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EX-32.2 - CERTIFICATION - Creatd, Inc.f10q0318ex32-2_jerrickmedia.htm
EX-32.1 - CERTIFICATION - Creatd, Inc.f10q0318ex32-1_jerrickmedia.htm
EX-31.2 - CERTIFICATION - Creatd, Inc.f10q0318ex31-2_jerrickmedia.htm
EX-31.1 - CERTIFICATION - Creatd, Inc.f10q0318ex31-1_jerrickmedia.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: March 31, 2018

 

OR

 

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

 

For the transition period from __________ to __________

 

Commission File No. 000-33383

 

JERRICK MEDIA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

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

 

202 S Dean Street

Englewood, NJ 07631

(Address of principal executive offices)

 

(201) 258-3770

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

 

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

 

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

 

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

 

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

 

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

 

As of June 18, 2018, there were 40,524,432 shares outstanding of the registrant’s common stock.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
     
Item 4. Controls and Procedures 30
     
PART II – OTHER INFORMATION
     
Item 1. Legal Proceedings 31
     
Item 1A. Risk Factors 31
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 3. Defaults Upon Senior Securities 31
     
Item 4. Mine Safety Disclosures 31
     
Item 5. Other Information 31
     
Item 6. Exhibits 32
     
Signatures 33

 

 

 

 

Jerrick Media Holdings, Inc.

 

March 31, 2018 and 2017

 

Index to the Condensed Consolidated Financial Statements

 

Contents   Page(s)
     
Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017   2
     
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (unaudited)   3
     
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)   4
     
Notes to the Condensed Consolidated Financial Statements (unaudited)   5

 

 1 

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Balance Sheet

 

   March 31, 2018   December 31, 2017 
   (Unaudited)     
Assets        
         
Current Assets        
Cash  $122,106   $111,051 
Prepaid expenses   118,338    - 
Accounts receivable   2,846    1,325 
Total Current Assets   243,290    112,376 
           
Property and equipment, net   37,633    48,056 
           
Security deposit   17,000    17,000 
           
Total Assets  $297,923   $177,432 
           
Liabilities and Stockholders' Deficit          
           
Current Liabilities          
Accounts payable and accrued liabilities  $1,647,671   $1,462,106 
Accrued dividends   529,477    472,444 
Demand loan   10,366    10,366 
Current portion of Convertible Notes - related party, net   30,379    - 
Current portion of Convertible Notes, net   25,000    96,500 
Current portion of capital lease payable   4,732    4,732 
Note payable - related party, net   1,259,000    1,249,000 
Note payable, net   373,500    689,500 
Line of credit - related party   130,000    130,000 
Line of credit   19,996    44,996 
           
Total Current Liabilities   4,030,121    4,159,644 
           
Non-current Liabilities:          
Convertible Notes - related party, net of debt discount   1,509,728    1,345,246 
Convertible Notes, net of debt discount and issuance costs   3,401,126    2,512,293 
           
Total Non-current Liabilities   4,910,854    3,857,539 
           
Total Liabilities   8,940,975    8,017,183 
           
Commitments and contingencies   -    - 
           
Stockholders' Deficit          
Series A Preferred stock, $0.001 par value, 31,581 and 31,581 shares issued and outstanding, respectively   31    31 
Series B Preferred stock, $0.001 par value, 8,063 and 8,063 shares issued and outstanding, respectively   8    8 
Series D Preferred stock, $0.001 par value, 0 and 0 shares issued and outstanding, respectively   -    - 
Common stock par value $0.001: 300,000,000 shares authorized; 40,524,432 and 39,520,682 issued and outstanding as of March 31, 2018 and December 31,2017 respectively   40,525    39,521 
Additional paid in capital   15,733,606    14,387,247 
Accumulated deficit   (24,398,215)   (22,247,551)
Less: Treasury stock, 220,000 and 220,000 shares, respectively   (19,007)   (19,007)
 Total Stockholders’ Deficit   (8,643,052)   (7,839,751)
           
Total Liabilities and Stockholders' Deficit  $297,923   $177,432 

 

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

 2 

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   For the Three Months Ended   For the Three Months Ended 
   March 31, 2018   March 31, 2017 
         
