December 31, 2016 was $11,447 and $31,153, respectively.

 

 

Note 6 –Note Payable

 

Notes payable as of June 30, 2017 and December 31, 2016 is as follows:

 

		Outstanding Principal as of														Warrants
		June 30, 2017				December 31, 2016				Interest Rate				Maturity Date		Quantity				Exercise Price
October 25, 2016			25,000				25,000				9	%		July 1, 2017			50,000				0.30
February 22, 2017			975,510				-				12	%		September 1, 2017			6,161,615				0.20
June 2, 2017			50,000				-				15	%		July 1, 2017			25,000				0.20
June 8, 2017			25,000				-				15	%		July 8, 2017			12,500				0.20
			1,075,510				25,000
Less: Debt Discount			(284,249	)			(9,421	)
Less: Debt Issuance Costs			(52,856	)			-
		$	738,405			$	15,579

 

On October 25, 2016, the Company entered into a loan agreement (the “October 2016 Loan Agreement”) with an individual (the “October 2016 Lender”), pursuant to which on October 25, 2016 (the “Closing Date”), the Lender issued the Company a promissory note of $25,000 (the “October 2016 Note”). Pursuant to the October 2016 Loan Agreement, the October 2016 Note bears interest at a rate of 9% per annum. As additional consideration for entering in the October 2016 Loan Agreement, the Company issued the October 2016 Lender a five-year warrant to purchase 50,000 shares of the Company’s common stock at a price of $0.30 per share . The maturity date of the October 2016 Note was July 1, 2017 (the “October 2016 Note Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the October 2016 Note were due. As of the date of this filing the October 2016 Loan was repaid.

 

 On June 2, 2017, the Company entered into a loan agreement (the “First June 2017 Loan Agreement”) with an individual (the “First June 2017 Lender”), the First June 2017 Lender issued the Company a promissory note of $50,000 (the “First June 2017 Note”). The First June 2017 Note is secured by an officer of the Company. Pursuant to the First June 2017 Loan Agreement, the First June 2017 Note bears interest at a rate of 15% per annum. As additional consideration for entering in the First June 2017 Loan Agreement, the Company issued the First June 2017 Lender a five-year warrant to purchase 25,000 shares of the Company’s common stock with an exercise price of $0.20 per share The maturity date of the First June 2017 Note was July 1, 2017 (the “First June 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First June 2017 Note were due. As of the date of this filing the First June 2017 Note was repaid.

 

 On June 8, 2017, the Company entered into a loan agreement (the “Second June 2017 Loan Agreement”) with an individual (the “Second June 2017 Lender”), the Second June 2017 Lender issued the Company a promissory note of $25,000 (the “Second June 2017 Note”). The Second June 2017 Note is secured by an officer of the Company. Pursuant to the Second June 2017 Loan Agreement, the Second June 2017 Note bears interest at a rate of 15% per annum. As additional consideration for entering in the Second June 2017 Loan Agreement, the Company issued Second June 2017 Lender a five-year warrant to purchase 12,500 shares of the Company’s common stock at a purchase price of $0.20 per share. The maturity date of the Second June 2017 Note was July 8, 2017 (the “Second June 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts were due. As of the date of this filing the Second June 2017 Note was repaid.

 

Private Placement Offering:

 

On February 22, 2017, the Company conducted the initial closing (the “Initial Closing”) of a private placement offering (the “February 2017 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 February 2017 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 (the “February 2017 Offering Notes”) with an original issue discount of six percent (6%) and warrants to purchase the Company’s common stock (the “February 2017 Offering Warrants”). Pursuant to the Subscription Agreements, the Company issued $975,511 aggregate principal amount of the February 2017 Offering Notes due on September 1, 2017 and warrants to purchase shares of the Company’s common stock for aggregate gross proceeds of $916,585.

 

 

The February 2017 Offering 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 February 2017 Offering Warrants have a five-year term. Investors received the February 2017 Offering 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 February 2017 Offering received a February 2017 Offering 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 February 2017 Offering 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 February 2017 Offering Notes and the February 2017 Offering Warrants.

 

Note 7 – Convertible Note Payable

 

Convertible notes payable as of June 30, 2017 and December 31, 2016 is as follows:

 

		Outstanding Principal as of																Warrants
		June 30, 2017				December 31, 2016				Interest Rate				Conversion Price		Maturity Date		Quantity				Exercise Price
November - December, 2016			400,000				400,000				10	%		0.30		November 1, 2017			400,000				0.30
December 27, 2016			100,000				100,000				10	%		0.30		December 27, 2017			100,000				0.30
June, 2017			121,500				-				12	%		Not Applicable		September 1, 2017			114,700				0.20
			621,500				500,000
Less: Debt Discount			(124,403	)			(184,398	)
Less: Debt Issuance Costs			(44,069	)			(46,779	)
		$	453,028			$	268,823

 

During the months of November and December 2016, the Company issued convertible notes to third party lenders totaling $400,000. The notes accrue interest at 10% per annum and mature with interest and principal both due on November 1, 2017 through December 29, 2017 . The notes and accrued interest are convertible at a conversion price as defined therein. In addition, in connection with the notes the Company issued five-year warrants to purchase an aggregate of 400,000 shares of Company common stock at a purchase price of $0.30 per share.

