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EX-32.1 - CERTIFICATION - Creatd, Inc.f10k2017ex32-1_jerrickmedia.htm
EX-32.2 - CERTIFICATION - Creatd, Inc.f10k2017ex32-2_jerrickmedia.htm
EX-31.2 - CERTIFICATION - Creatd, Inc.f10k2017ex31-2_jerrickmedia.htm
EX-31.1 - CERTIFICATION - Creatd, Inc.f10k2017ex31-1_jerrickmedia.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2017

 

or

 

   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-51872

 

JERRICK MEDIA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   87-0645394
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. 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)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐    No ☒ 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

 

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐ 

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐ 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐ (Do not check if a smaller reporting company) 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 ☒ 

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2017, based on a closing price of $0.1622 was $3,853,263. As of May 15, 2018, the registrant had 40,524,432 shares of its common stock, par value $0.001 per share, outstanding.

 

Documents Incorporated By Reference: None

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
PART I    
     
Item 1. Business 1
Item 1A. Risk Factors 3
Item 1B. Unresolved Staff Comments 13
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Mine Safety Disclosures 13
     
PART II    
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 14
Item 6. Selected Financial Data 16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data F-1
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 21
Item 9A. Controls and Procedures 21
Item 9B. Other Information 22
     
PART III    
     
Item 10. Directors, Executive Officers and Corporate Governance 23
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 27
Item 13. Certain Relationships and Related Transactions, and Director Independence 28
Item 14. Principal Accounting Fees and Services 33
     
PART IV    
     
Item 15. Exhibits, Financial Statements Schedules 34
     
SIGNATURES 38

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Included in this Annual Report on Form 10-K are “forward-looking” statements, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled “Risk Factors.” Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.

 

  

 

 

PART I

 

Item 1. Business.  

 

Corporate History and Overview

 

Jerrick Media Holdings, Inc. (“we,” “us,” the “Company,” or “Jerrick Media” or “Jerrick”) (formerly Great Plains Holdings, Inc. or “GTPH”) was incorporated under the laws of the state of Nevada on December 30, 1999 under the name LILM, Inc. The Company changed its name on December 3, 2013 to Great Plains Holdings, Inc. as part of its plan to diversify its business through the acquisition and operation of commercial real estate, including, but not limited to, self-storage facilities, apartment buildings, 55+ senior manufactured home communities, and other income producing properties. Historically, the Company principally engaged in the manufacture and marketing of the LiL Marc, a plastic boys’ toilet-training device, which we discontinued as of December 31, 2014.

 

On February 5, 2016 (the “Closing Date”), GTPH, GPH Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of GTPH (“Merger Sub”), and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), entered into an Agreement and Plan of Merger (the “Agreement”) pursuant to which the Merger Sub was merged with and into Jerrick, with Jerrick surviving as a wholly-owned subsidiary of GTPH (the “Merger”). GTPH acquired, through a reverse triangular merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 28,500,000 shares of GTPH’s common stock. GTPH assumed 33,415 shares of Jerrick’s Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred Stock (the “Jerrick Series B Preferred”).

 

In connection with the Merger, on the Closing Date, GTPH and Kent Campbell entered into a Spin-Off Agreement (the “Spin-Off Agreement”), pursuant to which Mr. Campbell purchased from GTPH (i) all of GTPH’s interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all of GTPH’s interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 781,818 shares of GTPH’s Common Stock held by Mr. Campbell. In addition, Mr. Campbell assumed all debts, obligations and liabilities of GTPH, including any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.

 

Effective February 28, 2016, GTPH entered into an Agreement and Plan of Merger (the “Statutory Merger Agreement”) with Jerrick, pursuant to which GTPH became the parent company of Jerrick Ventures, LLC, a wholly-owned operating subsidiary of Jerrick (the “Statutory Merger”).

 

Upon closing of the Merger on February 5, 2016, the Company changed its business plan to that of Jerrick Media.

 

On February 28, 2016, GTPH changed its name to Jerrick Media Holdings, Inc. to better reflect its new business strategy.

 

Jerrick Media Business

 

Jerrick Media Holdings Inc. develops technology-based solutions designed to solve for challenges that have resulted from disruption and evolution within the broad digital media and content generation environment. Its flagship product Vocal is a long-form, digital publishing platform focused on supporting content creators with content management tools that are embedded within digital communities. Vocal is architected to enable targeted marketing of branded content and e-commerce opportunities in long-form content. Vocal’s community sites are moderated by a dedicated team with a primary focus on creating healthy communities and identifying monetization opportunities within them. Vocal serves as a versatile home for content creators. The platform supports multiple forms of content such as: short videos, podcasts, music, and written word. This activity is expected to increase at a rapid pace. A fraction of creators achieve meaningful visibility for their content, and even fewer are rewarded financially. Jerrick Media Holdings’ product Vocal provides a solution for the creative community.

 

Jerrick Media Holdings, Inc. partners with content creators and brands that recognize difficulties inherent in the digital advertising space and are looking to capitalize on the branded content marketing opportunities available on publishing platforms like Vocal.

  

1

 

 

Through 2017 content creation continue to accelerate exponentially. Audiences continued to shift from traditional digital media to independent creator content. Traditional advertising business models continue to be threatened. The intrusive nature of display ads, which led to over 680 million ad-blockers installed and, is causing accelerated margin compression at the largest digital advertisers. Because of these tightening spreads, excessive traffic is required to successfully monetize content. Jerrick’s business model continues to view this opportunistically.

 

While management expects legacy assets that were acquired prior to the launch of Vocal to continue to contribute to revenues and generate strong margins we expect that the majority of revenues going forward will be generated by the Company’s technology. Jerrick’s diversified portfolio combines technology, data analytics and media related products to generate shareholder value. In addition to transactional revenues directly attributed to the long-form social platform, Jerrick will continue to monetize its core library of media assets as well as consult for brands and agencies through its suite of quantitative and fundamental analytics.

 

Our Strategy

 

We have developed a proprietary patent-pending technology platform, Vocal, designed to develop and cost-effectively acquire content that reaches audiences through our portfolio of genre-specific communities, as well as through other social and digital distribution channels. In addition to providing relevant and refreshing content, our technology is centered on efficiency and scalability in both input of content across a growing variety of topics, and output through a growing number of distribution methods. We believe our content-to-commerce model is an integral part of digital monetization. We focus on distribution of content through the Vocal platform that optimizes user-generated content through an algorithmically derived moderation process. Through the moderation process, we reduce manpower costs, and simultaneously increase our ability to publish content and rapidly produce genre-specific websites driven by usage data. Through these genre-specific websites, we are able to provide advertisers with a more transparent and targeted community for their brands, which we believe offers a very high value proposition. The Vocal platform and its proprietary technology can be white-labeled or licensed, to provide seamless integration to independent media companies and brands. We also use the Vocal platform for distribution and monetization of a substantial inventory of content featuring unpublished photographs, negatives, trademarks, videos, scripts, short stories, and articles across various genres. We believe we have a competitive advantage in the ownership of merchandising rights of such content which allows us to sell or license these properties.

  

As part of our strategy, we develop transmedia assets internally, in collaboration with other production and media companies, as well as with our expanding user base. The transmedia assets we produce, such as film, television, digital shorts, books, and comic series can be leveraged beyond digital media and can be distributed across multiple platforms and formats.

 

Our Website Communities

 

We are developing an ever-increasing number of genre-specific websites, designed to create self-sustaining communities, with each revolving around a specific topic or theme. The creation of these websites is driven by two factors: (i) the potential for monetization opportunities, and (ii) by the topical content provided by our users. All of these sites are powered by Vocal, our proprietary long-form digital publishing and content distribution platform.

 

Intellectual Property

 

We regard our technology and other proprietary rights as essential to our business. We rely on trade secrets, confidentiality procedures, contract provisions, and trademark law to protect our technology and intellectual property. We have also entered into confidentiality agreements with our consultants and corporate partners and intend to control access to and distribution of our products, documentation, and other proprietary information.

 

Protecting our Content from Copyright Theft

 

The theft of pictures, video and other entertainment content presents a significant challenge to our industry, and we have taken many steps to address this concern. Where possible, we make use of technological protection tools, such as encryption, to protect our content. Notwithstanding these efforts and the many legal protections that exist to combat piracy, the proliferation of content theft and technological tools with which to carry it out continue to escalate. The failure to obtain enhanced legal protections and enforcement tools could make it more difficult for us to adequately protect our intellectual property, which could negatively impact its value.

 

Competition

 

We face significant competition from many other websites. We face formidable competition in every aspect of our business, and particularly from other companies that seek to connect people with information on the web similar to ours, and provide them with relevant advertising. Although we face severe competition, we believe we have a competitive advantage in that the majority of our content is timeless, as opposed to many of our competitors, who focus mainly on providing timely content that has a limited lifespan, and therefore negligible long term monetization value. Competitive factors include:

 

  community cohesion, interaction and size;

 

  website or mobile platform and application ease-of-use and accessibility;

 

  user engagement;

 

  system reliability;

 

  reliability of delivery and payment; and

 

  quality of content.

 

2

 

 

We may be unable to compete successfully against current and future competitors. Some current and potential competitors have longer operating histories, larger user bases and greater brand recognition in other internet sectors than we do. Other online sites with similar business models may be acquired by, receive investments from, or enter into other commercial relationships with well-established and well-financed companies. As a result, some of our competitors with other revenue sources may be able to devote more resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote more resources to website, mobile platforms and applications and systems development than we can.

 

In addition, we compete with internet advertising companies, particularly in the areas of pay-for-performance and keyword-targeted internet advertising. Also, we may compete with companies that sell products and services online because these companies, like us, are trying to attract users to their websites to search for information about products and services and content like ours.

 

We also compete with destination websites that seek to increase their search-related traffic. These destination websites may include those operated by internet access providers, such as cable and DSL service providers. Because our users need to access our services through internet access providers, they have direct relationships with these providers. If an access provider or a computer or computing device manufacturer offers online services that compete with ours, the user may find it more convenient to use the services of the access provider or manufacturer. In addition, the access provider or manufacturer may make it hard to access our services by not listing them in the access provider’s or manufacturer’s own menu of offerings. Also, because the access provider gathers information from the user in connection with the establishment of a billing relationship, the access provider may be more effective than we are in tailoring services and advertisements to the specific tastes of the user. 

  

There has been a trend toward industry consolidation among our competitors, and so smaller competitors today may become larger competitors in the future. If our competitors are more successful than we are at generating traffic, our revenues may decline.

 

Where You Can Find More Information

 

Our corporate website address is located at https://jerrick.media/. We do not intend our website address to be an active link or to otherwise incorporate by reference the contents of the website into this Report. The public may read and copy any materials the Company files with the U.S. Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

  

Item 1A. Risk Factors.

 

RISK FACTORS

 

RISKS RELATED TO JERRICK MEDIA’S BUSINESS

 

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

 

As reflected in the accompanying audited consolidated financial statements, the Company had a net loss of approximately $8.8 million for the year ended December 31, 2017, and a working capital deficit and accumulated deficit of approximately $4.0 million and approximately $22.2 respectively, at December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur liabilities with certain related parties to sustain the Company’s existence.

 

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash, along with anticipated revenues, may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all.

 

In response to these problems, management has taken the following actions:

 

  seeking additional third party debt and/or equity financing;

 

  execute a plan to recapitalize the company;

 

  continue with the implementation of the business plan;

 

  generate new sales from international customers; and

 

  allocate sufficient resources to continue with advertising and marketing efforts.

 

In their report dated May 17, 2018, our independent auditors stated that our financial statements for the period ended December 31, 2017, were prepared assuming that we would continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 

3

 

 

We are not profitable and may never be profitable.

 

From inception through the present, we have been dependent on raising capital to support our working capital needs. During this same period, we have recorded net accumulated losses and are yet to achieve profitability. Our ability to achieve profitability depends upon many factors, including our ability to develop and commercialize our websites. There can be no assurance that we will ever achieve any significant revenues or profitable operations. 

 

Our operating expenses exceed our revenues and will likely continue to do so for the foreseeable future.

 

We are in the early stage of our development and we have not generated sufficient revenues to offset our operating expenses. Our operating expenses will likely continue to exceed our operating income for the foreseeable future, until such time as we are able to monetize our brands and generate substantial revenues, particularly as we undertake payment of the increased costs of operating as a public company.

  

Our Operating subsidiary has a limited operating history.

 

Our operating subsidiary has been in existence for approximately three years. Our limited operating history means that there is a high degree of uncertainty in our ability to: (i) develop and commercialize our products; (ii) achieve market acceptance; or (iii) respond to competition. Additionally, even if we do implement our business plan, we may not be successful. No assurances can be given as to exactly when, if at all, we will be able to recognize profits high enough to sustain our business. We face all the risks inherent in a new business, including the expenses, difficulties, complications, and delays frequently encountered in connection with conducting operations, including capital requirements. Given our limited operating history, we may be unable to effectively implement our business plan, which would result in a loss of your investment. 

 

WE have assumed A significant amount of debt and our operations may not be able to generate sufficient cash flows to meet our debt obligations, which could reduce our financial flexibility and adversely impact our operations.

 

Currently the Company has considerable convertible notes, related party notes and lines of credit outstanding with various debtors. Our ability to make payments on such indebtedness will depend on our ability to generate cash flow. The Company may not generate sufficient cash flow from operations to enable us to repay this indebtedness and to fund other liquidity needs, including capital expenditure requirements. Such indebtedness could affect our operations in several ways, including:

 

  a significant portion of our cash flows could be required to be used to service such indebtedness;

 

  a high level of debt could increase our vulnerability to general adverse economic and industry conditions;

 

  any covenants contained in the agreements governing such outstanding indebtedness could limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments;

 

  a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, our competitors may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and

 

  debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry.

 

4

 

 

A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flows to pay the principal or interest on our debt. If we cannot service or refinance our indebtedness, we may have to take actions such as selling significant assets, seeking additional equity financing (which will result in additional dilution to stockholders) or reducing or delaying capital expenditures, any of which could have a material adverse effect on our operations and financial condition. If we do not have sufficient funds and are otherwise unable to arrange financing, our assets may be foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.

 

We will need additional capital, which may be difficult to raise as a result of our limited operating history or any number of other reasons.

 

We expect that we will have adequate financing for the next 6 months. However, in the event that we exceed our expected growth, we would need to raise additional capital. There is no assurance that additional equity or debt financing will be available to us when needed, on acceptable terms or even at all. Our limited operating history makes investor evaluation and an estimation of our future performance substantially more difficult. As a result, investors may be unwilling to invest in us or such investment may be on terms or conditions which are not acceptable. In the event that we are not able to secure financing, we may have to scale back our growth plans or cease operations.

  

We depend on our key management personnel and the loss of their services could adversely affect our business.

 

We place substantial reliance upon the efforts and abilities of Jeremy Frommer, our Chief Executive Officer, and our other executive officers and directors. Though no individual is indispensable, the loss of the services of these executive officers could have a material adverse effect on our business, operations, revenues or prospects. We do not currently maintain key man life insurance on the lives of these individuals.