Net revenue  $16,249   $41,842 
           
Operating expenses          
Compensation   651,788    546,110 
Consulting fees   95,799    140,005 
General and administrative   592,239    383,738 
           
Total operating expenses   1,339,826    1,069,853 
           
Loss from operations   (1,323,577)   (1,028,011)
           
Other income (expenses)          
Interest expense   (268,125)   (57,387)
Accretion of debt discount and issuance cost   (174,888)   (293,180)
Gain (loss) on settlement of vendor liabilities   1,875    (110,674)
Loss on extinguishment of debt   (342,367)   - 
Gain on settlement of debt   13,452    - 
           
Other income (expenses), net   (770,053)   (461,241)
           
Loss before income tax provision   (2,093,630)   (1,489,252)
           
Income tax provision   -    - 
           
Net loss  $(2,093,630)  $(1,489,252)
           
Per-share data          
Basic and diluted loss per share  $(0.05)  $(0.04)
           
Weighted average number of common shares outstanding   39,930,275    36,462,497 

 

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

 3 

 

 

Jerrick Media Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Three Months Ended   For the Three Months Ended 
   March 31, 2018   March 31, 2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(2,093,630)  $(1,489,252)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   10,423    9,301 
Accretion of debt discount and issuance cost   174,888    293,180 
Share-based compensation   232,635    186,977 
Gain (loss) on settlement of vendor liabilities   (1,875)   110,674 
Gain on settlement of debt   (13,452)   - 
Loss on extinguishment of debt   342,366    - 
Changes in operating assets and liabilities:          
Prepaid expenses   (18,802)   10,000 
Accounts receivable   (1,521)   - 
Accounts payable and accrued expenses   244,619    (43,230)
Net Cash Used In Operating Activities   (1,124,349)   (922,351)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net proceeds from issuance of notes   50,000    926,585 
Repayment of notes   (76,500)   - 
Proceeds from issuance of convertible note   1,080,452    - 
Repayment of convertible notes   (71,500)   - 
Proceeds from issuance of convertible notes - related party   265,452    - 
Proceeds from issuance of note payable - related party   135,000    90,000 
Repayment of note payable - related party   (125,000)   (120,000)
Repayment of line of credit   (25,000)   (19,206)
Cash paid for debt issuance costs   (97,500)   (75,559)
Net Cash Provided By Financing Activities   1,135,404    801,820 
           
Net Change in Cash   11,055    (120,531)
           
Cash - Beginning of Year   111,051    174,494 
           
Cash - End of Year  $122,106   $53,963 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Year for:          
Income taxes  $-   $- 
Interest  $37,472   $3,534 
           
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Settlement of vendor liabilities  $3,750   $353,732 
Beneficial conversion feature on convertible notes  $38,413   $100,665 
Accrued dividends  $57,032   $43,718 
Warrants issued with debt  $554,639   $560,990 
Issuance of common stock for prepaid services  $116,300   $- 
Conversion of note payable and interest into convertible notes  $341,442   $- 
Warrants issued with amendment to notes payable  $135,596   $- 

 

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

 4 

 

 

Jerrick Media Holdings, Inc.

March 31, 2018 and 2017

Notes to the Consolidated Financial Statements

(Unaudited)

 

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.

 

 5 

 

 

Basis of Presentation - Unaudited Interim Financial Information

 

The accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2017.

 

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.

 

 6 

 

 

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

 

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

 

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

 

Actual results could differ from those estimates.

 

Principles of consolidation

 

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

 

As of March 31, 2018, 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.

  

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

The carrying amount of the Company’s financial assets and liabilities, such as cash, prepaid expenses, accounts payable and accrued liabilities and accrued liquidating damages approximate their fair value because of the short maturity of those instruments. Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

 7 

 

   

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.

 

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 condensed 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.

  

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.

 

 8 

 

 

Derivative Liability

 

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 year ended December 31, 2017 on a retrospective basis.

 

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 three months ended March 31, 2018 the Company 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. 

 

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.  

 

 9 

 

 

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

 

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

  

Income Taxes

 

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

 

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

 

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

 

Loss Per Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the three months ended March 31, 2018 and 2017 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.