 

On December 27, 2016, the Company issued a convertible note to a third party lender totaling $100,000 (the “December 2016 Note”). The December 2016 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 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. The December 2016 Note and accrued interest are convertible at a conversion price of $0.30 per share, subject to adjustment.

 

During the month of June, 2017 the Company issued convertible notes to third party lenders totaling $121,500. The notes accrue interest at 12% per annum and mature with interest and principal both due on September 1, 2017. The notes and accrued interest may be converted into a subsequent offering at a 15% discount to the offering price are convertible at a conversion price as defined therein. In addition, the Company issued warrants to purchase 102,550 shares of Company common stock. The warrants entitle the holders to purchase the Company’s common stock at a purchase price of $0.20 per share for a period of five years from the issue date.

 

As of June 30, 2017, the total outstanding balance of such convertible notes payable was $453,028, net of debt discount and debt issuance costs of $124,403 and $44,069, respectively.

 

 

Note 8 – Related Party Loan

 

Convertible notes

 

Convertible notes payable – related party as of June 30, 2017 and December 31, 2016 is as follows:

 

		Outstanding Principal as of														Warrants
		June 30, 2017				December 31, 2016				Interest Rate				Maturity Date		Quantity				Exercise Price
April 25, 2017			25,000				-				12	%		September 1, 2017			17,500				0.20
April 25, 2017			25,000				-				12	%		September 1, 2017			17,500				0.20
			50,000				-
Less: Debt Discount			(1,096	)			-
		$	48,904			$	-

 

On April 25, 2017, the Company issued convertible notes to Arthur Rosen, a lender, totaling $25,000 (the “April Rosen Note”). The April Rosen Notes accrue interest at 12% per annum and mature with interest and principal both due on September 1, 2017. In addition, in connection with the April Rosen Notes, the Company issued a five-year warrant to purchase 17,500 shares of Company common stock at a purchase price of $0.20 per share. The April Rosen Notes and accrued interest may be converted into a subsequent offering at a 15% discount to the offering price as defined.

 

On April 25, 2017, the Company issued a convertible note to Chris Gordon, a lender totaling $25,000 (the “April Gordon Notes”). The April Gordon Notes accrue interest at 12% per annum and matures with interest and principal both due on September 1, 2017. In addition, the Company issued a five-year warrant to purchase 17,500 shares of Company common stock at a purchase price of $0.20 per share. The April Gordon Notes and accrued interest may be converted into a subsequent offering at a 15% discount to the offering price.

 

As of June 30, 2017, the total outstanding balance of the April Rosen Notes and April Gordon Notes - related party was $ 48,904, net of debt discount of $1,096.

 

Notes payable

  

Notes payable – related party as of June 30, 2017 and December 31, 2016 is as follows:

 

		Outstanding Principal as of														Warrants
		June 30, 2017				December 31, 2016				Interest Rate				Maturity Date		Quantity				Exercise Price
May 26, 2016			1,000,000				1,000,000				13	%		November 26, 2017			1,000,000				0.40
September 12, 2016			40,000				100,000				12	%		November 22, 2017			17,500				0.20
September 20, 2016			-				10,000				10	%		March 20, 2017			235,000				0.40
October 13, 2016			50,000				50,000				12	%		November 22, 2017			50,000				0.40
October 24, 2016			15,000				15,000				9	%		January 1, 2018			30,000				0.30
October 31, 2016			-				10,000				10	%		November 10, 2016			10,000				0.30
November 22, 2016			225,000				225,000				10	%		November 22, 2017			750,000				0.30
December 21, 2016			50,000				50,000				10	%		November 22, 2017			166,666				0.30
January 25, 2017			50,000				-				10	%		January 1, 2018			50,000				0.30
March 2, 2017			10,000				-				10	%		January 21, 2018			10,000				0.30
April 12, 2017			10,000				-				10	%		January 21, 2018			17,500				0.20
April 12, 2017			10,000				-				10	%		September 1, 2017			17,500				0.20
May 4, 2017			15,000				-				12	%		September 1, 2017			10,500				0.30
May 11, 2017			20,000				-				10	%		September 30, 2017			20,000				0.20
June 26, 2017			30,000				-				10	%		January 21, 2018			22,500				0.20
			1,525,000				1,460,000
Less: Debt Discount			(2,533	)			(94,675	)
		$	1,522,467			$	1,365,325