 

We have not adopted various corporate governance measures, and as a result stockholders may have limited protections against interested director transactions, conflicts of interest and similar matters.

 

Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of corporate management and the securities markets. Because our securities are not yet listed on a national securities exchange, we are not required to adopt these corporate governance measures and have not done so voluntarily in order to avoid incurring the additional costs associated with such measures. Among these measures is the establishment of independent committees of the Board of Directors. However, to the extent a public market develops for our securities, such legislation will require us to make changes to our current corporate governance practices. Those changes may be costly and time-consuming. Furthermore, the absence of the governance measures referred to above with respect to our Company may leave our shareholders with more limited protection in connection with interested director transactions, conflicts of interest and similar matters.

 

We face intense competition. If we do not provide digital content that is useful to users, we may not remain competitive, and our potential revenues and operating results could be adversely affected.

 

Our business is rapidly evolving and intensely competitive, and is subject to changing technologies, shifting user needs, and frequent introductions of new products and services. Our ability to compete successfully depends heavily on providing digital content that is useful and enjoyable for our users and delivering our content through innovative technologies in the marketplace.

 

We have many competitors in the digital content creation industry and media companies. Our current and potential competitors range from large and established companies to emerging start-ups. Established companies have longer operating histories and more established relationships with customers and users, and they can use their experience and resources in ways that could affect our competitive position, including by making acquisitions, investing aggressively in research and development, aggressively initiating intellectual property claims (whether or not meritorious) and competing aggressively for advertisers and websites. Emerging start-ups may be able to innovate and provide products and services faster than we can.

 

5

 

 

Additionally, our operating results would suffer if our digital content is not appropriately timed with market opportunities, or if our digital content is not effectively brought to market. As technology continues to develop, our competitors may be able to offer user experiences that are, or that are seen to be, substantially similar to or better than ours. This may force us to compete in different ways and expend significant resources in order to remain competitive. If our competitors are more successful than we are in developing compelling content or in attracting and retaining users and advertisers, our revenues and operating results could be adversely affected.

 

We face competition from traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our operating results.

 

In addition to internet companies, we face competition from companies that offer traditional media advertising opportunities. Most large advertisers have set advertising budgets, a very small portion of which is allocated to internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our operating results would be harmed.

  

Our business depends on strong brands and relationships, and if we are not able to maintain our relationships and enhance our brands, our ability to expand our base of users, advertisers and affiliates will be impaired and our business and operating results could be harmed.

 

We believe that maintaining and enhancing the “Filthy Media”, “OMNI”, “Geeks”, “Longevity”, and “Potent” brands is critical to expanding our base of users, advertisers and affiliates. Maintaining and enhancing our brands’ profiles may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain the “Filthy Media”, “OMNI”, “Geeks”, “Longevity”, and “Potent” brands’ profiles, or if we incur excessive expenses in this effort, our business and operating results could be harmed. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands’ profiles may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to be a technology leader and to continue to provide attractive products and services, which we may not do successfully.

 

We need to manage growth in operations to maximize our potential growth and achieve our expected revenues and our failure to manage growth will cause a disruption of our operations, resulting in the failure to generate revenue.

 

In order to maximize potential growth in our current and potential markets, we believe that we must expand our marketing operations. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

 

In order to achieve the general strategies of our company we need to maintain and search for hard-working employees who have innovative initiatives, while at the same time, keep a close eye on any and all expanding opportunities in our marketplace.

 

We plan to generate a significant portion of our revenues from advertising and affiliate sales relationships, and a reduction in spending by or loss of advertisers and general decrease in online spending could adversely harm our business.

 

We plan to generate a substantial portion of our revenues from advertisers. Our advertisers may be able to terminate prospective contracts with us at any time. Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would adversely affect our revenues and business. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. 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.  Adverse macroeconomic conditions can also have a material negative impact on the demand for advertising and cause our advertisers to reduce the amounts they spend on advertising, which could adversely affect our revenues and business.

 

6

 

 

Security breaches could harm our business.

 

Security breaches have become more prevalent in the technology industry. We believe that we take reasonable steps to protect the security, integrity and confidentiality of the information we collect, use, store and disclose, but there is no guarantee that inadvertent (e.g., software bugs or other technical malfunctions, employee error or malfeasance, or other factors) or unauthorized data access or use will not occur despite our efforts. Although we have not experienced any material security breaches to date, we may in the future experience attempts to disable our systems or to breach the security of our systems. Techniques used to obtain unauthorized access to personal information, confidential information and/or the systems on which such information is stored and/or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.

 

If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers and/or suffer other negative consequences to our business. A security breach could adversely affect the digital content experience and cause the loss or corruption of data, which could harm our business, financial condition and operating results. Any failure to maintain the security of our infrastructure could result in loss of personal information and/or other confidential information, damage to our reputation and customer relationships, early termination of our contracts and other business losses, indemnification of our customers, financial penalties, litigation, regulatory investigations and other significant liabilities. In the event of a major third-party security incident, we may incur losses in excess of their insurance coverage.

 

Moreover, if a high profile security breach occurs with respect to us or another digital entertainment company, our customers and potential customers may lose trust in the security of our business model generally, which could adversely impact our ability to retain existing customers or attract new ones.

 

The laws and regulations concerning data privacy and data security are continually evolving; our or our platform providers’ actual or perceived failure to comply with these laws and regulations could harm our business.

 

Customers view our content online, using third-party platforms and networks and on mobile devices. We collect and store significant amounts of information about our customers—both personally identifying and non-personally identifying information. We are subject to laws from a variety of jurisdictions regarding privacy and the protection of this player information. For example, the European Union (EU) has traditionally taken a broader view than the United States and certain other jurisdictions as to what is considered personal information and has imposed greater obligations under data privacy regulations. The U.S. Children’s Online Privacy Protection Act (COPPA) also regulates the collection, use and disclosure of personal information from children under 13 years of age. While none of our content is directed at children under 13 years of age, if COPPA were to apply to us, failure to comply with COPPA may increase our costs, subject us to expensive and distracting government investigations and could result in substantial fines.

 

Data privacy protection laws are rapidly changing and likely will continue to do so for the foreseeable future. The U.S. government, including the Federal Trade Commission and the Department of Commerce, is continuing to review the need for greater regulation over the collection of personal information and information about consumer behavior on the Internet and on mobile devices and the EU has proposed reforms to its existing data protection legal framework. Various government and consumer agencies worldwide have also called for new regulation and changes in industry practices. In addition, in some cases, we are dependent upon our platform providers to solicit, collect and provide us with information regarding our players that is necessary for compliance with these various types of regulations.

 

7

 

 

Customer interaction with our content is subject to our privacy policy and terms of service. If we fail to comply with our posted privacy policy or terms of service or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by governmental authorities or others, which could result in fines or judgments against us, damage our reputation, impact our financial condition and harm our business. If regulators, the media or consumers raise any concerns about our privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, and negatively impact our financial condition and damage our business.

 

In the area of information security and data protection, many jurisdictions have passed laws requiring notification when there is a security breach for personal data or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to implement. Our security measures and standards may not be sufficient to protect personal information and we cannot guarantee that our security measures will prevent security breaches. A security breach that compromises personal information could harm our reputation and result in a loss of confidence in our products and ultimately in a loss of customers, which could adversely affect our business and impact our financial condition. This could also subject us to liability under applicable security breach-related laws and regulations and could result in additional compliance costs, costs related to regulatory inquiries and investigations, and an inability to conduct our business.

  

If any of our relationships with internet search websites terminate, if such websites’ methodologies are modified or if we are outbid by competitors, traffic to our websites could decline.

 

We depend in part on various internet search websites, such as Google.com, Bing.com, Yahoo.com and other websites to direct a significant amount of traffic to our websites. Search websites typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings generally are determined and displayed as a result of a set of unpublished formulas designed by search engine companies in their discretion. Purchased listings generally are displayed if particular word searches are performed on a search engine. We rely on both algorithmic and purchased search results, as well as advertising on other internet websites, to direct a substantial share of visitors to our websites and to direct traffic to the advertiser customers we serve. If these internet search websites modify or terminate their relationship with us or we are outbid by our competitors for purchased listings, meaning that our competitors pay a higher price to be listed above us in a list of search results, traffic to our websites could decline. Such a decline in traffic could affect our ability to generate advertising revenue and could reduce the desirability of advertising on our websites.

 

Our business involves risks of liability claims arising from our media content, which could adversely affect our ability to generate revenue and could increase our operating expenses.

 

As a distributor of media content, we face potential liability for defamation, invasion of privacy, negligence, copyright or trademark infringement, obscenity, violation of rights of publicity and/or obscenity laws and other claims based on the nature and content of the materials distributed. These types of claims have been brought, sometimes successfully, against broadcasters, publishers, online services and other disseminators of media content. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could have a material adverse effect on us. In addition, measures to reduce our exposure to liability in connection with content available through our internet websites could require us to take steps that would substantially limit the aesthetic of our internet websites and/or their availability in certain geographic areas, which could adversely affect our ability to generate revenue and could increase our operating expenses.

 

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Intellectual property litigation could expose us to significant costs and liabilities and thus negatively affect our business, financial condition and results of operations.

 

We may be subject to claims of infringement of third party patents and trademarks and other violations of third party intellectual property rights. Intellectual property disputes are generally time-consuming and expensive to litigate or settle, and the outcome of such disputes is uncertain and difficult to predict. The existence of such disputes may require us to set-aside substantial reserves, and has the potential to significantly affect our overall financial standing. To the extent that claims against us are successful, they may subject us to substantial liability, and we may have to pay substantial monetary damages, change aspects of our business model, and/or discontinue any of our services or practices that are found to be in violation of another party’s rights. Such outcomes may severely restrict or hinder ongoing business operations and impact the value of our business. Successful claims against us could also result in us having to seek a license to continue our practices. Under such conditions, a license may or may not be offered or otherwise made available to us. If a license is made available to us, the cost of the license may significantly increase our operating burden and expenses, potentially resulting in a negative effect on our business, financial condition and results of operations.

 

Although we have been and are currently involved in multiple areas of commerce, internet services, and high technology where there is a substantial risk of future patent litigation, we have not obtained insurance for patent infringement losses. If we are unsuccessful in resolving pending and future patent litigation in a reasonable and affordable manner, it could disrupt our business and operations, including by negatively impacting areas of commerce or putting us at a competitive disadvantage.

  

If we are unable to obtain or maintain key website addresses, our ability to operate and grow our business may be impaired.

 

Our website addresses, or domain names, are critical to our business. We currently own more than 388 domain names. However, the regulation of domain names is subject to change, and it may be difficult for us to prevent third parties from acquiring domain names that are similar to ours, that infringe our trademarks or that otherwise decrease the value of our brands. If we are unable to obtain or maintain key domain names for the various areas of our business, our ability to operate and grow our business may be impaired.

 

We may have difficulty scaling and adapting our existing network infrastructure to accommodate increased traffic and technology advances or changing business requirements, which could cause us to incur significant expenses and lead to the loss of users and advertisers.

 

To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic and the greater the complexity of our products and services, the more computer power we will need. We could incur substantial costs if we need to modify our websites or our infrastructure to adapt to technological changes. If we do not maintain our network infrastructure successfully, or if we experience inefficiencies and operational failures, the quality of our products and services and our users’ experience could decline. Maintaining an efficient and technologically advanced network infrastructure is particularly critical to our business because of the pictorial nature of the products and services provided on our websites. A decline in quality could damage our reputation and lead us to lose current and potential users and advertisers. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our operating results and financial condition.

 

Because some of our brands contain adult content, companies providing products and services on which we rely may refuse to do business with us.

 

Many companies that provide products and services we need are concerned that associating with us could lead to their becoming the target of negative publicity campaigns by public interest groups and boycotts of their products and services. As a result of these concerns, these companies may be reluctant to enter into or continue business relationships with us. There can be no assurance that we will be able to maintain our existing business relationships with the companies, domestic or international, that currently provide us with services and products. Our inability to maintain such business relationships, or to find replacement service providers, would materially adversely affect our business, financial condition and results of operations. We could be forced to enter into business arrangements on terms less favorable to us than we might otherwise obtain, which could lead to our doing business with less competitive terms, higher transaction costs and more inefficient operations than if we were able to maintain such business relationships or find replacement service providers.

 

9

 

 

Our business is exposed to risks associated with online commerce security and credit card fraud.

 

Consumer concerns over the security of transactions conducted on the internet or the privacy of users may inhibit the growth of the internet and online commerce. To transmit confidential information such as customer credit card numbers securely, we rely on encryption and authentication technology. Unanticipated events or developments could result in a compromise or breach of the systems we use to protect customer transaction data. Furthermore, our servers may also be vulnerable to viruses and other attacks transmitted via the internet.  As a payment processor, we are required to comply with PCI DSS and a credit card information breach could subject us to penalties or fines, litigation, regulatory investigation or regulatory action. While we proactively check for intrusions into our infrastructure, a new and undetected virus could cause a service disruption. Under current credit card practices, we may be held liable for fraudulent credit card transactions and other payment disputes with customers. A failure to control fraudulent credit card transactions adequately would adversely affect our business.

  

Risk Factors Related to our Potent Media Brand 

 

Cannabis remains illegal under Federal law.

 

Our Potent Media brand is a website devoted to exploring the history of marijuana, the cannabis culture and its effect on pop culture today. The site keeps its user base informed on all things involving cannabis culture including movies, tv and books and festivals, conventions and politics. However, despite the development of a legal cannabis industry under the laws of certain states, these state laws legalizing medical and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a schedule-I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that the Federal government has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that legalize its use. Although the Obama Administration determined that it is not an efficient use of resources to direct Federal law enforcement agencies to prosecute those lawfully abiding by state laws allowing the use and distribution of medical and recreational cannabis. The Trump administration has made statements implying that it could change this policy and decide to enforce the federal laws strongly, though no specific measures have yet been implemented other than revocation of the Cole Memo and two others. Any negative material change in the Federal government’s policy on enforcement of these laws could potentially cause damage to the Potent brand, but should not cause significant financial damage to the Company and/or our shareholders.  

 

As the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide to users. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business.

 

Under Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a). As a result of such an action, we may be forced to cease operation of our Potent Media brand. Such an action could have a material negative effect on our business and operations.

 

Federal enforcement practices could change with respect to services provided to participants in the cannabis industry, which could adversely impact us. If the Federal government were to change its practices, or were to expend its resources on enforcement actions against service providers in the cannabis industry, such actions could have a materially adverse effect on our operations, our customers, or the sales of our products.

 

It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our advertisers from selling cannabis and cannabis related products, and, if such legislation were enacted, such advertisers may discontinue the use of our services, our potential source of customers would be reduced, and our revenues would decline. Further, additional government disruption in the cannabis industry could cause potential customers and users to be reluctant use and advertise on our products, which would be detrimental to the Company. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

10

 

 

Operating a network open to all internet users may result in legal consequences. 