 

The Company had the following common stock equivalents at March 31, 2018 and 2017:

 

   March 31,
2018
   March 31,
2017
 
Series A Preferred stock   192,567    203,134 
Series B Preferred stock   40,929    40,929 
Options   17,649,990    2,259,090 
Warrants   55,521,987    21,813,281 
Convertible notes - related party   9,526,533    - 
Convertible notes   23,796,858    1,426,759 
Totals   106,728,864    25,743,193 

  

 10 

 

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to current period presentation.

 

Recently Adopted Accounting Guidance

 

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 has adopted the methodologies prescribed by ASU 2016-18, the adoption of ASU 2016-18 did not have a material effect on its financial position or results of operations. 

 

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 has adopted the methodologies prescribed by ASU 2017-09, the adoption of ASU 2017-09 did not have a material effect on its financial position or results of operations. 

 

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. 

 

Adoption of ASU 2017-11

 

As noted above, in connection with the securities purchase agreement and debt transactions during the year ended December 31, 2017, the Company issued warrants and convertible notes, to purchase common stock with an exercise price of $0.20 and a five-year term. Upon issuance of the warrants and convertible notes, the Company evaluated the note agreement to determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain put features embedded in the warrants and convertible notes that potentially could result in a net cash settlement in the event of a fundamental transaction, requiring the Company to classify the warrants and convertible notes as a derivative liability. The Company changed its method of accounting for the convertible notes and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017 on a retrospective basis. Accordingly, the Company recorded the warrant derivative and conversion option derivative liabilities to additional paid in capital upon issuance.

 

 11 

 

 

Tabular summaries of the revisions and the corresponding effects on the statement of earnings for the three months ended March 31, 2017 are presented below:

 

Consolidated Statement of Operations Three Months Ended March 31, 2017    
   Previously
Reported
   Revisions   Revised
Reported
 
Accretion of debt discount and issuance cost  $(330,897)  $37,718   $(293,179)
                
Derivative expense  $(254,470)  $254,470   $- 
                
Change in fair value of derivative liabilities  $223,766   $(223,766)  $- 
                
Net loss  $(1,557,673)  $68,422   $(1,489,251)
                
Net loss per ordinary share:               
Basic and diluted loss per share  $(0.04)  $(0.00)  $(0.04)

 

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 condensed 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.

  

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

 

Note 3 – Going Concern

 

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

 

As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit at March 31, 2018, 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 for a period of one year from the issuance of these financial statements.

 

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.

 

 12 

 

 

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

 

Note 4 – Line of Credit

 

Line of credit as of March 31, 2018 and December 31, 2017 is as follows:

 

   Outstanding Balances as of 
  

March 31,

2018

  

December 31,

2017

 
Revolving Note   19,996    44,996 
   $19,996   $44,996 

  

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. 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.

 

The balance outstanding on the Revolving Note at March 31, 2018 and December 31, 2017 was $19,996 and $44,996, respectively. As of the date of this filing the Revolving Note has been paid off.

  

Note 5 – Notes Payable

 

Notes payable as of March 31, 2018 and December 31, 2017 is as follows:

 

   Outstanding Principal as of          Warrants 
   March 31,
2018
   December 31,
2017
   Interest Rate   Maturity Date  Quantity   Exercise
Price
 
February 22, 2017   373,500    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   -   $- 
    373,500    700,000                   
Less: Debt Discount   -    (10,500)                  
   $373,500   $689,500                   

   

Private Placement Offerings:

 

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”). 

 

 13 

 

 

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.

  

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. During the three months ended March 31, 2018 the company has repaid $26,500 in principal and $26,375 in interest.

 

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. During the three months ended March 31, 2018 the Company has repaid $50,000 in principal and the debtor has forgiven the interest of $4,424 this was recorded as a gain on forgiveness of debt.

 

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 ). 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 January 12, 2018, the First November 2017 Note and accrued but unpaid interest was converted into the Company’s August 2017 Convertible Note Offering.

 

 14 

 

 

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 ). 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 January 12, 2018, the First November 2017 Note and accrued but unpaid interest was converted into the Company’s August 2017 Convertible Note Offering.

 

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). 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. On January 12, 2018, the First November 2017 Note and accrued but unpaid interest was converted into the Company’s August 2017 Convertible Note Offering.