 

On May 26, 2016, the Company entered into a loan agreement (the “May 2016 Rosen Loan Agreement”) with Arthur Rosen, an individual (“Rosen”), pursuant to which on May 26, 2016 (the “Closing Date”), Rosen provided the Company a secured term loan of $1,000,000 (the “May 2016 Rosen Loan”). In connection with the May 2016 Rosen Loan Agreement, on May 26, 2016, the Company and Rosen entered into a security agreement (the “Rosen Security Agreement”), pursuant to which the Company granted to Rosen a senior security interest in substantially all of the Company’s assets as security for repayment of the May 2016 Rosen Loan. Pursuant to the May 2016 Rosen Loan Agreement, the May 2016 Rosen Loan bears interest at a rate of 12.5% per annum, compounded annually and payable on the maturity date of May 26, 2017 (the “May 2016 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the May 2016 Rosen Loan are due. The Company entered into an amendment to the May 2016 Rosen Loan extending the May 2016 Rosen Maturity Date to November 26, 2017. As additional consideration for entering in the May 2016 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase 1,000,000 shares of the Company’s common stock at a purchase price of $0.40 per share (the “May 2016 Rosen Warrant”). The May 2016 Rosen Warrant contains anti-dilution provisions as further described therein.

 

On September 12, 2016, the Company entered into a loan agreement (the “September 2016 Rosen Loan Agreement”) with Rosen, pursuant to which on September 12, 2016 (the “Closing Date”), the Company issued Rosen a promissory note of $100,000 (the “September 2016 Rosen Note”). Pursuant to the September 2016 Rosen Loan Agreement, the September 2016 Rosen Note bears interest at a rate of 12% per annum. As additional consideration for entering in the September 2016 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase 150,000 shares of the Company’s common stock at a purchase price of $0.40 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the September 2016 Rosen Note are due on the maturity date. The original maturity date of the September 2016 Rosen Note was October 12, 2016. The Company entered into an amendment to the September 2016 Rosen Note , extending maturity date to November 22, 2017.

  

On October 13, 2016, the Company entered into a loan agreement (the “October 2016 Gordon Loan Agreement”) with Chris Gordon, an individual (the “Gordon”), pursuant to which on October 13, 2016 (the “Closing Date”), the Company issued a promissory note of $50,000 to Gordon (the “October 2016 Gordon Note”). Pursuant to the October 2016 Gordon Loan Agreement, the October 2016 Gordon Note bears interest at a rate of 12% per annum. As additional consideration for entering in the October 2016 Gordon Loan Agreement, the Company issued Gordon a five-year warrant to purchase 50,000 shares of the Company’s common stock at a purchase price of $0.40 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the October 2016 Gordon Note are due on the November 12, 2016 (the “October 2016 Gordon Note Maturity Date”). The Company entered into an amendment to the October 2016 Gordon Note, extending the October 2016 Gordon Note Maturity Date to November 22, 2017.

 

On October 24, 2016, the Company entered into a loan agreement (the “October 2016 Schiller Loan Agreement”) with Leonard Schiller, a Board Member (the “Schiller”), pursuant to which on October 24, 2016 (the “Closing Date”), the Company issued Schiller a promissory note of $15,000 (the “October 2016 Schiller Note”). Pursuant to the October 2016 Schiller Loan Agreement, the October 2016 Schiller Note bears interest at a rate of 9% per annum. As additional consideration for entering in the October 2016 Schiller Loan Agreement, the Company issued Schiller a 5-year warrant to purchase 30,000 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the October 2016 Schiller Note were due July 1, 2017 (the “October 2016 Schiller Note Maturity Date”). The Company entered into an amendment to the October 2016 Schiller Note, extending the October 2016 Schiller Note Maturity Date to January 1, 2018..

 

On October 31, 2016, the Company entered into a loan agreement (the “October 2016 Rosen Loan Agreement”) with Rosen, pursuant to which on October 31, 2016 (the “Closing Date”), Company issued Rosen a promissory note of $10,000 (the “October 2016 Rosen Note”). Pursuant to the October 2016 Rosen Loan Agreement, the October 2016 Rosen Note bears interest at a rate of 10% per annum. As additional consideration for entering in the October 2016 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase 10,000 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the October 2016 Rosen Note were due on November 10, 2016 (the “October 2016 Rosen Note Maturity Date”). The Company entered into an amendment to the October 2016 Rosen Note and the October 2016 Rosen Note Maturity Date was extended to January 1, 2018.