 

Our Terms and Conditions clearly state that our network and services are only to be used by users who are over 13 years old. However, it is impractical to independently verify that all activity occurring on our network fits into this description. As such, we run the risk of federal and state law enforcement prosecution.

 

Although the Obama Administration has determined that it is not an efficient use of resources to direct Federal law enforcement agencies to prosecute those following certain state laws allowing for the use and distribution of medical and recreational cannabis, there can be no assurance that the administration, or future administrations, will not change its stated policy and begin enforcement of the Federal laws against us or users of our website. Additionally, there can be no assurance that we will not face criminal prosecution from states where the use of cannabis is permitted for the use of cannabis in ways which do not fall under the state law. Finally, even if we attempt to prevent the use of our website or digital communities in states where cannabis use is not permitted under state law, use of our websites by those in such states may still occur and state authorities may still bring an action against us for the promotion of cannabis related material by those residing in such states.

 

Risks Related to FILTHY MEDIA

 

Changes in laws regulating adult content could materially adversely affect our business, financial condition and results of operations. 

 

Our brand, Filthy Media, presents content related to culture of erotic art. Regulation, investigations and prosecutions of adult content could prevent us from making such content available in certain jurisdictions and may otherwise have a material adverse effect on our business, financial condition and results of operations. Government officials may also place additional restrictions on adult content affecting the way people interact on the internet. The governments of some countries, such as China and India, have sought to limit the influence of other cultures by restricting the distribution of products deemed to represent foreign or “immoral” influences. Regulation aimed at limiting minors’ access to adult content both in the United States and abroad could also increase our cost of operations and introduce technological challenges by requiring development and implementation of age verification systems. U.S. government officials could amend or construe and seek to enforce more broadly or aggressively the adult content recordkeeping and labeling requirements set forth in 18 U.S.C. Section 2257 and its implementing regulations in a manner that is unfavorable to our business. Court rulings may place additional restrictions on adult content affecting how people interact on the internet, such as mandatory web labeling.

 

RISKS RELATED TO OUR COMMON STOCK 

 

The price of our Common Stock may be subject to wide fluctuations.

 

Even though we have our shares quoted on the OTCQB, a consistently active trading market for our Common Stock may not exist.  You may not be able to sell your shares quickly or at the current market price if trading in our stock is not active.  You may lose all or a part of your investment.  The market price of our Common Stock may be highly volatile and subject to wide fluctuations in response to a variety of factors and risks, many of which are beyond our control.  In addition to the risks noted elsewhere in this prospectus, some of the other factors affecting our stock price may include:

 

  variations in our operating results;
     
  the level and quality of securities analysts’ coverage of our Common Stock;
     
  announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
     
  announcements by third parties of significant claims or proceedings against us; and
     
  future sales of our Common Stock.

 

For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on past results as an indication of future performance.  In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against the public company.  Regardless of its outcome, this type of litigation could result in substantial costs to us and a likely diversion of our management’s attention. You may not receive a positive return on your investment when you sell your shares and you may lose the entire amount of your investment.

 

11

 

 

We may, in the future, issue additional SHARES OF COMMON STOCK, which would reduce investors’ percent of ownership and dilute our share value.

 

Our Articles of Incorporation authorize the issuance of 300,000,000 shares of Common Stock, and 20,000,000 shares of preferred stock. Currently the Company has issued 31,581 shares of Series A Preferred, 8,063 shares of Series B Preferred and 0 of Series D Convertible Preferred Stock (the “Series D Preferred”). Additionally, the Company has issued warrants to purchase 46,211,279 shares of our common stock at a weighted average exercise price of $0.25. As of May 15, 2018, the Series A Preferred, Series B Preferred and Series D Preferred, are convertible into 233,496 shares of the Company’s common stock, subject to adjustment. In addition, the Company has convertible notes outstanding that convert into 23,282,046 shares of the Company’s common stock at conversion rates between $0.20 - $0.30. Assuming all of the Company’s currently outstanding preferred stock be converted and all outstanding warrants be exercised, the Company would have to issue an additional 190,769,997 shares of common stock representing 175% of our current issued and outstanding common stock. The future issuance of this Common Stock would result in substantial dilution in the percentage of our Common Stock held by our then existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of Common Stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our Common Stock.

 

OUR COMMON SHARES ARE SUBJECT TO THE “PENNY STOCK” RULES OF THE SEC AND THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.

 

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.

 

For any transaction involving a penny stock, unless exempt, the rules require:

 

  (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and

  

  (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person; and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination, and (b) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our Common shares and cause a decline in the market value of our stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

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LIABILITY OF DIRECTORS FOR BREACH OF DUTY OF CARE IS LIMITED.

 

According to Nevada law (NRS 78.138(7)), all Nevada corporations limit the liability of directors and officers, including acts not in good faith. Our stockholders’ ability to recover damages for fiduciary breaches may be reduced by this statute. In addition, we are obligated to indemnify our directors and officers regarding stockholder suits which they successfully defend (NRS 78.7502).

 

BECAUSE WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON OUR COMMON STOCK, OUR STOCKHOLDERS WILL NOT BE ABLE TO RECEIVE A RETURN ON THEIR SHARES UNLESS THEY SELL THEM.

 

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.

 

WE MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK IN THE FUTURE THAT MAY ADVERSELY IMPACT YOUR RIGHTS AS HOLDERS OF OUR COMMON STOCK.

  

Our articles of incorporation authorize us to issue up to issue up to 20,000,000 shares of preferred stock in various classes. As of December 31, 2017 there are 39,520,682 outstanding shares of common stock. Currently, the Company has issued 31,581 shares of Series A Preferred, 8,063 shares of Series B Preferred and 0 shares of Series D Preferred stock outstanding. As of May 15, 2018, our outstanding preferred stock is convertible into 233,496 shares of the Company’s Common Stock. Our board of directors will have the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue additional shares, without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our Common Stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the Common Stock. To the extent that we do issue such additional shares of preferred stock, your rights as holders of Common Stock could be impaired thereby, including, without limitation, dilution of your ownership interests in us. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult, which may not be in your interest as a holder of Common Stock.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

Item 2. Properties.

 

As of May 15, 2018, our corporate headquarters which houses operations and support personnel, is located at 202 S Dean Street, Englewood, NJ 07631, an office consisting of a total of 12,000 square feet. The current lease term is effective from January 8, 2014 through May 1, 2018 (the “Term”) with monthly rent of $8,500 until December 31, 2015 and $14,165 for each subsequent year of the Term thereafter. Because the Term expired May 1, 2018, the Company is currently operating on a month-to-month basis at the same monthly rent of $14,165.

 

We will be relocating our corporate headquarters as soon as the construction on our new office is complete. We recently signed a lease for the new corporate headquarters consisting of a total of 2,300 square feet. The lease term is effective upon the later of May 1, 2018 or substantial completion of the landlord’s work and ends five years and one month after the lease commences with monthly rent of $5,612.00 for the first year and increases at a rate of 3% for each subsequent year thereafter.

 

Item 3. Legal Proceedings.

 

We are not currently 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 our subsidiary, threatened against or affecting our Company, our common stock, our subsidiary or of our Company’s or our Company’s subsidiary’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

(a) Market Information

 

Our shares of Common Stock are quoted on the OTCQB under the symbol “JMDA”. Prior to March 3, 2016, our shares of Common Stock were quoted on the OTCQB under the symbol “GTPH”. The OTCQB is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (“OTC”) equity securities. An OTCQB equity security is not listed or traded on a national securities exchange.

 

The following table sets forth the high and low bid price for our common stock for each quarter during the 2017 and 2016 fiscal years and the first and second quarters of the 2018 fiscal year through May 16, 2018. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.

 

Fiscal 2017   High     Low  
First Quarter (January 1 – March 31)   $ 0.30     $ 0.07  
Second Quarter (April 1 – June 30)   $ 0.31     $ 0.13  
Third Quarter (July 1 – September 30)   $ 0.20     $ 0.05  
Fourth Quarter (October 1 – December 31   $ 0.23     $ 0.10  

 

Fiscal 2016   High     Low  
First Quarter (January 1 – March 31)   $ 0.51     $ 0.20  
Second Quarter (April 1 – June 30)   $ 0.72     $ 0.36  
Third Quarter (July 1 – September 30)   $ 0.95     $ 0.05  
Fourth Quarter (October 1 – December 31   $ 0.95     $ 0.22  

 

(b) Holders of Common Equity

 

As of May 16, 2018, there were approximately 125 stockholders of record. An additional number of stockholders are beneficial holders of our Common Stock in “street name” through banks, brokers and other financial institutions that are the record holders.

 

(c) Dividend Information

 

We have not paid any cash dividends to our holders of common stock. The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

(d) Securities Authorized for Issuance under Equity Compensation Plans

 

There are currently 17,649,990 outstanding options to purchase our securities with a weighted exercise price of $0.42 per option. Currently, the Company has 350,010 available options to issue under the plan.

 

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Option Plan

 

Pursuant to the Merger, on February 5, 2016, the Company assumed Jerrick’s 2015 Stock Incentive and Award Plan (the “Plan”) which provides for the issuance of up to 18,000,000 shares of the Company’s common stock.

 

The purpose of the Plan is to provide additional incentive to those officers, employees, consultants and non-employee directors of the Company and its parents, subsidiaries and affiliates whose contributions are essential to the growth and success of the Company’s business.

 

Eligible recipients of option awards are employees, officers, consultants or directors (including non-employee directors) of the Company or of any parent, subsidiary or affiliate of the Company. Upon recommendation from the board or the Compensation Committee, the board has the authority to grant to any eligible recipient any options, restricted stock or other awards valued in whole or in part by reference to, or otherwise based on, our common stock.

 

The provisions of each option granted need not be the same with respect to each option recipient. Option recipients shall enter into award agreements with us, in such form as the board shall determine.

 

The Plan shall be administered by the Compensation Committee consisting of two or more independent, non-employee and outside directors. In the absence of such a Committee, the board of the Company shall administer the Plan.

 

Each Option shall contain the following material terms:

 

  (i) the purchase price of each share of Common Stock with respect to Incentive Options shall be determined by the Committee at the time of grant, shall not be less than 100% of the Fair Market Value (defined as the closing price on the final trading day immediately prior to the grant on the principal exchange or quotation system on which the Common Stock is listed or quoted, as applicable) of the Common Stock of the Company, provided that if the recipient of the Option owns more than ten percent (10%) of the total combined voting power of the Company, the exercise price shall be at least 110% of the Fair Market Value;

 

  (ii) The purchase price of each share of Common Stock purchasable under a Non-qualified Option shall be at least 100% of the Fair Market Value of such share of Common Stock on the date the Non-qualified Option is granted, unless the Committee, in its sole and absolute discretion, determines to set the purchase price of such Non-qualified Option below Fair Market Value.

 

  (iii) the term of each Option shall be fixed by the Committee, provided that such Option shall not be exercisable more than five (5) years after the date such Option is granted, and provided further that with respect to an Incentive Option, if the recipient owns more than ten percent (10%) of the total combined voting power of the Company, the Incentive Option shall not be exercisable more than five (5) years after the date such Incentive Option is granted;

 

  (iv) subject to acceleration in the event of a Change of Control of the Company (as further described in the Plan), the period during which the Options vest shall be designated by the Committee or, in the absence of any Option vesting periods designated by the Committee at the time of grant, shall vest and become exercisable in equal amounts on each fiscal quarter of the Company through the four (4) year anniversary of the date on which the Option was granted;

 

  (vi) no Option is transferable and each is exercisable only by the recipient of such Option except in the event of the death of the recipient; and

 

  (vii) with respect to Incentive Options, the aggregate Fair Market Value of Common Stock exercisable for the first time during any calendar year shall not exceed $100,000.

 

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Each award of Restricted Stock is subject to the following material terms:

 

  (i) no rights to an award of Restricted Stock are granted to the intended recipient of Restricted Stock unless and until the grant of Restricted Stock is accepted within the period prescribed by the Compensation Committee;

 

  (ii) Restricted Stock shall not be delivered until they are free of any restrictions specified by the Compensation Committee at the time of grant;

 

  (iii) recipients of Restricted Stock have the rights of a stockholder of the Company as of the date of the grant of the Restricted Stock;

 

  (iv) shares of Restricted Stock are forfeitable until the terms of the Restricted Stock grant have been satisfied or the employment with the Company is terminated; and

 

  (v) the Restricted Stock is not transferable until the date on which the Compensation Committee has specified such restrictions have lapsed.

 

(e) Unregistered Sales of Equity Securities

 

During the year ended December 31, 2017, we issued securities that were not registered under the Securities Act, and were not previously disclosed in a Current Report on Form 8-K or Quarterly Report on Form 10-Q as listed below. All of the securities discussed in this Item 5(e) were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.

 

On February 7, 2017, the Company issued 1,767,633 shares of its restricted Common Stock to consultants in exchange for services at a fair value of $293,427.

 

In March of 2017, the Company issued 60,000 shares of Common Stock to ProActive Capital Resources Group, under an Advisory Agreement for their services as an Investor Relations group.

 

On April 25, 2017, the Company issued convertible notes to Arthur Rosen, totaling $25,000 (the “April Rosen Notes”). 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. On September 7, 2017, the April Rosen Notes and accrued interest was converted into the August 2017 Convertible Note Offering.

  

On April 25, 2017, the Company issued a convertible note to Chris Gordon, 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 were converted into the August 2017 Convertible Note Offering.

 

In November of 2017, the Company issued a warrant to purchase 100,000 shares of Common Stock to Arthur Rosen in consideration for the extension of an outstanding Promissory Note. The warrants have an exercise price of $0.20 and an expiration date of November 13, 2022.

 

Item 6. Selected Financial Data.

 

As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 6 Selected Financial Data.  

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.

 

Overview

 

Jerrick Media Holdings Inc. develops technology-based solutions designed to solve for challenges that have resulted from disruption and evolution within the broad digital media and content generation environment. Its flagship product Vocal is a long-form, digital publishing platform focused on supporting content creators with content management tools that are embedded within digital communities. Vocal is architected to enable targeted marketing of branded content and e-commerce opportunities in long-form content. Vocal’s community sites are moderated by a dedicated team with a primary focus on creating healthy communities and identifying monetization opportunities within them.

 

16

 

 

Vocal serves as a versatile home for content creators. The platform supports multiple forms of content such as: short videos, podcasts, music, and written word. This activity is expected to increase at a rapid pace. A fraction of creators achieve meaningful visibility for their content, and even fewer are rewarded financially. Jerrick Media Holdings’ product Vocal provides a solution for the creative community.

 

Jerrick Media Holdings, Inc. partners with content creators and brands that recognize difficulties inherent in the digital advertising space and are looking to capitalize on the branded content marketing opportunities available on publishing platforms like Vocal.