 

 On March 14, 2018, the Company entered into a loan agreement (the “March 2018 Loan Agreement”) with an individual (the “March 2018 Lender”), the March 2018 Lender issued the Company a promissory note of $50,000 (the “March 2018 Note”). Pursuant to the March 2018 Loan Agreement, the March 2018 Note bears interest at a rate of 12% per annum. As additional consideration for entering in the March 2018 Loan Agreement, the Company issued the March 2018 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 March 2018 Note was March 29, 2018 (the “March 2018 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the June 2017 Note were due. On March 29, 2018, the March 2018 Note and accrued but unpaid interest was converted into the Company’s August 2017 Convertible Note Offering.

 

Note 6 – Convertible Note Payable

 

Convertible notes payable as of March 31, 2018 and December 31, 2017 is as follows: 

 

   Outstanding Principal as of               Warrants 
   March 31, 2018   December 31, 2017   Interest
Rate
   Conversion
Price
   Maturity Date  Quantity   Exercise
Price
 
November – December, 2016   25,000    25,000    10%   0.30    November 1, 2017   400,000    0.30 
June, 2017   -    71,500    12%   Not Applicable    September 1, 2017   114,700    0.20 
August – November 2017   2,943,884    2,943,884    15%   0.20 (*)  August – November 2019   14,716,419    0.20 
December 21, 2017   100,000    100,000    15%   0.20 (*)  December 21, 2019   500,000.00    0.20 
January – February 2018   1,015,675    -    15%   0.20 (*)  January – February 2020   5,078,375    0.20 
February 8, 2018   40,750    -    18%   0.20 (*)  February 8, 2020   81,500    0.20 
March 2018   370,767    -    14%   0.20 (*)  March 2020   1,853,833    0.20 
    4,496,076    3,140,384                         
Less: Debt Discount   (846,146)   (452,022)                        
Less: Debt Issuance Costs   (223,803)   (79,569)                        
    

3,426,126

    2,608,793                         
Less: Current Debt   (25,000)   (96,500)                        
Total Long-Term Debt  $

3,401,126

   $2,512,293                         

  

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

  

 15 

 

 

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 between 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. 

 

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 August 2017 Convertible Note Offering

 

From August through November of 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. 

 

 16 

 

 

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.

 

The February 2018 Convertible Note Offering

 

During the three months ended March 31, 2018, the Company conducted multiple closings of a private placement offering to accredited investors (the “February 2018 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 $725,000. In addition, $250,000 of the Company’s short term debt along with accrued but unpaid interest of $40,675 was converted into the February 2018 Offering. The conversions resulted in the issuance of 1,453,375 warrants with a fair value of $181,139. These were recorded as a loss on extinguishment of debt.

 

The February 2018 Convertible Note Offering consisted of a maximum of $750,000 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 Notes are secured by a second priority security interest in the Company’s assets up to $1,000,000.

 

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 conversion feature of the February 2018 Offering provides for an effective conversion price that is below market value on the date of issuance. Such feature is normally characterized as a beneficial conversion feature (“BCF”). When the Company records a BCF the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The Company recorded a BCF and related debt discount of $37,350, the discount is being accreted over the life of the first Debenture to accretion of debt discount and issuance cost.

 

The Company recorded a $316,875 debt discount relating to 3,625,000 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 retained a placement agent (the “Placement Agent”), to carry out the Offering on a “best-efforts” basis. For services in its capacity as Placement Agent, the Company has paid the Placement Agent a cash fee of $94,250 and issued to the Placement Agent shares of the Company’s common stock equal to ten percent (13%) of the Conversion Shares underlying the Notes or 362,500 shares that had a fair value of $74,881, which was recorded as issuance cost and is being accreted over the life of the note to accretion of debt discount and issuance cost.

  

 17 

 

 

On February 8, 2018, the Company issued a convertible note to a third party lender totaling $40,750 (the “February 2018 Note”). The February 2018 Note accrues interest at 18% per annum and matures with interest and principal both due on February 8, 2020. In addition, the Company issued a warrant to purchase 81,500 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 $7,962.55 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 and an original issue discount of $5,298. The debt discount is being accreted over the life of the note. The February 2018 Note and accrued interest is convertible at a conversion price of $0.20 per share, subject to adjustment. The February 2018 Note is secured by a second priority lien on the assets of the Company.