 

On December 21, 2016, the Company entered into a loan agreement (the “December 2016 Gordon Loan Agreement”) with Gordon, pursuant to which on December 21, 2016 (the “Closing Date”), the Company issued Gordon a promissory note of $275,000 (the “December 2016 Gordon Note”). Pursuant to the December 2016 Gordon Loan Agreement, the December 2016 Gordon Note bears interest at a rate of 10% per annum. As additional consideration for entering in the December 2016 Gordon Loan Agreement, the Company issued Gordon a five-year warrant to purchase 166,666 shares of the Company’s common stock at a purchase price of $0.40 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the Loan were due on January 20, 2017 (the “December 2016 Gordon Note Maturity Date”). The Company entered into an amendment to the December 2016 Gordon Note, extending the December 2016 Gordon Note Maturity Date to November 22, 2017.

 

On January 25, 2017, the Company entered into a loan agreement (the “January 2017 Rosen Loan Agreement”) with Rosen pursuant to which on January 25, 2017 (the “Closing Date”), the Company issued Rosen a promissory note of $50,000 (the “January 2017 Rosen Note”). The January 2017 Rosen Note is secured by an officer of the Company. Pursuant to the January 2017 Rosen Loan Agreement, the January 2017 Rosen Note bears interest at a rate of 10% per annum. As additional consideration for entering in the January 2017 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase 50,000 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the January 2017 Rosen Note were due July 1, 2017 (the January 2017 Rosen Note Maturity Date. The Company entered into an amendment to the January 2017 Rosen Note, extending the January 2017 Rosen Note Maturity Date to January 1, 2018.

 

On January 26, 2017, the Company entered into a loan agreement (the “January 2017 Gordon Loan Agreement”) with Gordon pursuant to which on January 26, 2017 (the “Closing Date”), the Company issued Gordon a promissory note of $50,000 (the “January 2017 Gordon Note”). The January 2017 Gordon Note is secured by an officer of the Company. Pursuant to the January 2017 Gordon Loan Agreement, the January 2017 Gordon Note bears interest at a rate of 10% per annum. As additional consideration for entering in the January 2017 Gordon Loan Agreement, the Company issued Gordon a five-year warrant to purchase 50,000 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the January 2017 Gordon Note are due November 22, 2017.

 

 

On February 7, 2017, the Company entered into a loan agreement (the “February 2017 Schiller Loan Agreement”) with Schiller, a member of the Board, pursuant to which on October 24, 2016 (the “Closing Date”), the the Company issued Schiller a promissory note of $10,000 (the “February 2017 Schiller Note”). The February 2017 Schiller Note is secured by an officer of the Company. Pursuant to the February 2017 Schiller Loan Agreement, the February 2017 Schiller Note bears interest at a rate of 10% per annum. As additional consideration for entering in the February 2017 Schiller Note Loan Agreement, the Company issued Schiller a five-year warrant to purchase 10,000 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the February 2017 Schiller Note were due on May 7, 2017 (the “February 2017 Schiller Note”). The Company entered into an amendment to the February 2017 Schiller Note, extending the February 2017 Schiller Note Maturity Date to January 21, 2018.

 

On April 12, 2017, the Company entered into a loan agreement (the “April 2017 Schiller Loan Agreement”) with Schiller, a member of the Board, whereby the Company issued Schiller a promissory note of $10,000 (the “April 2017 Schiller Note”). The April 2017 Schiller Note is secured by an officer of the Company. Pursuant to the April 2017 Schiller Loan Agreement, the April 2017 Schiller Note bears interest at a rate of 10% per annum. As additional consideration for entering in the April 2017 Schiller Loan Agreement, the Company issued Schiller a five-year warrant to purchase 10,000 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the April 2017 Schiller Note are due on September 1, 2017.

 

On April 12, 2017, the Company entered into a loan agreement (the “April 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $10,000 (the “April 2017 Rosen Note”). The April 2017 Rosen Note is secured by an officer of the Company. Pursuant to the April 2017 Rosen Loan Agreement, the April 2017 Rosen Note bears interest at a rate of 10% per annum. As additional consideration for entering in the April 2017 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase 10,000 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the April 2017 Rosen Note were due on June 30, 2017 (“April 2017 Rosen Note Maturity Date”). The Company entered into an amendment to the April 2017 Rosen Note, extending the maturity date to January 21, 2018.

 

On May 4, 2017, the Company entered into a loan agreement (the “May 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $15,000 (the “May 2017 Rosen Note”). The May 2017 Rosen Note is secured by an officer of the Company. Pursuant to the May 2017 Rosen Note Loan Agreement, the May 2017 Rosen Note bears interest at a rate of 12% per annum. As additional consideration for entering in the May 2017 Rosen Note Loan Agreement, the Company issued Rosen a five-year warrant to purchase 10,500 shares of the Company’s common stock at a purchase price of $0.30 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the May 2017 Rosen Note are due on September 1, 2017.