 

During the remainder of the second quarter of 2018, Jerrick planned and plans to launch additional revenue lines, including brand subscriptions to access the platform and its community of creators as well as subscription revenues for creator upgrade tools. The Company believes that these new streams of revenue will contribute a meaningful portion of revenues in fiscal year 2018. The Company also intends to release further enhancements to the Vocal editor and introduce social features.

 

In the third and fourth quarters of 2018, the Company plans to introduce Software as a Service (SaaS) subscriptions to the Vocal platform. Additional features will include user analytics updates as well as iOS and Android applications.

 

Results of Operations

 

Liquidity and Capital Resources

 

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

 

   December 31,
2017
   December 31,
2016
   Increase /
(Decrease)
 
Current Assets  $112,376   $184,494   $(72,118)
Current Liabilities  $4,159,644   $3,544,996   $614,648 
Working Capital Deficit  $(4,047,268)  $(3,360,502)  $(686,766)

 

At December 31, 2017, we had a working capital deficit of $4,047,268, as compared to a working capital deficit of $3,360,502 at December 31, 2016, an increase of $686,766. The increase is primarily attributable to the decrease in cash, increase in accrued dividends, increase in notes payable and an increase in line of credit related party. These were offset by an increase in accounts receivable, decrease in convertible notes current, decrease in note payable related party and a decrease in line of credit.

 

Net Cash

 

Net cash used in operating activities for the year ended December 31, 2017 and 2016, was $3,852,552 and $2,517,113 respectively. The net loss for the year ended December 31, 2017 and 2016 was $8,751,586 and $7,391,907, respectively. This change is primarily attributable to the net loss for the current period offset by the repayment of a deposit in the amount of $10,000, share-based payments in the amount of $1,262,377 to employees and consultants for services rendered, the accretion of debt discount and debt issuance costs of $1,828,027 due to the incentives given with debentures, and a loss on extinguishment of debt of $906,531 for the incentives given to amend or convert debt. These increases were offset by gain on settlement of the revenue based factoring agreement of $2,079, gain on settlement of vendor liabilities of $167,905 and a change in accounts receivable of $1,325.

  

Net cash used in investing activities for the year ended December 31, 2017 and 2016 was $14,662 and $43,957 for the purchase of property and equipment.

 

Net cash provided by financing activities for the year ended December 31, 2017 and 2016 was $3,803,771 and $2,296,935. During the 2017 period, the Company was predominantly financed by issuance of notes and related party notes of $3,743,085 and $1,084,000, respectively to fund operations. These increases were offset by repayment of note payable and convertible notes of $100,000 and $477,777, respectively. The Company also paid $211,956 for debt issuance costs during the year ended December 31, 2017. During the 2016 period, the Company was predominantly financed by issuance of notes and preferred stock.

 

Summary of Statements of Operations for the Year Ended December 31, 2017 and 2016:

 

   Year Ended 
   December 31,
2017
   December 31,
2016
 
Net revenue  $95,653   $223,927 
Gross margin  $95,653   $180,606 
Operating expenses  $(5,657,981)  $(3,872,362)
Loss from operations  $(5,562,328)  $(3,691,756)
Other expenses  $(3,189,258)  $(3,700,151)
Net loss  $(8,751,586)  $(7,391,907)
Loss per common share – basic and diluted  $(0.23)  $(0.23)

      

17

 

 

Net Revenue

 

Net revenue was $95,653 for the year ended December 31, 2017, as compared to $ 223,927 for the comparable year ended December 31, 2016, a decrease of $128,274. The decrease in net revenue is primarily attributable to the Company’s transitioning its ecommerce business from direct sale of products and Company owned memorabilia, through various web-based distribution channels, toward generating revenue through native advertising, branded marketing, and affiliate sales, resulting from the creation of genre specific, user generated content community websites. As part of that transition, the Company focused its efforts throughout 2017 on the development of its proprietary Vocal software platform to support the scalability of its business model.

 

Gross Profit

 

Gross profit percentage was 100% during the years ended December 31, 2017 and 2016. Gross margin is primarily attributable to the Company’s higher margin advertising and branded content revenue resulting from increased traffic on its websites, as well as media sales with little to no associated cost. The Company expects its gross margins to fluctuate as its business model continues to evolve.

 

Operating Expenses

 

Operating expenses for the years ended December 31, 2017 were $5,657,981 as compared to $3,872,362 for the year ended December 31, 2016. The increase of $1,785,619 in operating expenses is a result of a $644,768 increase in General and Administrative expenses related to the continued development of the Vocal platform, including the launch of additional content, a $134,728 decrease in consulting and professional fees related to being a publicly traded company and a $345,912 increase in compensation.

 

Loss from Operations

 

Loss from operations for the year ended December 31, 2017 was $5,562,328 as compared to loss of $3,691,756 for the year ended December 31, 2016. The increase in the loss from operations is primarily attributable to an increase in expenses related to the continued development of the Vocal platform, including the launch of additional content and operating as a publicly traded company and the decrease in sales.

 

Other Income (Expenses)

 

Other income (expenses) for the year ended December 31, 2017 was $(3,189,258), as compared to $(3,700,151) for the year ended December 31, 2016. Other expenses during the year ended December 31, 2017 was comprised of interest expense of $(477,005) on notes and related party notes, accretion of debt discount and issuance cost of $(1,828,027) due to the incentives given with debentures and loss on extinguishment of debt of $(906,531) for the incentives given to amend or convert debt. These expenses were offset by the gain on settlement of the revenue based factoring agreement of $2,079 as recorded during the year ended December 31, 2017. During year ended December 31, 2016, other expenses were comprised of interest expense of $(3,474,529) on notes and related party notes, accretion of debt discount and issuance cost of $(235,622) due to the incentives given with debentures. These expenses were offset by the gain on the sale of asset of $10,000 as recorded during the year ended December 31, 2017.

 

Net Loss

 

Net loss attributable to common shareholder for year ended December 31, 2017, was $8,751,586, or loss per share of $0.23, as compared to a net loss of $7,391,907, or loss per share of $0.23, for the year ended December 31, 2016.

 

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

 

18

 

 

Off-Balance Sheet Arrangements 

 

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

 

Critical Accounting Policies

 

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

 

Use of Estimates

 

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

  

Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

  

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.

 

19

 

 

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 changed its method of accounting for the debt and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017 on a retrospective basis.

 

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 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

20

 

 

Item 8. Financial Statements.

 

Jerrick Media Holdings, Inc.

December 31, 2017 and 2016

 

Index to the Consolidated Financial Statements

 

Contents  Page(s)
    
Reports of Independent Registered Accounting Firms  F-2
    
Consolidated Balance Sheets of December 31, 2017 and 2016  F-4
    
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016  F-5
    
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017 and 2016  F-6
    
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016  F-7
    
Notes to the Consolidated Financial Statements  F-8

 

F-1

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Jerrick Media Holdings, Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Jerrick Media Holdings, Inc. (“the Company”) as of December 31, 2017, the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph Regarding Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Sadler, Gibb & Associates, LLC

 

We have served as the Company’s auditor since 2017.

 

Salt Lake City, UT

May 17, 2018

 

 

F-2

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of

Jerrick Media Holdings, Inc.

 

We have audited the accompanying consolidated balance sheet of Jerrick Media Holdings, Inc. as of December 31, 2016 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2016. Jerrick Media Holdings, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jerrick Media Holdings, Inc. as of December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 3 to the financial statements, the entity has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ KLJ & Associates, LLP

 

KLJ & Associates, LLP

Edina, MN

March 31, 2017

 

 

5201 Eden Avenue

Suite 300

Edina, MN 55436

630.277.2330

F-3

 

  

Jerrick Media Holdings, Inc.

Consolidated Balance Sheet

  

   December 31,
2017
   December 31,
2016
 
         
Assets          
           
Current Assets          
Cash  $111,051   $174,494 
Accounts receivable   1,325    - 
Prepaid expenses   -    10,000 
Total Current Assets   112,376    184,494 
           
Property and equipment, net   48,056    71,829 
           
Security deposit   17,000    38,445 
           
Minority investment in business   -    83,333 
           
Total Assets  $177,432   $378,101 
           
Liabilities and Stockholders’ Deficit          
           
Current Liabilities          
Accounts payable and accrued liabilities  $1,462,106   $1,387,068 
Accrued dividends   472,444    259,170 
Demand loan   10,366    10,366 
Convertible Notes, net   96,500    268,823 
Current portion of capital lease payable   4,732    3,524 
Note payable - related party, net   1,249,000    1,365,325 
Note payable, net   689,500    15,579 
Line of credit - related party   130,000    - 
Line of credit   44,996    235,141 
           
Total Current Liabilities   4,159,644    3,544,996 
           
Non-current Liabilities:          
Capital lease payables   -    1,208 
Convertible Notes - related party, net   1,345,246    - 
Convertible Notes, net   2,512,293    - 
           
Total Non-Current Liabilities   3,857,539    1,208 
           
Total Liabilities   8,017,183    3,546,204 
           
Commitments and contingencies          
           
Stockholders’ Deficit          
Series A Preferred stock: 100,000 shares designated, $0.001 par value 31,581 and 33,314 shares issued and outstanding, respectively   31    33 
Series B Preferred stock: 20,000 shares designated, $0.001 par value, 8,063 and 8,063 shares issued and outstanding, respectively   8    8 
Series D Preferred stock: 2,100,000 shares designated, $0.001 par value, 0 and 914 shares issued and outstanding, respectively   -    1 
Common stock par value $0.001: 300,000,000 shares authorized; 39,520,682 and 33,894,592 issued and outstanding as of December 31, 2017 and 2016 respectively   39,521    33,895 
Additional paid in capital   14,387,247    10,075,941 
Accumulated deficit   (22,247,551)   (13,277,981)
Less: Treasury stock, 220,000 and 0 shares, respectively, at cost   (19,007)   - 
    (7,839,751)   (3,168,103)
           
Total Liabilities and Stockholders’ Deficit  $177,432   $378,101 

  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

 

 

Jerrick Media Holdings, Inc.

Consolidated Statements of Operations

  

   For the Year Ended   For the Year Ended 
   December 31, 2017   December 31, 2016 
         
Net revenue  $95,653   $223,927 
           
Cost of revenue   -    43,321 
           
Gross margin   95,653    180,606 
           
Operating expenses          
Compensation   1,480,082    1,134,170 
Consulting fees   1,216,189    1,350,917 
Share based payments   1,262,377    332,711 
General and administrative   1,699,333    1,054,564 
           
Total operating expenses   5,657,981    3,872,362 
           
Loss from operations   (5,562,328)   (3,691,756)
           
Other income (expenses)          
Interest expense   (477,005)   (3,474,529)
Accretion of debt discount and issuance cost   (1,828,027)   (235,622)
Change In derivative liability   (64,346)   - 
Settlement of vendor liabilities   167,905    - 
Loss on extinguishment of debt   (906,531)   - 
Gain on settlement of debt   2,079    - 
Impairment of minority investment   (83,333)   - 
Gain on the sale of assets   -    10,000 
           
Other income (expenses), net   (3,189,258)   (3,700,151)
           
Loss before income tax provision   (8,751,586)   (7,391,907)
           
Income tax provision   -    - 
           
Net loss  $(8,751,586)  $(7,391,907)
           
Per-share data          
Basic and diluted loss per share  $(0.23)  $(0.23)
           
Weighted average number of common shares outstanding   38,601,987    32,046,149 

  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

 

 

Jerrick Media Holdings, Inc.

Consolidated Statement of Stockholders’ Equity

For the Years ended December 31, 2017 and 2016

 

   Series A Preferred Stock   Series B Preferred Stock   Series D Preferred Stock   Common Stock   Treasury stock   Additional   Accumulated   Stockholders'  
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Paid In Capital   Deficit   Equity 
                                                     
Balance, December 31, 2015   33,314    33    7,000    7    -    -    28,500,000    28,500    -    -    5,319,835    (5,708,840)   (360,465)
                                                                  
Net proceeds from issuance of  common stock and warrants   -    -    -    -    -    -    666,666    667    -    -    343,581    -    344,248 
                                                                  
Issuance of common stock for cashless exercise of warrants   -    -    -    -    -    -    392,764    393    -    -    (393)   -    - 
                                                                  
Conversion of series D preferred stock to common stock   -    -    -    -    (1,099)   (1)   1,098,933    1,099    -    -    (1,098)   -    - 
                                                                  
Conversion of interest to series B preferred stock   -    -    1,063    1    -    -    -    -    -    -    108,843         108,844 
                                                                  
Conversion of common stock to Series D preferred stock   -    -    -    -    2,013    2    -    -    -    -    -    -    2 
                                                                  
Common stock issued commissions and placement agreement   -    -    -    -    -    -    322,015    322    -    -    -    -    322 
                                                                  
Issuance of common stock for cash   -    -    -    -    -    -    2,626,308    2,626    -    -    -    -    2,626 
                                                                  
Recapitalization   -    -    -    -    -    -    287,896    288    -    -    -    -    288 
                                                                  
Liquidated damages on preferred stock and warrants   -    -    -    -    -    -    -    -    -    -    3,329,993    -    3,329,993 
                                                                  
Stock based compensation   -    -    -    -    -    -    -    -    -    -    484,692    -    484,692 
                                                                  
Stock warrants issued with convetible notes   -    -    -    -    -    -    -    -    -    -    255,203    -    255,203 
                                                                  
Stock warrants issued with note payable - related party   -    -    -    -    -    -    -    -    -    -    193,652    -    193,652 
                                                                  
Stock warrants issued with promissory note   -    -    -    -    -    -    -    -    -    -    41,633    -    41,633 
                                                                  
Dividends   -    -    -    -    -    -    -    -    -    -    -    (177,234)   (177,234)
                                                                  
Net loss for the year ended December 31, 2016   -    -    -    -    -    -    -    -    -    -    -    (7,391,907)   (7,391,907)
                                                                  
Balance, December 31, 2016   33,314    33    8,063    8    914    1    33,894,582    33,895    -    -    10,075,941    (13,277,981)   (3,168,103)
                                                                  
Conversion of series A to common stock   (1,733)   (2)   -    -    -    -    1,146,307    1,146    -    -    3,566    -    4,710 
                                                                  
Conversion of series D to common stock             -    -    (914)   (1)   266,325    266    -    -    (265)   -    - 
                                                                  
Common stock issued to settle vendor liabilities   -    -    -    -    -    -    1,179,107    1,179    -    -    184,648    -    185,827 
                                                                  
Stock based compensation   -    -    -    -    -    -    788,395    789    -    -    1,247,590    -    1,248,379 
                                                                  
Stock warrants issued with note payable   -    -    -    -    -    -    -    -    -    -    2,487,904    -    2,487,904 
                                                                  
Common stock issued for services   -    -    -    -    -    -    1,867,633    1,868    -    -    305,559    -    307,427 
                                                                  
Common stock issued with note payable   -    -    -    -    -    -    378,333    378    -    -    82,304    -    82,682 
                                                                  
Purchase of treasury stock   -    -    -    -    -    -    -    -    (220,000)   (19,007)   -    -    (19,007)
                                                                  
Dividends   -    -    -    -    -    -    -    -    -    -    -    (217,984)   (217,984)
                                                                  
Net loss for the year ended December 31, 2016   -    -    -    -    -    -    -    -    -    -    -    (8,751,586)   (8,751,586)
                                                                  
Balance, December 31, 2017   31,581    31    8,063    8    -    -    39,520,682    39,521    (220,000)   (19,007)   14,387,247    (22,247,551)   (7,839,751)

  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6

 

Jerrick Media Holdings, Inc.