 

The March 2018 Convertible Note Offering

 

During the three months ended March 31, 2018, the Company conducted multiple closings of a private placement offering to accredited investors (the “March 2018 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 $320,000. In addition, $50,000 of the Company’s short term debt along with accrued but unpaid interest of $767 was converted into the March 2018 Convertible Note Offering. The conversions resulted in the issuance of 253,833 warrants with a fair value of $25,631. These were recorded as a loss on extinguishment of debt.

 

The March 2018 Convertible Note Offering consisted of a maximum of $900,000, with an over-allotment option of an additional $300,000 of units of the Company’s securities (each, a “Unit” and collectively, the “Units”), with each Unit consisting of (a) a 14% 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 four-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 $120,832 debt discount relating to 1,600,000 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.

 

Note 7 – Related Party Loan

 

Convertible notes

 

Convertible notes payable – related party as of March 31, 2018 and December 31, 2017 is as follows:

 

   Outstanding Principal as of          Warrants 
   March 31, 2018   December 31,
2017
   Interest Rate   Maturity Date  Quantity   Exercise
Price
 
August – October 2017   1,416,026    1,416,026    15%  August – October 2019   4,589,466    0.20 
December 21, 2017   100,000    100,000    15%  December 21, 2019   500,000    0.20 
January – February 2018   25,000    -    15%  January – February 2020   125,000    0.20 
February 8, 2018   40,750    -    20%  September 30, 2018   81,500    0.20 
March 2018   205,000    -    14%  March 2020   1,025,000    0.20 
    1,786,776    1,516,026                   
Less: Debt Discount   (241,293)   (170,780)                  
Less: Debt Issuance Costs   (5,375)   -                   
    1,540,108    1,345,246                   
Less: Current Debt   (30,380)   -                   
Total Long-Term Debt  $1,509,728   $1,345,246                   

 

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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. 

 

The February 2018 Convertible Note Offering

 

During the three months ended March 31, 2018, the Company conducted multiple closings of a private placement offering to accredited investors (the “February 2018 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 $25,000.

 

The February 2018 Convertible Note Offering consisted of a maximum of $750,000 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 Notes are secured by a second priority security interest in the Company’s assets up to $1,000,000.

 

 19 

 

 

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 conversion feature of the February 2018 Convertible Note Offering provides for an effective conversion price that is below market value on the date of issuance. Such feature is normally characterized as a beneficial conversion feature (“BCF”). When the Company records a BCF the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The Company recorded a BCF and related debt discount of $1,063, the discount is being accreted over the life of the first Debenture to accretion of debt discount and issuance cost.

 

The Company recorded a $11,054 debt discount relating to 125,000 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 retained the Placement Agent, to carry out the Offering on a “best-efforts” basis. For services in its capacity as Placement Agent, the Company has paid the Placement Agent a cash fee of $3,250 and issued to the Placement Agent shares of the Company’s common stock equal to ten percent (10%) of the Conversion Shares underlying the Notes or 12,500 shares that had a fair value of $2,606, which was recorded as issuance cost and is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

On February 8, 2018, the Company issued a convertible note to a third party lender totaling $40,750 (the “Second February 2017 Note”). The Second February 2018 Note accrues interest at 18% per annum and matures with interest and principal both due on September 30, 2018. In addition, the Company issued a warrant to purchase 81,500 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 $7,963 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 and an original issue discount of $5,298. The debt discount is being accreted over the life of the note The Second February 2018 Note and accrued interest is convertible at a conversion price of $0.20 per share, subject to adjustment. The Second February 2018 Note is secured as a second priority lien on the assets of the Company. 

 

The March 2018 Convertible Note Offering

 

During the three months ended March 31, 2018, the Company conducted multiple closings of a private placement offering to accredited investors (the “March 2018 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 $205,000.

 

The March 2018 Convertible Note Offering consisted of a maximum of $900,000, with an over-allotment option of an additional $300,000, of units of the Company’s securities (each, a “Unit” and collectively, the “Units”), with each Unit consisting of (a) a 14% 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 four-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.

 

 20 

 

 

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 $75,319 debt discount relating to 1,025,000 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.