 

On May 11, 2017, the Company entered into a loan agreement (the “May 2017 Schiller Loan Agreement”) with a Schiller, a member of the Board, whereby the Company issued Schiller a promissory note of $20,000 (the “May 2017 Schiller Note ”). Pursuant to the May 2017 Schiller Loan Agreement, the May 2017 Schiller Note bears interest at a rate of 10% per annum. As additional consideration for entering in the May 2017 Schiller Note Loan Agreement, the Company issued Schiller a five-year warrant to purchase 20,000 shares of the Company’s common stock at a purchase price of $0.20 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the May 2017 Schiller Note are due on September 30, 2017.

 

On June 26, 2017, the Company entered into a loan agreement (the “June 2017 Schiller Loan Agreement”) Schiller, a member of the Board, whereby the Company issued Schiller a promissory note of $30,000 (the “June 2017 Schiller Note”). Pursuant to the June 2017 Schiller Loan Agreement, the June 2017 Schiller Note bears interest at a rate of 10% per annum. As additional consideration for entering in the June 2017 Schiller Loan Agreement, the Company issued Schiller a five-year warrant to purchase 22,500 shares of the Company’s common stock at a purchase price of $0.20 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the June 2017 Schiller Note were due on July 3, 2017 (“June 2017 Schiller Note Maturity Date”). The Company entered into an amendment to the June 2017 Schiller Note extending the Maturity Date to January 21, 2018.

 

As of June 30, 2017, the total outstanding balance of related party notes payable was $1,522,467, net of debt discount of $2,533. 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.

 

 

Line of credit

 

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%.

 

On May 09, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $56,000 in favor Grawlin, LLC. 

 

On May 16, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $30,000 in favor Grawlin, LLC. 

 

On May 22, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $6,000 in favor Grawlin, LLC. 

 

On May 25, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $35,000 in favor Grawlin, LLC. 

 

On June 16, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $3,000 in favor Grawlin, LLC. 

 

As of June 30, 2017, the total outstanding balance of line of credit - related party was $130,000.

 

Note 9 – Capital Leases Payable

 

Capital lease obligation consisted of the following:

 

				June 30, 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 June 30, 2017. The Company had no financial assets measured at fair value on a recurring basis as of June 30, 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 June 30, 2017.

 

		Low				High
Annual dividend rate			0	%			0	%
Expected life			0.34				0.83
Risk-free interest rate			1.14	%			1.93	%
Expected volatility			88.89	%			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 June 30, 2017.

 

		Three Months Ended June 30, 2017
		Level 1				Level 2				Level 3
Derivative liabilities as January 1, 2017		$	-			$	-			$	-
Addition			-				-				1,529,414
Conversion			-				-
Loss on changes in fair value			-				-				(584,011	))
Derivative liabilities as June 30, 2017		$	-			$	-			$	945,403

 

Note 11 - Stockholders’ Deficit

 

Shares Authorized

 

Upon incorporation, the total number of shares of all classes of stock which the Company is authorized to issue is Three Hundred Twenty Million (320,000,000) shares of which Three Hundred Million (300,000,000) shares shall be Common Stock, par value $0.001 per share and Twenty Million (20,000,000) 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.

 

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.

 

During the six months ended June 30, 2017, the Company converted 1,148 shares of Series A for 700,000 shares of common stock.

 

 

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 June 30, 2017, the Company accrued $0 for liquidating damages on the Series A and $0 on the warrants associated with the Series A. 

 

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. 

 

During the six months ended June 30, 2017, the Company accrued $0 for liquidating damages on the Series B and $0 on the warrants associated with the Series B.

 

During the six months ended June 30, 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.

   

 

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 June 30, 2017 and December 31, 2016 are as follows:

 

		June 30, 2017				December 31, 2016
Exercise price			0.20-0.75				0.25-0.40
Expected dividends			0	%			0	%
Expected volatility			63.72% - 92.14	%			73.44%-90.05	%
Risk free interest rate			1.81% - 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			15,399,990			$	0.43				4.89
Exercised			-				-				-
Cancelled/Modified			(100,000	)		$	0.40				-
Balance – June 30, 2017 – outstanding			17,549,990			$	0.42				4.77
Balance – June 30, 2017 – exercisable			8,883,322			$	0.27				4.65
Outstanding options held by related party – June 30, 2017			17,549,990			$	0.42				4.77
Exercisable options held by related party – June 30, 2017			8,883,322			$	0.27				4.65

 

At June 30, 2017, the aggregate intrinsic value of options outstanding and exercisable was $0 and $0, respectively.

 

Stock-based compensation for stock options has been recorded in the condensed consolidated statements of operations and totaled $463,619 and $0, for the three months ended June 30, 2016 and 2015, respectively.