Consolidated Statements of Cash Flows

  

   For the Year Ended   For the Year Ended 
   December 31, 2017   December 31, 2016 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(8,751,586)  $(7,391,907)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   38,435    42,634 
Accretion of debt issuance costs   303,799    - 
Accretion of debt discount   1,524,228    235,622 
Share-based compensation   1,262,377    463,503 
Loss on settlement of vendor liabilities   (167,905)   - 
Gain on settlement of debt   (2,079)   - 
Impairment of minority investment   83,333    - 
Change in fair value of derivative liability   64,346    - 
Loss on extinguishment of debt   906,531    - 
Changes in operating assets and liabilities:          
Prepaid expenses   10,000    (10,000)
Accounts receivable   (1,325)   - 
Security deposit   21,445    (21,445)
Accounts payable and accrued expenses   855,849    834,487 
Accrued liquidating damages   -    3,329,993 
Net Cash Used In Operating Activities   (3,852,552)   (2,517,113)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid for property and equipment   (14,662)   (43,957)
Net Cash Used In Investing Activities   (14,662)   (43,957)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment of loans   -    (107,887)
Net proceeds from issuance of notes   1,441,585    146,000 
Repayment of notes   (100,000)   - 
Net proceeds from issuance of  preferred stock   -    344,250 
Proceeds from issuance of demand loan   -    10,366 
Proceeds from issuance of convertible note   2,201,500    550,000 
Repayment of convertible notes   (477,777)   (50,000)
Proceeds from issuance of convertible notes - related party   655,000    - 
Proceeds from issuance of note payable - related party   529,000    1,446,500 
Repayment of note payable - related party   (145,000)   (1,500)
Proceeds from issuance of line of credit   -    39,195 
Proceeds from issuance of line of credit - related party   130,000    - 
Repayment of line of credit   (199,574)   (24,007)
Cash paid for debt issuance costs   (211,956)   (55,982)
Purchase of treasury stock   (19,007)     
Net Cash Provided By Financing Activities   3,803,771    2,296,935 
           
Net Change in Cash   (63,443)   (264,135)
           
Cash - Beginning of Year   174,494    438,629 
           
Cash - End of Year  $111,051   $174,494 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Year for:          
Income taxes  $-   $- 
Interest  $3,534   $5,738 
           
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  $1,006,753   $24,425 
Debt discount on related party note payable  $198,702   $218,800 
Debt discount on note payable  $483,745   $- 
Accrued dividends  $217,985   $177,234 
Warrants at issuance of debt  $-   $490,488 
Liquidated damages  $-   $3,329,993 
Derivative liability ceases to exist  $383,993   $- 
Conversion of note payable and interest into convertible notes  $765,656   $- 
Conversion of note payable - related party and interest into convertible notes - related party  $801,026   $- 

  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7

 

 

Jerrick Media Holdings, Inc.

December 31, 2017 and 2016

Notes to the Consolidated Financial Statements

 

Note 1 - Organization and Operations

 

Jerrick Media Holdings, Inc. (“we,” “us,” the “Company,” or “Jerrick Media” or “Jerrick”) (formerly Great Plains Holdings, Inc. or “GTPH”) was incorporated under the laws of the state of Nevada on December 30, 1999 under the name LILM, Inc. The Company changed its name on December 3, 2013 to Great Plains Holdings, Inc. as part of its plan to diversify its business through the acquisition and operation of commercial real estate, including, but not limited to, self-storage facilities, apartment buildings, 55+ senior manufactured home communities, and other income producing properties. Historically, the Company has principally engaged in the manufacture and marketing of the LiL Marc, a plastic boys’ toilet-training device, which we discontinued as of December 31, 2014.

 

On February 5, 2016 (the “Closing Date”), GTPH, GPH Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of GTPH (“Merger Sub”), and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), entered into an Agreement and Plan of Merger (the “Agreement”) pursuant to which the Merger Sub was merged with and into Jerrick, with Jerrick surviving as a wholly-owned subsidiary of GTPH (the “Merger”). GTPH acquired, through a reverse triangular merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 28,500,000 shares of GTPH’s common stock. GTPH assumed 33,415 shares of Jerrick’s Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred Stock (the “Jerrick Series B Preferred”).

   

In connection with the Merger, on the Closing Date, GTPH and Kent Campbell entered into a Spin-Off Agreement (the “Spin-Off Agreement”), pursuant to which Mr. Campbell purchased from GTPH (i) all of GTPH’s interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all of GTPH’s interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 781,818 shares of GTPH’s Common Stock held by Mr. Campbell. In addition, Mr. Campbell assumed all debts, obligations and liabilities of GTPH, including any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.

 

Upon closing of the Merger on February 5, 2016, the Company changed its business plan to that of Jerrick Media.

 

Effective February 28, 2016, GTPH entered into an Agreement and Plan of Merger (the “Statutory Merger Agreement”) with Jerrick, pursuant to which GTPH became the parent company of Jerrick Ventures, LLC, a wholly-owned operating subsidiary of Jerrick (the “Statutory Merger”) and GTPH changed its name to Jerrick Media Holdings, Inc. to better reflect its new business strategy.

 

Jerrick Media 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

 

Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

F-8

 

 

Basis of Presentation

 

The Company’s 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”). 

 

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.

 

F-9

 

 

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 majority-owned subsidiaries, if any, in which the parent’s power to control exists.

 

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

 

Name of combined affiliate   State or other jurisdiction of
incorporation or organization
  Company interest  
           
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 certain of it’s inactive business subsidiaries, with the exception of Jerrick Ventures LLC, to the Company’s Chief Executive Officer, Jeremy Frommer, in consideration for Mr. Frommer’s assumption of all liabilities of such subsidiaries, if any, with such assignment and assumption effected entirely in the interest of corporate efficiency. The Board reviewed the transaction and believes it to be fair in all respects, deeming it to advance the Company’s business interests by allowing the Company to divest non-producing and non-operating subsidiaries at no cost to the Company. All of the Company’s operations have been, and will continue to be, run through its operating subsidiary, Jerrick Ventures LLC.

 

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.

 

F-10

 

 

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.

   

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.

 

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.

 

F-11

 

 

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. The company recorded an impairment of minority investment of $83,333.

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

F-12

 

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.

 

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 changed its method of accounting for the debt and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017 on a retrospective basis.

 

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 recognizes gross 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. During the year ended the recorded revenue from the following sources products at auction, sponsored content and affiliate sites.

 

Stock-Based Compensation

 

The Company recognizes compensation expense for all equity–based payments granted to employees 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.

 

F-13

 

 

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 year ended December 31, 2017 and 2016 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

F-14

 

 

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

 

  

December 31,
2017

  

December 31,
2016

 
Series A Preferred stock   192,567    203,134 
Series B Preferred stock   40,929    40,929 
Options   17,749,990    2,150,000 
Warrants   46,193,779    15,541,666 
Convertible notes - related party   7,080,128    - 
Convertible notes   17,749,990    1,344,115 
Totals   88,773,887    19,035,781 

  

Reclassifications

 

Certain prior year amounts in the 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 Adopted Accounting Guidance

 

In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The adoption of ASU 2016-09 will not have a material effect on its financial position or results of operations or cash flows.

  

F-15

 

  

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606). In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2016-10 will not have a material effect on its financial position or results of operations or cash flows.

 

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The adoption of ASU 2016-12 won’t have a material effect on its financial position or results of operations or cash flows.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The adoption of ASU 2016-15 won’t have a material effect on its financial position or results of operations or cash flows.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company early adopted the ASU 2017-11 in the year ending December 31, 2017.

 

F-16

 

 

Recent Accounting Guidance Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated financial statements and disclosures.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

 

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 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.

 

F-17

 

 

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

 

The Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private offering 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 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:

 

  

December 31,

2017

  

December 31,

2016

 
Computer Equipment  $234,315   $219,653 
Furniture and Fixtures   61,803    61,803 
    296,118    281,456 
Less: Accumulated Depreciation   (248,062)   (209,627)
   $48,056   $71,829 

 

Depreciation expense was $38,435 and $42,634 for the year ended December 31, 2017 and 2016, respectively.

 

Note 5 – Line of Credit

 

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

 

   Outstanding Balances as of 
  

December 31,

2017

  

December 31,

2016

 
Revolving Note   44,996    203,988 
Factoring Agreement   -    31,153 
   $44,996   $235,141 

  

On March 19, 2009, Astoria Surgical Supplies North LLC signed a revolving note (the “Revolving 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, 2017 and 2016 was 3.75% and 3.75%, 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 December 1, 2017. As of the date of this filing the Revolving Note has been paid off.

 

The balance outstanding on the Revolving Note at December 31, 2017 and 2016 was $44,996 and $203,988, respectively.

 

F-18

 

 

On October 4, 2016, the Company signed a revenue based factoring agreement (the “Factoring Agreement”) with Imperial Advance, LLC. The company received proceeds of $40,000 and agreed to pay $52,400 of future receivables. The note issued in connection with the Factoring Agreement is secured by an officer of the Company. On August 21, 2017, the Company and Imperial Advance, LLC entered into a Settlement Agreement pursuant to which the Company agreed to pay Imperial Advance, LLC $9,368 by August 23, 2017. The company recorded a gain on settlement of debt of $2,079.

 

The balance outstanding on the revenue based factoring agreement at December 31, 2017 and 2016 was $0 and $31,153, respectively.

 

Note 6 – Notes Payable

 

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

 

   Outstanding Principal as of          Warrants 
   December 31,
2017
   December 31,
2016
   Interest Rate   Maturity Date  Quantity   Exercise
Price
 
October 25, 2016   -    25,000    9%  July 1, 2017   50,000   $0.30 
February 22, 2017   400,000    -    12%  September 1, 2017   2,450,000   $0.20 
June 12, 2017   50,000    -    12%  September 1, 2017   35,000   $0.20 
November 28, 2017   100,000    -    15%  January 12, 2018   -    - 
November 29, 2017   50,000    -    15%  January 13, 2018   -    - 
November 29, 2017   100,000    -    15%  January 13, 2018   -    - 
    700,000    25,000                   
Less: Debt Discount   (10,500)   (9,421)                  
Less: Debt Issuance Costs   -    -                   
   $689,500   $15,579                   

   

Private Placement Offering:

 

From February 24, 2017 through March 17, 2017, the Company conducted multiple closings of a private placement offering (the “February 2017 Offering”) of the Company’s securities by entering into subscription agreements (the “Subscription Agreements”) with accredited investors (the “Accredited Investors”) for aggregate gross proceeds of $916,585 for which the Accredited Investors received $975,511 in principal value of secured promissory notes with an original issue discount of six percent (6%) (the “February 2017 Offering Notes”) and warrants to purchase the Company’s common stock (the “February 2017 Offering Warrants”). 

 

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 February 2017 Offering 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.

 

F-19

 

 

Pursuant to the Subscription Agreements, the February 2017 Offering Notes matured on September 1, 2017 (the “February 2017 Offering Maturity Date”). Prior to the February 2017 Offering Maturity Date, investors representing $575,511 in principal value converted their February 2017 Offering Notes into two year, 15% secured convertible promissory notes offered by the Company (the “August 2017 Convertible Note Offering”). The remaining investors representing an aggregate $400,000 in principal of the February 2017 Offering Notes agreed to forbear their right to declare an event of default until December 15, 2017 during which time they retain the right to convert their principal and any accrued but unpaid interest into the August 2017 Convertible Note Offering. In consideration of the forbearance for which the investors will receive a warrant to purchase up to fifteen percent (15%) of the shares of common stock underlying the warrant acquired with the purchase of the February 2017 Offering Notes at a purchase price of $0.20 per share, and the interest on their note would be increased to eighteen percent (18%) from September 1, 2017 through December 15, 2017 or the conversion date, whichever is sooner.

 

On June 12, 2017, the Company entered into a loan agreement (the “June 2017 Loan Agreement”) with an individual (the “June 2017 Lender”), the June 2017 Lender issued the Company a promissory note of $50,000 (the “June 2017 Note”). Pursuant to the June 2017 Loan Agreement, the June 2017 Note bears interest at a rate of 10% per annum. As additional consideration for entering in the June 2017 Loan Agreement, the Company issued the June 2017 Lender a five-year warrant to purchase 35,000 shares of the Company’s common stock with an exercise price of $0.20 per share. The maturity date of the June 2017 Note was September 1, 2017 (the “June 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the June 2017 Note were due. As of the date of the filing the note is in default.

 

On July 21, 2017, the Company entered into a loan agreement (the “July 2017 Loan Agreement”) with an individual (the “July 2017 Lender”), the July 2017 Lender issued the Company a promissory note of $100,000 (the “July 2017 Note”). Pursuant to the July 2017 Loan Agreement, the July 2017 Note bears interest at a rate of 10% per annum. As additional consideration for entering in the July 2017 Loan Agreement, the Company issued the 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 July 2017 Note was April 21, 2017 (the “July 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the July 2017 Note were due. On September 28, 2017, the July 2017 Note and accrued but unpaid interest was converted into the Company’s August 2017 Convertible Note Offering.

 

On August 18, 2017, the Company entered into a loan agreement (the “August 2017 Loan Agreement”) with an individual (the “August 2017 Lender”), the August 2017 the Company issued the Lender a promissory note of $50,000 (the “August 2017 Note”). Pursuant to the August 2017 Loan Agreement, the August 2017 Note bears interest at a rate of 15% per annum. The maturity date of the August 2017 Note was October 2, 2017 at which time all outstanding principal, accrued and unpaid interest and other amounts due under the August 2017 Note were due. During September 2017, the August 2017 Note and accrued but unpaid interest was converted into the Company’s August Convertible Note Offering. 

 

On November 28, 2017, the Company entered into a loan agreement (the “First November 2017 Loan Agreement”) with an individual (the “First November 2017 Lender”), the First November 2017 Lender issued the Company a promissory note of $100,000 (the “First November 2017 Note”). Pursuant to the First November 2017 Loan Agreement, the First November 2017 Note has interest of fifteen percent (15%), (i) five percent (5%) (i.e. $5,000) shall be payable in cash or convertible into shares of the Company’s restricted common stock at a rate of $0.20 per share, at the option of the Lender, at the Maturity Date; (ii) ten percent (10%) (i.e. $10,000) shall be paid in the form of the Company’s restricted common stock at a rate of $0.20 per share (equivalent to 50,000 shares of the Company’s common stock issued at $0.20 per share). The maturity date of the First November 2017 Note was January 12, 2018 (the “First November 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First November 2017 Note are due.