 

Notes payable

  

Notes payable – related party as of March 31, 2018 and December 31, 2017 is as follows:

 

   Outstanding Principal as of           Warrants 
   March 31, 2018   December 31, 2017   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 8, 2017   224,000    224,000    1%   September 24, 2017    125,000    0.20 
November 20, 2017   -    25,000    15%   December 31, 2017    -    - 
March 4, 2018   10,000    -    12%   March 19, 2018    10,000    0.20 
March 9, 2018   15,000    -    12%   March 24, 2018    15,000    0.20 
March 13, 2018   10,000    -    12%   March 28, 2018    10,000    0.20 
    1,259,000    1,249,000                     

 

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 $150,128 (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. 

 

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 February 20, 2018 the company entered into a Forbearance agreement whereas the Company issued Rosen a five-year warrant to purchase 448,000 shares of the Company’s common stock at a purchase price of $0.20 per share. The warrants had a fair value of $65,378 which was recorded to Loss on extinguishment of debt. The new Maturity Date is September 8, 2018.

 

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. During the three months ended March 31, 2018 the Company repaid $25,000 in principal and $637 in interest.

 

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On January 16, 2018, the Company entered into a loan agreement (the “January 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $60,000 (the “January 2018 Rosen Note”). The January 2018 Rosen Note is secured by an officer of the Company whereas upon default an officer of the company owes default shares to the lender equal to the amount of principal outstanding divided by 0.20. Pursuant to the January 2018 Rosen Loan Agreement, the January 2018 Rosen Note bears interest at a rate of 6% per annum and payable on the maturity date of January 31, 2018 (the “January 2018 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. During the three months ended the company have repaid $60,000 in principal and $200 in interest.

 

On January 16, 2018, the Company entered into a loan agreement (the “January 2018 Gordon Loan Agreement”) with Gordon, whereby the Company issued Gordon a promissory note of $40,000 (the “January 2018 Gordon Note”). The January 2018 Gordon Note is secured by an officer of the Company whereas upon default an officer of the company owes default shares to the lender equal to the amount of principal outstanding divided by 0.20. Pursuant to the January 2018 Gordon Loan Agreement, the January 2018 Gordon Note bears interest at a rate of 6% per annum and payable on the maturity date of January 31, 2018 (the “January 2018 Gordon Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the January 2018 Gordon Loan are due. During the three months ended the company have repaid $40,000 in principal and $105 in interest.

 

On March 4, 2018, the Company entered into a loan agreement (the “First March 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $10,000 (the “First March 2018 Rosen Note”). As additional consideration for entering in the First March 2018 Rosen Note 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 $0.20 per share. Pursuant to the First March 2018 Rosen Loan Agreement, the First March 2018 Rosen Note bears interest at a rate of 12% per annum and payable on the maturity date of March 19, 2018 (the “First March 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First March 2018 Rosen Loan was due.

 

On March 9, 2018, the Company entered into a loan agreement (the “Second March 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $15,000 (the “Second March 2018 Rosen Note”). As additional consideration for entering in the Second March 2018 Rosen Note Loan Agreement, the Company issued Rosen a five-year warrant to purchase 15,000 shares of the Company’s common stock at a purchase price of $0.20 per share. Pursuant to the Second March 2018 Rosen Loan Agreement, the Second March 2018 Rosen Note bears interest at a rate of 12% per annum and payable on the maturity date of March 24, 2018 (the “Second March 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second March 2018 Rosen Loan was due.

 

On March 13, 2018, the Company entered into a loan agreement (the “Third March 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory note of $10,000 (the “Third March 2018 Rosen Note”). As additional consideration for entering in the Third March 2018 Rosen Note 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 $0.20 per share. Pursuant to the Third March 2018 Rosen Loan Agreement, the Third March 2018 Rosen Note bears interest at a rate of 12% per annum and payable on the maturity date of March 28, 2018 (the “Third March 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Third March 2018 Rosen Loan was due.

 

 22 

 

 

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 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%. 

 

As of March 31, 2018, the total outstanding balance of line of credit - related party was $130,000.

 

Note 8 – Capital Leases Payable

 

Capital lease obligation consisted of the following:

 

      March 31,
2018
   December 31,
2017
 
            
(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)   (4,732)
              
   Capital lease obligation, net of current maturities   -    - 
              
   TOTAL CAPITAL LEASE OBLIGATION  $4,732   $4,732 

 

The capital leases mature as follows:

 

2018:  $4,732   $4,732 

 

Note 9 – 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.