 

The following is a summary of the Company’s stock options granted during the six months ended June 30, 2017:

 

Options				Value				Purpose for Grant
	15,399,990			$	457,179			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 June 30, 2017 are as follows:

 

		June 30, 2017			December 31, 2016
Exercise price		$	0.20-0.30		$	0.40
Expected dividends			0	%		0	%
Expected volatility			62.63%-92.96	%		73.44-91.54	%
Risk free interest rate			1.77%-2.03	%		1.13%-1.39	%
Expected life of warrant			5 years			5 years

 

 

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			6,531,815			$	0.20
Exercised			-			$	-
Forfeited/Cancelled			-			$	-
Outstanding – June 30, 2017			22,073,481			$	0.31
Exercisable – June 30, 2017			22,073,481			$	0.31

  

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				22,073,481				3.70				0.31			22,073,481			0.31

 

During the six months ended June 30, 2017, a total of 6,199,115.00 warrants were issued with promissory notes (See Note 6 above). The warrants have a grant date fair value of $844,686 using a Black-Scholes option-pricing model and the above assumptions.

 

During the six months ended June 30, 2017, a total of 114,700.00 warrants were issued with convertible notes (See Note 7 above). The warrants have a grant date fair value of $14,214.28 using a Black-Scholes option-pricing model and the above assumptions.

 

During the six months ended June 30, 2017, a total of 183,000 warrants were issued with notes payable – related party (See Note 8 above). The warrants have a grant date fair value of $15,650 using a Black-Scholes option-pricing model and the above assumptions.

 

 During the six months ended June 30, 2017, a total of 35,000 warrants were issued with convertible notes payable – related party (See Note 8 above). The warrants have a grant date fair value of $2,245 using a Black-Scholes option-pricing model and the above assumptions.

 

Note 12 - Subsequent Events

 

On July 6, 2017, the Company entered into a loan agreement (the “July 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $25,000 (the “May 2017 Rosen Note”). The July 2017 Rosen Note is secured by an officer of the Company. Pursuant to the July 2017 Rosen Note Loan Agreement, the July 2017 Rosen Note bears interest at a rate of 10% per annum. As additional consideration for entering in the July 2017 Rosen Note Loan Agreement, the Company issued Rosen a five-year warrant to purchase 18,750 shares of the Company’s common stock at a purchase price of $0.20 per share. All outstanding principal, accrued and unpaid interest and other amounts due under the July 2017 Rosen Note are due on July 21, 2017. The Company entered into an amendment to the July 2017 Rosen Note, extending the maturity date to January 21, 2018.

 

On July 11, 20176, the Company issued a convertible note to a third party lender totaling $222,000 (the “First July 2017 Note”). The First July 2017 Note accrues interest at 8.5% per annum and matures with interest and principal both due on April 11, 2018. In addition, the Company issued a warrant to purchase 350,000 shares of Company common stock. The warrant entitles the holder to purchase the Company’s common stock at a purchase price of $0.20 per share for a period of five years from the issue date. The First July 2017 Note and accrued interest are convertible after January 11, 2018 at a conversion price of $0.20 per share, subject to adjustment. In connection with the First July 2017 Note the lender purchased 110,000 shares of the Company’s restricted common stock for proceeds of $22,000.

 

On July 18, 2017, the Company issued a convertible note to a third party lender totaling $222,000 (the “Second July 2017 Note”). The Second July 2017 Note accrues interest at 8.5% per annum and matures with interest and principal both due on April 18, 2018. In addition, the Company issued a warrant to purchase 350,000 shares of Company common stock. The warrant entitles the holder to purchase the Company’s common stock at a purchase price of $0.20 per share for a period of five years from the issue date. The Second July 2017 Note and accrued interest are convertible after January 11, 2018 at a conversion price of $0.20 per share, subject to adjustment. In connection with the Second July 2017 Note the lender purchased 110,000 shares of the Company’s restricted common stock for proceeds of $22,000.

 

On July 21, 2017, the Company entered into a loan agreement (the “Third July 2017 Loan Agreement”) with an individual (the “Third July 2017 Lender”), the Third July 2017 Lender issued the Company a promissory note of $100,000 (the “Third July 2017 Note”). Pursuant to the Third July 2017 Loan Agreement, the Third July 2017 Note bears interest at a rate of 10% per annum. As additional consideration for entering in the Third July 2017 Loan Agreement, the Company issued the Third July 2017 Lender a five-year warrant to purchase 100,000 shares of the Company’s common stock with an exercise price of $0.20 per share. The maturity date of the Third July 2017 Note is May 21, 2017 (the “Third June 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Third June 2017 Note are due.