 

On November 29, 2017, the Company entered into a loan agreement (the “Second November 2017 Loan Agreement”) with an individual (the “Second November 2017 Lender”), the Second November 2017 Lender issued the Company a promissory note of $50,000 (the “Second November 2017 Note”). Pursuant to the Second November 2017 Loan Agreement, the Second November 2017 Note has interest of fifteen percent (15%), (i) five percent (5%) (i.e. $2,500) shall be payable in cash or convertible into shares of the Company’s restricted common stock at a rate of $0.20 per share, at the option of the Lender, at the Maturity Date; (ii) ten percent (10%) (i.e. $5,000) shall be paid in the form of the Company’s restricted common stock at a rate of $0.20 per share (equivalent to 25,000 shares of the Company’s common stock issued at $0.20 per share). The maturity date of the Second November 2017 Note was January 13, 2018 (the “Second November 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second November 2017 Note are due.

 

On November 29, 2017, the Company entered into a loan agreement (the “Third November 2017 Loan Agreement”) with an individual (the “Third November 2017 Lender”), the Third November 2017 Lender issued the Company a promissory note of $100,000 (the “Third November 2017 Note”). Pursuant to the Third November 2017 Loan Agreement, the Third November 2017 Note has interest of fifteen percent (15%), (i) five percent (5%) (i.e. $5,000) shall be payable in cash or convertible into shares of the Company’s restricted common stock at a rate of $0.20 per share, at the option of the Lender, at the Maturity Date; (ii) ten percent (10%) (i.e. $10,000) shall be paid in the form of the Company’s restricted common stock at a rate of $0.20 per share (equivalent to 50,000 shares of the Company’s common stock issued at $0.20 per share). The maturity date of the Third November 2017 Note was January 13, 2018 (the “Third November 2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Third November 2017 Note are due.

 

F-20

 

 

Note 7 – Convertible Note Payable

 

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

 

   Outstanding Principal as of              Warrants 
   December 31, 2017   December 31, 2016   Interest
Rate
   Conversion
Price
   Maturity Date  Quantity   Exercise
Price
 
November – December, 2016   25,000    400,000    10%   0.30   November 1, 2017   400,000    0.30 
December 27, 2016   -    100,000    10%   0.30   December 27, 2017   100,000    0.30 
June, 2017   71,500    -    12%   Not Applicable   September 1, 2017   114,700    0.20 
July, 2017   -    -    8.5%   0.20(*)  April 11, 2018   350,000    0.20 
August – November 2017   2,943,884    -    15%   0.20(*)  August – November 2019   14,716,419    0.20 
December 21, 2017   100,000                             
    3,140,384    500,000                        
Less: Debt Discount   (452,022)   (184,398)                       
Less: Debt Issuance Costs   (79,569)   (46,779)                       
    2,672,574    268,823                        
Less: Current Debt   (96,500)   (268,823)                       
Total Long-Term Debt  $2,512,293   $-                        

  

(*) As subject to adjustment as further outlined in the notes

 

F-21

 

 

During the months of November and December 2016, the Company issued convertible notes to third party lenders totaling $400,000. These notes accrue interest at a rate of 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. The investors converted $375,000 of principal and $30,719 of interest into the August 2017 Convertible Note Offering. 

 

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 is convertible at a conversion price of $0.30 per share, subject to adjustment. On August 31, 2017 the investor converted $100,000 of principal and $6,767 of interest into the August 2017 Convertible Note Offering. 

 

During the month of June 2017 the Company issued convertible notes to third party lenders totaling $71,500. 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 67,550 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 December 31, 2018, the Company was currently in default on $71,500 in principal due on the notes.  On February 8, 2018, the Company repurchased these notes and is no longer in default.

 

The July 2017 Convertible Offering

 

During the month of July 2017, the Company entered into Securities Purchase Agreements and conducted closings of a private placement offering (the “July 2017 Convertible Note Offering”) of the Company’s securities for aggregate gross proceeds of $445,000. In aggregate, the Company entered into Securities Purchase Agreements with three accredited investors for (i) the issuance and sale of 8.5% Convertible Redeemable Debentures, containing a ten percent (10%) original issuance discount, due April 18, 2018 (the “Debentures”) and (ii) the issuance and sale of five-year Common Stock Purchase Warrants to purchase up to 778,750 shares of the Company’s common stock, par value $0.001 per share. The Warrants were immediately exercisable upon issuance at an exercise price of $0.20 per share, subject to adjustment, and expire five years from the date of issuance. The accredited investors also received a total of 245,000 shares of the Company’s common stock as inducement for participating in the July 2017 Convertible Note Offering (the “Consideration Shares”).

 

During September 8, 2017 through September 13, 2017, the Company redeemed the 8.5% Convertible Redeemable Debentures by paying the three accredited investors an aggregate $606,812 representing 117.5% of the principal along with interest. Pursuant to such redemption, the Debentures are no longer in full force and effect.

 

F-22

 

 

The Company also repurchased 220,000 consideration shares of one of the accredited investors for $19,007, cancelling the accredited investor’s Consideration Shares.

 

Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Black Scholes model at the issuance date and the period end. The conversion feature of The July 2017 Convertible Offering issued during the year ended December 31, 2017, gave rise to a derivative liability of $332,942 which was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible note.

 

The Company recorded an $78,823 debt discount relating to 778,750 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

The August 2017 Convertible Note Offering

 

During the year ended December 31, 2017, the Company conducted multiple closings of a private placement offering to accredited investors (the “August 2017 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “Investors”) for aggregate gross proceeds of $1,585,000. In addition, $1,217,177 of the Company’s short term debt along with accrued but unpaid interest of $40,146 was converted into the August Offering. The conversions resulted in the issuance of 6,791,419 warrants with a fair value of $583,681 and an original issue discount of $101,561. These were recorded as a loss on extinguishment of debt.

 

The August Offering consisted of a maximum of $6,000,000 of units of the Company’s securities (each, a “Unit” and collectively, the “Units”), with each Unit consisting of (a) a 15% Convertible Secured Promissory Note (each a “Note” and together the “Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion price of $0.20 per share (the “Conversion Price”), and (b) a five-year warrant (each a “Warrant and together the “Warrants”) to purchase common stock equal to one hundred percent (100%) of the shares into which the Notes can be converted into (“Warrant Shares”) at an exercise price of $0.20 per share (“Exercise Price”). The Notes mature on the second (2nd) anniversary of their issuance dates.

 

The Conversion Price of the Note and the Exercise Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase price, subject to carve-outs as described therein.

 

The Company recorded a $472,675 debt discount relating to 7,925,000 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

In connection with the Offering, the Company paid a placement agent a cash fee of $90,508 to carry out the Offering on a “best-efforts” basis, which was recorded as issuance cost and is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

F-23

 

 

On December 27, 2017, the Company issued a convertible note to a third party lender totaling $100,000 (the “First December 2017 Note”). The First December 2017 Note accrues interest at 15% per annum and matures with interest and principal both due on December 27, 2019. In addition, the Company issued a warrant to purchase 500,000 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 Company recorded a $35,525 debt discount relating to the warrants issued to the investor based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note The First December 2017 Note and accrued interest is convertible at a conversion price of $0.20 per share, subject to adjustment. The First December 2017 Note is secured by a second priority lien on the assets of the Company.

 

Note 8 – Related Party Loan

 

Convertible notes

 

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

 

   Outstanding Principal as of          Warrants 
   December 31, 2017   December 31,
2016
   Interest Rate   Maturity Date  Quantity   Exercise
Price
 
August – October 2017   1,416,026       -    15%  August – October 2019   4,589,466    0.20 
December 21, 2018   100,000         15%  December 21, 2019   500,000    0.20 
    1,516,026    -                   
Less: Debt Discount   (170,780)   -                   
    1,345,246    -                   
Less: Current Debt   -    -                   
Total Long-Term Debt  $1,345,246   $                  -                   

 

On April 25, 2017, the Company issued convertible notes to Arthur Rosen, a lender, totaling $25,000 (the “April Rosen Notes”). 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. On September 7, 2017, the April Rosen Notes and accrued interest was converted into the August 2017 Convertible Note Offering.

  

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 were converted into the August 2017 Convertible Note Offering.

 

The August 2017 Convertible Note Offering – Related Party 

 

During the year ended December 31, 2017, the Company conducted multiple closings of a private placement offering to accredited investors (the “The August 2017 Convertible Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “Investors”) for aggregate gross proceeds of $505,000. In addition, $645,000 of the Company’s short term debt along with accrued but unpaid interest of $206,026 was converted into the August 2017 Convertible Offering. The conversions resulted in the issuance of 4,555,129 warrants with a fair value of $440,157 and the increase of principal of $60,000. These resulted in a loss on extinguishment of debt of $500,157.

 

The Company offered, through a placement agent, $6,000,000 of units of its securities (each, a “Unit” and collectively, the “Units”), with each Unit consisting of (a) a 15% Convertible Secured Promissory Note (each a “Note” and together the “Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion price of $0.20 per share (the “Conversion Price”), and (b) a five-year warrant ( each a “Warrant and together the “Warrants”) to purchase common stock equal to one hundred percent (100%) of the shares into which the Notes can be converted into (“Warrant Shares”) at an exercise price of $0.20 per share (“Exercise Price”). The Notes mature on the second (2nd) anniversary of their issuance dates.

 

F-24

 

 

The Conversion Price of the Note and the Exercise Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase price, subject to carve-outs as described therein.

  

The Company recorded a $160,700 debt discount relating to 2,525,000 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

On December 21, 2017, the Company issued a convertible note to a third party lender totaling $100,000 (the “Second December 2017 Note”). The Second December 2017 Note accrues interest at 15% per annum and matures with interest and principal both due on December 27, 2019. In addition, the Company issued a warrant to purchase 500,000 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 Company recorded a $36,722 debt discount relating to the warrants issued to the investor based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note The Second December 2017 Note and accrued interest is convertible at a conversion price of $0.20 per share, subject to adjustment. The Second December 2017 Note is secured as a second priority lien on the assets of the Company. 

 

Notes payable

  

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

 

    Outstanding Principal as of               Warrants  
    December 31, 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     -       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       12 %   November 22, 2017     50,000       0.40  
October 24, 2016     -       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       10 %   November 22, 2017     750,000       0.30  
December 21, 2016     -       50,000       10 %   November 22, 2017     166,666       0.30  
September 8, 2017     224,000       -       1 %   September 24, 2017    

125,000

      0.20  
November 20, 2017     25,000       -       15 %   December 31, 2017     -       -  
      1,249,000       1,460,000                              
Less: Debt Discount     (-)       (94,675 )                            
    $ 1,249,000     $ 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 7, 2017 (the “Conversion Date”), Rosen converted all accrued but unpaid interest on the May 26 Rosen Loan from May 26, 2016 through September 6, 2017 in the amount of $150,127.97 (the “May 26 Rosen Loan Interest”) into the Company’s August Convertible Note Offering, after which May 26 Rosen Loan Interest was deemed paid in full through the Conversion Date.

 

F-25

 

 

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

  

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

  

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

F-26

 

 

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. During the year ended December 31, 2017 the principal and interest of this note were repaid.

 

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 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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

  

On May 11, 2017, the Company entered into a loan agreement (the “May 2017 Schiller Loan Agreement”) with 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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

  

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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

F-27

 

 

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 “July 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. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

On July 6, 2017, the Company entered into a loan agreement (the “July 2017 Gordon Loan Agreement”) with Gordon, whereby the Company issued Gordon a promissory note of $25,000 (the “July 2017 Gordon Note”). The July 2017 Gordon Note is secured by an officer of the Company. Pursuant to the July 2017 Gordon Note Loan Agreement, the July 2017 Gordon Note bears interest at a rate of 10% per annum. As additional consideration for entering in the July 2017 Gordon Note Loan Agreement, the Company issued Gordon a five-year warrant to purchase 18,750 shares of the Company’s common stock at a purchase price of $0.20 per share. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

On August 24, 2017, the Company entered into a loan agreement (the “August 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $20,000 (the “August 2017 Rosen Note”). The August 2017 Rosen Note is secured by an officer of the Company. Pursuant to the August 2017 Rosen Note Loan Agreement, the August 2017 Rosen Note bears interest at a rate of 12% per annum. During the year ended December 31, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.

 

On September 8, 2017, the Company entered into a loan agreement (the “September 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $224,000 (the “September 2017 Rosen Note”). The September 2017 Rosen Note is secured by an officer of the Company. As additional consideration for entering in the September 2017 Rosen Note Loan Agreement, the Company issued Rosen a five-year warrant to purchase 25,000 shares of the Company’s common stock at a purchase price of $0.20 per share. On November 13, 2017, in consideration for extending the Promissory Note, Rosen was issued a warrant to purchase 100,000 shares of the Company’s Common Stock exercisable within five (5) years and with an exercise price of $0.20 per share.

 

On November 20, 2017, the Company entered into a loan agreement (the “November 2017 Schiller Loan Agreement”) Schiller, a member of the Board, whereby the Company issued Schiller a promissory note of $25,000 (the “November 2017 Schiller Note”). Pursuant to the November 2017 Schiller Loan Agreement, the November 2017 Schiller Note bears interest at a rate of 15% per annum.

  

On November 20, 2017, the Company entered into a loan agreement (the “November 2017 Rosen Agreement”) whereby the Company issued Rosen a promissory note of $25,000 (the “November 2017 Rosen Note”). Pursuant to the November 2017 Rosen Loan Agreement, the November 2017 Rosen Note bears interest at a rate of 15% per annum. During the year ended December 31, 2017 the principal and interest of this note were repaid. 

 

Line of credit

 

On May 9, 2017, the Company entered into a Revolving Line of Credit (the “LOC”) with Grawin, 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%.

 

F-28

 

 

As of December 31, 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:

 

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

 

The capital leases mature as follows:

 

2017:  $-   $3,524 
2018:   4,732   $1,208 

  

Note 10 – Derivative Liabilities

 

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

  

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

 

   Low   High 
Annual dividend rate   0%   0%
Expected life   0.58    0.75 
Risk-free interest rate   1.11%   1.16%
Expected volatility   90.71%   93.55%

 

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 expected term.

 

F-29

 

 

Expected term: The Company’s remaining term is based on the remaining contractual maturity of the convertible notes.

 

The following are the changes in the derivative liabilities during the year ended December 31, 2017.

 

   Year Ended
December 31, 2017
 
   Level 1   Level 2   Level 3 
Derivative liabilities as January 1, 2017  $       -   $      -   $- 
Addition   -    -    332,942 
Conversion   -    -      
Extinguishment Expense             (397,288)
Gain on changes in fair value   -    -    64,346 
Derivative liabilities as December 31, 2017  $-   $-   $- 

 

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 (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 year ended December 31, 2017, the Company converted 1,733 shares of Series A for 1,146,307 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.

 

F-30

 

 

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.

 

During the year ended December 31, 2016 the conversion price was adjusted to $0.164

 

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 provision 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 year ended December 31, 2016, the Company accrued $3,318,353 for liquidating damages on the Series A and $309,665 on the warrants associated with the Series A.

 

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

 

F-31

 

 

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.

 

During the year ended December 31, 2016 the conversion price was adjusted to $0.197

 

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.

 

F-32

 

 

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 year ended December 31, 2016, the Company accrued $667,313 for liquidating damages on the Series B and $51,159 on the warrants associated with the Series B.

 

During the year ended December 31, 2016, the Company issued 1,063 shares of Series B upon conversion of interest totaling $108,844.

 

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

 

During the year ended December 31, 2017, the Company issued 0 shares of Series B upon conversion of interest totaling $0.

 

Series D Convertible Preferred Stock

 

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

 

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

 

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

 

The Company 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.

 

F-33

 

 

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.

 

During the year ended December 31, 2017, the Company converted 914 shares of Series D for 266,325 shares of common stock. 

  

Common Stock

 

On February 1, 2016, the Company issued 268,333 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.

 

On February 6, 2016, the Company entered into Stock Purchase Agreements (the “Purchase Agreements”) with three investors providing for the issuance and sale of an aggregate of 2,626,308 shares of the Company’s common stock, par value $0.001 per share, for an aggregate purchase price of $2,626.

 

On August 17, 2016, the Company entered into a subscription agreement (the “Subscription Agreement”) with an accredited investor for the sale of 666,666 shares of the Company’s Common Stock (the “Shares”) and warrants to purchase 333,333 shares of the Company’s Common Stock (the “Warrant”) for a purchase price of $250,000. The Warrant is exercisable at any time after the date of issuance and has a five year term. The Warrant is exercisable at price of $0.40 per share.

 

During the year ended December 31, 2016, the Company issued 392,764 common shares for cashless exercise of warrants.

 

On January 30, 2017, the Company issued 947,440 shares of its restricted common stock to settle outstanding vendor liabilities of $353,732. In connection with this transaction the company also recorded a gain on settlement of vendor liabilities of $167,905. 

 

On February 7, 2017, the Company issued 1,767,633 shares of its restricted common stock to consultants in exchange for services at a fair value of $293,427.

 

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

 

F-34

 

 

On February 13, 2017, the Company issued 133,333 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. 

  

Treasury Stock

 

 As discussed in Note 7, upon amendment of the July 2017 Convertible Note, the Company repurchased the 220,000 shares for an aggregate purchase price of $19,007 which is presented as Treasury Stock on the consolidated balance sheets.

 

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 year ended December 31, 2017 and December 31, 2016 are as follows:

 

   

December 31,

2017

   

December 31,

2016

 
Exercise price     0.16-0.75       0.25-0.40  
Expected dividends     0%       0%  
Expected volatility     86.62% - 92.14%       73.44%-90.05%  
Risk free interest rate     1.74% - 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, 2015 – outstanding and exercisable   500,000    0.25    4.93 
Granted   1,750,000    0.36    5.0 
Exercised   -    -    - 
Cancelled/Modified   -    -    - 
Balance – December 31, 2016 – outstanding   2,250,000    0.34    4.38 
Balance – December 31, 2016 – exercisable   2,200,000    0.30    4.38 
                
Outstanding options held by related party – December 31, 2016   2,250,000    0.34    4.38 
Exercisable options held by related party – December 31, 2016   2,200,000    0.30    4.38 
                
Balance – December 31, 2016   2,250,000   $0.34    4.38 
Granted   15,499,990   $0.43    5.00 
Exercised   -    -    - 
Cancelled/Modified   (100,000)  $0.40    - 
Balance – December 31, 2017 – outstanding   17,649,990   $0.42    4.27 
Balance – December 31, 2017 – exercisable   8,983,322   $0.27    4.15 
               
Outstanding options held by related party – December 31, 2017   17,429,990   $0.42    4.65 
Exercisable options held by related party – December 31, 2017   8,843,322   $0.27    4.15 

  

At December 31, 2017, the aggregate intrinsic value of options outstanding and exercisable was $3,500 and $ 3,500, respectively.

 

F-35

 

 

Stock-based compensation for stock options has been recorded in the consolidated statements of operations and totaled $1,092,970 and $231,035, for the year ended December 31, 2017 and 2016, respectively.

 

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

 

Options   Value   Purpose for Grant
 15,499,990   $1,172,022   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 year ended December 31, 2017 are as follows:

 

   December 31,
2017
   December 31,
2016
 
Exercise price   $0.20-0.30   $0.40
Expected dividends   0%   0%
Expected volatility   96.76%-102.21%    73.44-91.54% 
Risk free interest rate   1.63%-2.26%    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 and Exercisable – December 31, 2015   10,750,000    0.35 
Granted   4,791,666    0.40 
Exercised   -    - 
Forfeited/Cancelled   -    - 
Outstanding – December 31, 2016   15,541,666   $0.36 
Granted   30,652,113    0.20 
Exercised   -    - 
Forfeited/Cancelled   -    - 
Outstanding and Exercisable – December 31, 2017   46,193,779   $0.25 

  

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     46,193,779    4    0.25    46,193,779    0.25 

  

During the year ended December 31, 2017, a total of 5,811,360 warrants were issued with promissory notes (See Note 6 above). In addition, the placement agent was granted a total of 487,755 warrants to purchase common stock. The warrants have a grant date fair value of $1,189,235 using a Black-Scholes option-pricing model and the above assumptions.

 

F-36

 

 

During the year ended December 31, 2017, a total of 16,597,719 warrants were issued with convertible notes (See Note 7 above). In addition, the placement agent was granted a total of 12,150 warrants to purchase common stock. The warrants have a grant date fair value of $1,472,161 using a Black-Scholes option-pricing model and the above assumptions.

 

During the year ended December 31, 2017, a total of 345,500 warrants were issued with notes payable – related party (See Note 8 above). The warrants have a grant date fair value of $38,109 using a Black-Scholes option-pricing model and the above assumptions.

 

During the year ended December 31, 2017, a total of 7,115,129 warrants were issued with convertible notes payable – related party (See Note 8 above). The warrants have a grant date fair value of $680,037 using a Black-Scholes option-pricing model and the above assumptions. 

  

Stock Incentive Plan

 

On December 9, 2015, Jerrick adopted the 2015 Stock Incentive and Award Plan (the “Plan”) which will provide for the issuance of up to 18,000,000 shares of the Company’s Common Stock.

 

The purpose of the Plan is to provide additional incentive to those officers, employees, consultants and non-employee directors of the Company and its parents, subsidiaries and affiliates whose contributions are essential to the growth and success of the Company’s business.

 

Eligible recipients of option awards are employees, officers, consultants or directors (including non-employee directors) of the Company or of any parent, subsidiary or affiliate of the Company. Upon recommendation from the Compensation Committee, the board has the authority to grant to any eligible recipient any options, restricted stock or other awards valued in whole or in part by reference to, or otherwise based on, our Common Stock.

 

The provisions of each option granted need not be the same with respect to each option recipient. Option recipients shall enter into award agreements with us, in such form as the board shall determine.

 

The Plan shall be administered by the Compensation Committee consisting of two or more independent, non-employee and outside directors. In the absence of such a Committee, the Board of the Company shall administer the Plan.

 

Each Option shall contain the following material terms:

 

  (i) the purchase price of each share of Common Stock with respect to Incentive Options shall be determined by the Committee at the time of grant, shall not be less than 100% of the Fair Market Value (defined as the closing price on the final trading day immediately prior to the grant on the principal exchange or quotation system on which the Common Stock is listed or quoted, as applicable) of the Common Stock of the Jerrick,  provided  that if the recipient of the Option owns more than ten percent (10%) of the total combined voting power of the Jerrick, the exercise price shall be at least 110% of the Fair Market Value;
     
  (ii) The purchase price of each share of Common Stock purchasable under a Non-qualified Option shall be at least 100% of the Fair Market Value of such share of Common Stock on the date the Non-qualified Option is granted,  unless  the Committee, in its sole and absolute discretion, determines to set the purchase price of such Non-qualified Option below Fair Market Value.
     
  (iii) the term of each Option shall be fixed by the Committee,  provided  that such Option shall not be exercisable more than five (5) years after the date such Option is granted, and  provided further  that with respect to an Incentive Option, if the recipient owns more than ten percent (10%) of the total combined voting power of the Jerrick, the Incentive Option shall not be exercisable more than five (5) years after the date such Incentive Option is granted;
     
  (iv) subject to acceleration in the event of a Change of Control of the Jerrick (as further described in the Plan), the period during which the Options vest shall be designated by the Committee or, in the absence of any Option vesting periods designated by the Committee at the time of grant, shall vest and become exercisable in equal amounts on each fiscal quarter of the Jerrick through the four (4) year anniversary of the date on which the Option was granted;

 

F-37

 

 

  (v) no Option is transferable, and each is exercisable only by the recipient of such Option except in the event of the death of the recipient; and
     
  (vi) with respect to Incentive Options, the aggregate Fair Market Value of Common Stock exercisable for the first time during any calendar year shall not exceed $100,000.

 

Each award of Restricted Stock is subject to the following material terms:

 

  (i) no rights to an award of Restricted Stock are granted to the intended recipient of Restricted Stock unless and until the grant of Restricted Stock is accepted within the period prescribed by the Compensation Committee;
     
  (ii) Restricted Stock shall not be delivered until they are free of any restrictions specified by the Compensation Committee at the time of grant;
     
  (iii) recipients of Restricted Stock have the rights of a stockholder of the Jerrick as of the date of the grant of the Restricted Stock;
     
  (iv) shares of Restricted Stock are forfeitable until the terms of the Restricted Stock grant have been satisfied or the employment with the Company is terminated; and
     
  (v) the Restricted Stock is not transferable until the date on which the Compensation Committee has specified such restrictions have lapsed.

 

Note 12 - Income Taxes

  

Components of deferred tax assets are as follows:

 

   December 31, 2017   December 31,
2016
 
Net deferred tax assets – Non-current:        
         
Expected income tax benefit from NOL carry-forwards  $7,600,000   $3,100,000 
Less valuation allowance   (7,600,000)   (3,100,000)
Deferred tax assets, net of valuation allowance  $-   $- 

 

Income Tax Provision in the Consolidated Statements of Operations

 

A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

 

   For the Year Ended
December 31, 2017
   For the Year Ended
December 31, 2016
 
         
Federal statutory income tax rate   21.0%   34.0%
           
Change in valuation allowance on net operating loss carry-forwards   (21.0)%   (34.0)%
           
Effective income tax rate   0.0%   0.0%

  

F-38

 

 

Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets of the Company will not be fully realizable for the year ended December 31, 2017 and 2016. Accordingly, management had applied a full valuation allowance against net deferred tax assets as of December 31, 2017 and 2016.

 

As of December 31, 2017, the Company had approximately $7.6 million of federal net operating loss carryforwards available to reduce future taxable income which will begin to expire in 2033 for both federal and state purposes.

 

On December 22, 2017, the Tax Cuts and Jobs Act pf 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended (the “Code”). The Act reduces the federal corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. ASC 470 requires the Company to remeasure the existing net deferred tax asset in the period of enactment. The Act also provides for immediate expensing of 100% or the costs of qualified property that is incurred and placed in service during the period from September 27, 2017 to December 31, 2022. Beginning January 1, 2023, the immediate expensing provision is phased down by 20% per year until it is completely phased out as of January 1, 2027. Additionally, effective January 1, 2018, the Act imposes possible limitations on the deductibility of interest expense. As a result of the provisions of the Act, the Company’s deduction for interest expense could be limited in future years. The effects of other provisions of the Act are not expected to have a material impact on the Company’s financial statements.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that begins in the reporting period that includes the Act’s enactment date and ends when an entity has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements under ASC 720. However, in no circumstance should the measurement period extend beyond one year from the enactment date. In accordance with SAB 118, a company must reflect in its financial statements the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. SAB 118 provides that to the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

 

The Company does not reflect a deferred tax asset in its financial statements but includes that calculation and valuation in its footnotes. We are still analyzing the impact of certain provisions of the Act and refining our calculations. The Company will disclose any change in the estimates as it refines the accounting for the impact of the Act.

  

Note 13 - Subsequent Events

 

Subsequent to December 31, 2017, the Company received gross proceeds of $1,780,750 of the issuance of convertible notes. In addition, $300,000 of the Company’s short term debt along with accrued but unpaid interest of $41,442 was converted into convertible debentures. As additional consideration for entering in the convertible debentures, the Company issued the investors 5-year warrant to purchase 10,488,708 shares of the Company’s common stock at a purchase price of $0.20 per share.

  

Subsequent to December 31, 2017, the Company received gross proceeds of $50,000 of the issuance of notes payable. As additional consideration for entering in the debentures, the Company issued the investors 5-year warrant to purchase 100,000 shares of the Company’s common stock at a purchase price of $0.20 per share.

  

Subsequent to December 31, 2017, the Company received gross proceeds from related parties of $40,750 of the issuance of convertible notes. As additional consideration for entering in the convertible debentures, the Company issued the investors 5-year warrant to purchase 81,500 shares of the Company’s common stock at a purchase price of $0.20 per share.

  

Subsequent to December 31, 2017, the Company received gross proceeds from related parties of $135,000 of the issuance of notes payable. As additional consideration for entering in the convertible debentures, the Company issued the investors 5-year warrant to purchase 35,000 shares of the Company’s common stock at a purchase price of $0.20 per share.

 

Subsequent to December 31, 2017, the Company issued 375,000 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.

 

Subsequent to December 31, 2017, the Company issued 628,750 shares of its common stock to consultants in exchange for services.

 

F-39

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None

 

Item 9A. Controls and Procedures.

 

(a) Evaluation of Disclosure and Control Procedures

 

Based on his evaluation as of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer has 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) Management’s Report on Internal Control over Financial Reporting

 

This Company’s management is responsible for establishing and maintaining internal controls over financial reporting and disclosure controls. Internal Control Over Financial Reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officer, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the registrant; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

 

 21

 

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is appropriately recorded, processed, summarized and reported within the specified time periods.

 

Management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017, based on the framework established in Internal Control-Integrated Framework-2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Based on this assessment, management concluded that as of the period covered by this Annual Report on Form 10-K, it had material weaknesses in its internal control procedures.  

 

As of period covered by this Annual Report on Form 10-K, we have concluded that our internal control over financial reporting was not effective. The Company’s assessment identified certain material weaknesses which are set forth below:

 

Functional Controls and Segregation of Duties

 

Because of the Company’s limited resources, there are limited controls over information processing.

 

There is an inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation we would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties. Management will reassess this matter in the following year to determine whether improvement in segregation of duty is feasible. 

 

Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.

 

Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving funding for the Company’s business operations.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report herein.

 

(c) 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.

 

Item 9B. Other Information. 

 

None.