 

On July 24, 2017, the Company issued a convertible note to a third party lender totaling $50,000 (the “Fourth July 2017 Note”). The Fourth July 2017 Note accrues interest at 8.5% per annum and matures with interest and principal both due on April 24, 2018. In addition, the Company issued a warrant to purchase 78,750 shares of Company common stock. The warrant entitles the holder to purchase the Company’s common stock at a purchase price of $0.20 per share for a period of five years from the issue date. The Fourth July 2017 Note and accrued interest are convertible after January 24, 2018 at a conversion price of $0.20 per share, subject to adjustment. In connection with the Fourth July 2017 Note the lender purchased 25,000 shares of the Company’s restricted common stock for proceeds of $5,000.

 

Subsequent to June 30, 2017, a Series A preferred note holder elected to convert $27,500 of principal and $4,711 of dividends into 196,407 shares of the company’s common stock. 

 

 

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 six months ended June 30, 2017 and 2016, included elsewhere in this report.

  

We are an Internet technology company focused on the development of communities, marketing branded digital content, and e-commerce opportunities. Our flagship product is “Vocal”, a proprietary long form social publishing platform, with our second product “What To Buy”, a curated social shopping network, in beta production.

 

Vocal enables content creators to reach an engaged audience through our growing portfolio of genre-specific branded websites. By creating communities of engaged, topically focused users through our social platform content creation process, we provide advertisers and marketers access to targeted markets of engaged customers. Content, which includes articles, e-books, videos, and imagery, film and television projects, is derived from external and internal content providers creators and external collaborations. Heretofore, revenue has been generated through the sale of memorabilia from the company owned Guccione property of more than 250,000 items. We commenced the commercial launch of our Vocal platform in November 2016 with six platforms communities and increased the number of platforms communities to 12 18, and we also beta tested the next generation product update of Vocal, designed to activate revenue sources, Vocal 2.0, during the first quarter in 2017. We completed the rollout of Vocal 2.0 subsequent to the end of the second quarter 2017 in August 2017. We intend to generate revenue through: (i) the sale of advertising, native advertising and affiliate marketing related to our content; (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; (iv) micropayments; and (v) SaaS model for Vocal’s proprietary technology.

 

Demand and pricing for our advertising depends on our user base and overall market conditions. 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.

 

 

Results of Operations

 

Summary of Statements of Operations for the Three-Month Period Ended June 30, 2017 and 2016:

 

		Three Month Period Ended
		June 30, 2017				June 30, 2016
Net revenue		$	52,259			$	63,932
Gross margin		$	52,259			$	55,009
Operating expenses		$	(999,878	)		$	(1,071,457	)
Loss from operations		$	(947,619	)		$	(1,016,448	)
Other expenses		$	(347,660	)		$	(4,380,434	)
Net loss		$	(1,295,279	)		$	(5,396,882	)
Loss per common share – basic and diluted		$	(0.03	)		$	(0.17	)

   

Net Revenue

 

Net revenue was $52,259 for the three-month period ended June 30, 2017, as compared to $63,932 for the comparable three-month period ended June 30, 2016, a decrease of $11,673. 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 on the development of its proprietary Vocal software platform to support the scalability of its business model. The Company expects revenue derived from its Vocal platform websites as well as sales of artwork and memorabilia related to the Guccione Acquisition to increase in 2017.

 

Gross Profit

 

Gross profit percentage increased from a gross profit of 86% during the three-month period ended June 30, 2016, to a gross profit of 100% during the three-month period ended June 30, 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 June 30, 2017 were $999,878 as compared to $1,071,457 for the three-month period ended June 30, 2016. The decrease of $71,579 in operating expenses is a result of a $85,005 decrease in General and Administrative expenses related to the development and launch of its Vocal platform and a $368,324 decrease in consulting and professional fees related to becoming a publicly traded company, which were partially offset by an increase in compensation of $381,748 which includes charges of $440,642 related to option grants to company executives and employees.

 

Loss from Operations

 

Loss from operations for the three-month period ended June 30, 2017 was $947,619 as compared to loss of $1,016,448 for the three-month period ended June 30, 2016. The decrease in net loss is primarily attributable to a decrease 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 June 30, 2017 was $(347,660), as compared to $(4,380,434) for the three-month period ended June 30, 2016. Other expenses during the three-month period ended June 30, 2017 was comprised of interest expense of $(707,904) on notes payable. These expenses were offset by the gain on derivative liability of $360,244 as recorded during the three-month period ended June 30, 2017. During the three-month period ended June 30, 2016, other expenses were comprised of interest expense of $(4,380,434).

 

 

Net Loss

 

Net loss attributable to common shareholder for three-month period ended June 30, 2017, was $1,295,279, or loss per share of $0.03, as compared to a net loss of $5,396,882, or loss per share of $0.17, for the three-month period ended June 30, 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. 