 

 22

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

The following table and biographical summaries set forth information, including principal occupation and business experience, about our directors and executive officers at May 16, 2018: 

 

Name   Age   Positions
Jeremy Frommer(1)(2)   50   Chief Executive Officer, Director
Rick Schwartz(1)   50   President
Leonard Schiller(2)   74   Director
Andrew Taffin(3)   52   Director

 

(1) Effective February 5, 2016, Jeremy Frommer was appointed as our Chief Executive Officer and Rick Schwartz was appointed as our President.
(2) Effective February 5, 2016, Jeremy Frommer and Leonard Schiller were appointed as members of the board of directors.
(3) Effective May 2, 2016, Andrew Taffin was appointed as a member of the board of directors. 

 

Jeremy Frommer, Chief Executive Officer and Director

 

Mr. Frommer, age 50, combines over 20 years of experience in the financial technology industry. Previously, Mr. Frommer held key leaderships roles in the investment banking and trading divisions of large financial institutions. From 2009 to 2012, Mr. Frommer was briefly retired until beginning concept formation for Jerrick Ventures which he officially founded in 2013. From 2007 to 2009, Mr. Frommer was Managing Director of Global Prime Services at RBC Capital Markets, the investment banking arm of the Royal Bank of Canada, the largest financial institution in Canada, after the sale of Carlin Financial Group, a professional trading firm. From 2004 to 2007, Mr. Frommer was the Chief Executive Officer of Carlin Financial Group after the sale of NextGen Trading, a software development company focused on building equity trading platforms. From 2002 to 2004, Mr. Frommer was Founder and Chief Executive Officer of NextGen Trading. From 2000 to 2002, he was Managing Director of Merger Arbitrage Trading at Bank of America, a financial services firm. Mr. Frommer was also a director of LionEye Capital, a hedge fund from June 2012 to June 2014. He holds a B.A. from the University of Albany. 

 

Rick Schwartz, President

 

Mr. Schwartz, age 50, is a film and television producer and financier based in New York. Notable credits include The Departed, Black Swan, Gangs of New York, The Aviator, Machete, and The Others. Mr. Schwartz began his film career at Miramax under Harvey and Bob Weinstein, working there for seven years and eventually serving as the company’s Senior Vice President of Production. From 2008 to 2014, Mr. Schwartz was CEO and Founder of Overnight Productions. In 2014, Mr. Schwartz and partner Jimmy Fallon created Eight Million Plus Productions, a New York-based production company, which produces shows such as Spike TV’s Lip Sync Battle and NBC’s Sharing.

 

Leonard Schiller, Director

 

Leonard Schiller, age 74, is President and Managing Partner of the Chicago law firm of Schiller Klein PC and has been associated with the firm since 1977. Mr. Schiller also has served as the President of The Dearborn Group, a residential property management and real estate company with properties located in the Midwest. Mr. Schiller has also been involved in the ownership of residential properties and commercial properties throughout the country. Mr. Schiller has acted as a principal in numerous private loan transactions and has been responsible for the structure, and management of these transactions. Mr. Schiller has also served as a member of the Board of Directors of IMALL, an internet search engine company, which was acquired by Excite@Home. He also served as a member of the Board of AccuMed International, Inc., a company which manufactured and marketed medical diagnostic screening products, which was acquired by Molecular Diagnostics, Inc. He presently serves as a director of Milestone Scientific, Inc., a Delaware company and as a director of Point Capital, Inc., a Delaware corporation. 

 

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Andrew Taffin, Director

 

Andrew Taffin, age 52, has over 25 years of entrepreneurial and executive leadership experience. He is currently the Chief Executive Officer and co-founder of Tallen Technology Rentals (“Tallen”), a leading provider of technology services and short-term rental AV equipment for businesses and organizations of all sizes. Under Mr. Taffin’s leadership, Tallen has experienced consistent revenue growth, secured multimillion dollar contracts with Fortune 100 companies, expanded into multiple business categories including pharmaceutical and financial services, and established a global presence to include supporting clients across the globe. Mr. Taffin was also one of the founding members and former president of the International Technology Rental Associations (“ITRA”). Mr. Taffin is a consistent speaker at industry conferences and events and contributes regularly to several technology publications. Mr. Taffin graduated from Plymouth State University with a B.A. in communications.

 

The members of the Board of Directors serve until the next annual meeting of stockholders, or until their successors have been elected.

 

When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board of Directors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director.  With regard to Mr. Frommer, the Board of Directors considered his significant experience, expertise and background with regard to the Company’s business and his prior experience as a chief executive for other business enterprises.  With regard to Mr. Schiller, the Board of Directors considered his background and experience as an investor in many different businesses, together with his prior experience serving on the boards of public and private companies. With regard to Mr. Taffin, the Board of Directors considered his management experience in growing small businesses.

 

Family Relationships

 

There are currently no family relationships among any of our directors or executive officers.

  

Board Committees

 

Our Board of Directors does not have any committees formed.  As independent directors are added to our board, we intend to form a formal Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and adopt appropriate written charters for such committees.  Presently, however, there are no plans to appoint certain directors to specific committees.  Until such time as an Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee is formed, the full Board of Directors fulfills the functions normally undertaken by such committees.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).

 

Based solely on our review of certain reports filed with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, the reports required to be filed with respect to transactions in our common stock during the fiscal year ended December 31, 2017, the following persons did not file timely. Leonard Schiller, a member of our Board, did not file timely two times, but has made all required filings as of this date; and Mr. Andrew Taffin, a member of our Board, did not file timely once, but has made all required filings as of this date.

 

Mr. Arthur Rosen, a beneficial owner of more than 10% of our Common Stock did not file his Form 3 on a timely basis during the fiscal year ended December 31, 2017. On April 23, 2018, Mr. Rosen filed a Form 3 and a Schedule 13D. To the Company’s knowledge, Mr. Rosen has made all required filings as of this date.

 

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Code of Ethics

 

The Company does not currently maintain a Code of Ethics but plans to adopt one in the near future.     

 

Legal Proceedings

 

There are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.

  

Item 11. Executive Compensation.

 

The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the years ended December 31, 2017, and 2016.

 

Name and Principal
Position
  Year   Salary
($)
   Bonus
($)
   Stock
Awards
($)
   Option
Awards
($)
   Non-Equity
Incentive Plan
Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings 
($)
   All Other
Compensation
($)
   Total 
($)
 
                                     

Kent Campbell (1)

Chief Executive Officer and

   2017   $     0   $     0   $      0   $      0   $        0   $        0   $       0   $0 
Chief Financial Officer   2016   $0  $0  $0  $0   $0   $0   $0   $0 
                                              
Denis Espinoza (1) President and Chief Operating   2017   $0   $0   $0   $0   $0   $0   $0   $0 
Officer   2016   $0   $0   $0   $0   $0   $0   $0   $0 
                                              
Jeremy Frommer (2) Chief Executive   2017   $126,010   $160,350   $0   $189,650   $0   $0   $132,792(3)  $608,802 
Officer   2016   $127,895   $137,500   $0   $0   $0   $0   $81,000   $346,395 
                                              
Rick Schwartz (2)   2017   $119,151   $0   $0   $189,650   $0   $0   $12,944   $321,745 
President   2016   $136,105   $0   $0   $0   $0   $0   $12,000   $148,105 

 

(1) Effective February 5, 2016, Kent Campbell resigned as our Chief Executive Officer and Chief Financial Officer and Denis Espinoza resigned as our President and Chief Operating Officer.
(2) Effective February 5, 2016, Jeremy Frommer was appointed as our Chief Executive Officer and Rick Schwartz was appointed as our President.
(3) The $132,792 includes payment to Mr. Frommer for living expenses, health insurance and a vehicle allowance.

 

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Employment Agreements

 

As of May 7, 2018, the Company has not entered into any employments agreements, but intends on entering into such agreements with its Chief Executive Officer and President in the fiscal year 2018. 

    

Outstanding Equity Awards at Fiscal Year-End 2017

 

At December 31, 2017, we had outstanding equity awards as follows:

 

Name     Number of Securities Underlying Unexercised Options Exercisable       Number of Securities Underlying Unexercised Options Unexercisable       Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options       Weighted Average
Exercise Price
     

Expiration

Date

      Number of Shares or Units of Stock That Have Not Vested       Market Value of Shares or Units of Stock That Have Not Vested       Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested       Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested  
                                                                         
Jeremy Frommer (1)     4,000,000       2,000,000       4,000,000     $ 0.375       May 22, 2022       2,000,000   $ 390,000       -       -  
                                                                         
Rick Schwartz (1)     4,000,000       2,000,000       4,000,000     $ 0.375       May 22, 2022       2,000,000   $ 390,000       -       -  

 

(1) Effective February 5, 2016, Jeremy Frommer was appointed as our Chief Executive Officer and Rick Schwartz was appointed as our President.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

As of the close of business on May 16, 2018 we had outstanding 40,524,432 shares of common stock.  Each share of common stock is currently entitled to one vote on all matters put to a vote of our stockholders.  The following table sets forth the number of common shares, and percentage of outstanding common shares, beneficially owned as of May 16, 2018, by:

 

  each person known by us to be the beneficial owner of more than five percent of our outstanding common stock;
     
  each of our current directors;
     
  each our current executive officers and any other persons identified as a “named executive” in the Summary Compensation Table above; and
     
  all our current executive officers and directors as a group.

 

Shares beneficially owned and percentage ownership before this offering is based on 40,524,432 shares of common stock outstanding as of May 16, 2018.

 

Beneficial ownership is determined in accordance with the rules of the SEC, and includes general voting power and/or investment power with respect to securities. Shares of common stock issuable upon exercise of options or warrants that are currently exercisable or exercisable within 60 days of the record date, and shares of common stock issuable upon conversion of other securities currently convertible or convertible within 60 days, are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Under the applicable SEC rules, each person’s beneficial ownership is calculated by dividing the total number of shares with respect to which they possess beneficial ownership by the total number of outstanding shares.  In any case where an individual has beneficial ownership over securities that are not outstanding, but are issuable upon the exercise of options or warrants or similar rights within the next 60 days, that same number of shares is added to the denominator in the calculation described above. Because the calculation of each person’s beneficial ownership set forth in the “Percentage Beneficially Owned” column of the table may include shares that are not presently outstanding, the sum total of the percentages set forth in such column may exceed 100%.  Unless otherwise indicated, the address of each of the following persons is 202 S Dean Street, Englewood, NJ 07631, and, based upon information available or furnished to us, each such person has sole voting and investment power with respect to the shares set forth opposite his, her or its name.

  

Name and Address  Shares
Beneficially
Owned (1)
   Percentage
Beneficially Owned
 
5% or Greater Stockholders        
         
Chris Gordon   13,109,995    24.44%
Arthur Rosen   19,089,905    35.40%
All 5% or Greater Stockholders as a Group   22,997,338    59.84%
           
Named Executive Officers and Directors          
Jeremy Frommer   15,495,884    27.66%
Rick Schwartz   7,110,486    14.93%
Leonard Schiller   3,578,760    8.11%
Andrew Taffin   2,468,555    5.74%
All current directors and officers as a group (4)   28,103,685    40.95%

   

* less than one percent

 

(1) The securities “beneficially owned” by a person are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the SEC and accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person, as well as other securities over which the person has or shares voting or investment power or securities which the person has the right to acquire within 60 days.

  

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Market for our Securities

 

Our Common Stock is quoted on the OTC Markets OTCQB under the symbol “JMDA”.

 

The market price of our Common Stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our Common Stock, regardless of our actual or projected performance.

 

Anti-Takeover Provisions

 

Our charter and bylaws contain provisions that may make it more difficult for a third party to acquire or may discourage acquisition bids for us. Our Board may, without action of our stockholders, issue authorized but unissued shares of preferred stock. The existence of unissued preferred stock may enable the Board, without further action by the stockholders, to issue such stock to persons friendly to current management or to issue such stock with terms that could render more difficult or discourage an attempt to obtain control of us, thereby protecting the continuity of our management. Our shares of preferred stock could therefore be issued quickly with terms that could delay, defer, or prevent a change in control of us, or make removal of management more difficult.

 

Item 13. Certain Relationships and Related Transactions.

 

Upon completion of the Merger, as of February 5, 2016, the Company has a commercial lease agreement with 202 S Dean, LLC for its current office building located at 202 S Dean Street, Englewood, NJ 07631. Under the agreement, the Company pays monthly rent to 202 S. Dean LLC, which is 50% owned by our Chief Executive Officer, Jeremy Frommer. Monthly rent is $8,500 through 2015. Commencing 2016 through the expiration of the lease, monthly rent will be $14,165. The lease expired April 30, 2018. Before moving to a new office space, the Company will be paying rent on a month-to-month basis at the rate of $14,165 per month.

 

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

  

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

 

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

 

On April 25, 2017, the Company issued convertible notes to Arthur Rosen, a lender, totaling $25,000 (the “April Rosen Notes”). 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. On September 7, 2017, the April Rosen Notes and accrued interest was converted into the August 2017 Convertible Note Offering.

  

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 were converted into the August 2017 Convertible Note Offering.

 

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The August 2017 Convertible Note Offering – Related Party 

 

During the year ended December 31, 2017, the Company conducted multiple closings of a private placement offering to accredited investors (the “The August 2017 Convertible Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “Investors”) for aggregate gross proceeds of $505,000. In addition, $645,000 of the Company’s short term debt along with accrued but unpaid interest of $206,026 was converted into the August 2017 Convertible Offering. The conversions resulted in the issuance of 4,555,129 warrants with a fair value of $440,157 and the increase of principal of $60,000. These resulted in a loss on extinguishment of debt of $500,157.

 

The Company offered, through a placement agent, $6,000,000 of units of its securities (each, a “Unit” and collectively, the “Units”), with each Unit consisting of (a) a 15% Convertible Secured Promissory Note (each a “Note” and together the “Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion price of $0.20 per share (the “Conversion Price”), and (b) a five-year warrant ( each a “Warrant and together the “Warrants”) to purchase common stock equal to one hundred percent (100%) of the shares into which the Notes can be converted into (“Warrant Shares”) at an exercise price of $0.20 per share (“Exercise Price”). The Notes mature on the second (2nd) anniversary of their issuance dates.

 

The Conversion Price of the Note and the Exercise Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase price, subject to carve-outs as described therein.

  

The Company recorded a $160,700 debt discount relating to 2,525,000 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

On December 21, 2017, the Company issued a convertible note to a third party lender totaling $100,000 (the “Second December 2017 Note”). The Second December 2017 Note accrues interest at 15% per annum and matures with interest and principal both due on December 27, 2019. In addition, the Company issued a warrant to purchase 500,000 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 Company recorded a $36,722 debt discount relating to the warrants issued to the investor based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note The Second December 2017 Note and accrued interest is convertible at a conversion price of $0.20 per share, subject to adjustment. The Second December 2017 Note is secured as a second priority lien on the assets of the Company. 

 

Notes payable

  

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

 

    Outstanding Principal as of               Warrants  
    December 31, 2017     December 31, 2016     Interest
Rate
    Maturity Date   Quantity     Exercise
Price
 
May 26, 2016     1,000,000       1,000,000