 

Summary of Statements of Operations for the Six-Month Period Ended June 30, 2017 and 2016:

 

		Six Month Period Ended
		June 30, 2017				June 30, 2016
Net revenue		$	94,101			$	184,640
Gross margin		$	94,101			$	141,319
Operating expenses		$	(2,069,731	)		$	(1,776,303	)
Loss from operations		$	(1,975,630	)		$	(1,634,984	)
Other expenses		$	(877,322	)		$	(4,413,588	)
Net loss		$	(2,852,952	)		$	(6,048,57	))
Loss per common share – basic and diluted		$	(0.08	)		$	(0.20	)

   

Net Revenue

 

Net revenue was $94,101 for the six-month period ended June 30, 2017, as compared to $184,640 for the comparable six-month period ended June 30, 2016, a decrease of $90,539. 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 on the development of its proprietary Vocal software platform to support the scalability of its business model. The Company expects revenue derived from its Vocal platform websites as well as sales of artwork and memorabilia related to the Guccione Acquisition to increase in 2017.

 

Gross Profit

 

Gross profit percentage increased from a gross profit of 76% during the six-month period ended June 30, 2016, to a gross profit of 100% during the six-month period ended June 30, 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 six-month period ended June 30, 2017 were $2,069,731 as compared to $1,776,303 for the six-month period ended June 30, 2016. The increase of $293,428 in operating expenses is a result of a $377,968 increase in compensation, which includes charges of $440,642 related to option grants to company executives and employees, and an $88,897 increase in General and Administrative expenses related to the development and launch of its Vocal platform, which was partially offset by a $337,437 decrease in consulting and professional fees related to becoming a publicly traded company.

 

 

Loss from Operations

 

Loss from operations for the six-month period ended June 30, 2017 was $1,975,630 as compared to loss of $1,634,984 for the six-month period ended June 30, 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 six-month period ended June 30, 2017 was $(877,322), as compared to $(4,413,588) for the six-month period ended June 30, 2016. Other expenses during the six-month period ended June 30, 2017 was comprised of interest expense of $(1,350,659) 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 $584,011 as recorded during the six-month period ended June 30, 2017. During the six-month period ended June 30, 2016, other expenses were comprised of interest expense of $(4,413,588).

 

Net Loss

 

Net loss attributable to common shareholder for six-month period ended June 30, 2017, was $ 2,852,952, or loss per share of $0.08, as compared to a net loss of $6,048,572, or loss per share of $0.20, for the six-month period ended June 30, 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. 

  

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at June 30, 2017 compared to December 31, 2016:

 

		June 30, 2017				December 31, 2016				Increase/(Decrease)
Current Assets		$	5,277			$	184,494			$	(179,217	)
Current Liabilities		$	5,518,274			$	3,544,996			$	1,973,278
Working Capital Deficit		$	(5,512,997	)		$	(3,360,502	)		$	(2,152,495	)

 

At June 30, 2017, we had a working capital deficit of $5,512,997, as compared to a working capital deficit of $3,360,502 at June 30, 2016, an increase of $2,152,495. The increase is primarily attributable to the derivative liability of $945,403 recorded as of June 30, 2017. 

 

Net Cash

 

Net cash used in operating activities for the six-month period ended June 30, 2017 and 2016, was $1,386,370 and $1,341,232, respectively. The net loss for the six-month period ended June 30, 2017 and 2016 was $2,852,952 and $6,048,572, 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 $18,704, share-based compensation of $627,619, the accretion of debt discount and debt issuance costs of $951,483, 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 $77,642 and the change in fair value of the derivative liability of $(584,010), respectively.

 

 

Net cash used in investing activities for the six-month period ended June 30, 2017 and 2016 was $0 and $43,956 for the purchase of property and equipment.

 

Net cash provided by financing activities for the six-month period ended June 30, 2017 and 2016 was $1,217,153 and $1,092,833. During the 2017 period, the Company was predominantly financed by issuance of notes and related party notes of $991,585 and $185,000, respectively. These increases were offset by repayment of related party notes and line of credit of $120,000 and $41,706, respectively. The Company also paid $99,226 for debt issuance costs during the 2017 six-month period. During the 2016 period, the Company was predominantly financed by issuance of notes and preferred stock.

 

Off-Balance Sheet Arrangements 

 

As of June 30, 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.

  

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 June 30, 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.  

 

 

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 June 30, 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.

 

None.

 

 

Item 6. Exhibits.

  

Exhibit No.		Description
4.1		Form of Warrant to purchase Common Stock (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on July 20, 2017)
10.2		Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on July 20, 2017)
10.3		Form of 8.5% Convertible Redeemable Debentures Due April 18, 2018 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on July 20, 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

  

 

 

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.

 

	JERRICK MEDIA HOLDINGS, INC.
Date: August 14, 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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