 

Common Stock

 

On January 31, 2018, the Company issued 18,750 shares of its restricted common stock to settle outstanding vendor liabilities of $3,750. In connection with this transaction the Company also recorded a gain on settlement of vendor liabilities of $375. 

 

During the three months ended March 31, 2018, the Company issued 610,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $116,300. These shares were recorded as common stock issued for prepaid services and will be expensed over the life of the consulting contract to share based payments. During the three months ended March 31, 2018 the company recorded $16,764 to share based payments.

 

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. 

 

At March 31, 2018 and 2017, the aggregate intrinsic value of options outstanding and exercisable was $0 and $0, respectively. 

 

 23 

 

 

Stock-based compensation for stock options has been recorded in the consolidated statements of operations and totaled $215,871 and $22,976, for the three months ended March 31, 2018 and 2017, respectively.

 

The Company did not issue any new options during the three months ended March 31, 2018.

 

Warrants

 

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

 

The assumptions used for warrants granted during the three months ended March 31, 2018 are as follows:

 

   March 31,
2018
   March 31,
2017
 
Exercise price  $0.20   $0.40-0.20 
Expected dividends   0%   0%
Expected volatility   93.69%-100.56%   92.24-92.96%
Risk free interest rate   1.64%-2.69%   1.93-2.03%
Expected life of warrant   4 - 5 years    5 years 

 

Warrant Activities

 

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

 

   Warrants   Weighted Average
Exercise
Price
 
         
Outstanding – December 31, 2017   46,193,779   $0.25 
Granted   

9,328,208

    0.20 
Exercised   -    - 
Forfeited/Cancelled   -    - 
Outstanding and Exercisable – March 31, 2018   

55,521,987

   $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    55,021,987    3.89    0.25  55,021,987    0.25 

  

During the three months ended March 31, 2018, a total of 600,000 warrants were issued with promissory notes (See Note 5 above). The warrants have a grant date fair value of $83,236 using a Black-Scholes option-pricing model and the above assumptions.

 

During the three months ended March 31, 2018, a total of 7,013,708 warrants were issued with convertible notes (See Note 6 above). The warrants have a grant date fair value of $976,689 using a Black-Scholes option-pricing model and the above assumptions.

 

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During the three months ended March 31, 2018, a total of 483,000 warrants were issued with notes payable – related party (See Note 7 above). The warrants have a grant date fair value of $70,291 using a Black-Scholes option-pricing model and the above assumptions.

 

During the three months ended March 31, 2018, a total of 1,231,500 warrants were issued with convertible notes payable – related party (See Note 7 above). The warrants have a grant date fair value of $149,642 using a Black-Scholes option-pricing model and the above assumptions. 

  

Note 10 – Subsequent Events

 

Subsequent to March 31, 2018, the Company received gross proceeds of $450,000 of the issuance of convertible notes. In addition, $140,600 of the Company’s vendor liabilities was converted into convertible debentures. As additional consideration for entering in the convertible debentures, the Company issued the investors 4-year warrant to purchase 2,953,000 shares of the Company’s common stock at a purchase price of $0.20 per share.

 

Subsequent to March 31, 2018, the Company received gross proceeds of $588,500 of the issuance of notes payable. As additional consideration for entering in the debentures, the Company issued the investors 5-year warrant to purchase 1,765,500 shares of the Company’s common stock at a purchase price of $0.20 per share.

 

Subsequent to March 31, 2018, the Company received gross proceeds from related parties of $34,400 of the issuance of convertible notes. As additional consideration for entering in the convertible debentures, the Company issued the investors 4-year warrant to purchase 172,000 shares of the Company’s common stock at a purchase price of $0.20 per share.

 

Subsequent to March 31, 2018, the Company received gross proceeds from related parties of $100,000 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 300,000 shares of the Company’s common stock at a purchase price of $0.20 per share.

 

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

 

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

 

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

 

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

 

Overview

 

We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our financial statements and accompanying notes for the three months ended March 31, 2018 and 2017, included elsewhere in this report.

  

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.

 

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During the remainder of the second quarter of 2018, Jerrick plans to launch additional revenue lines, including brand subscriptions to access the platform and its community of creators as well as a subscription model for creator upgrade tools. The Company also intends to release further enhancements to the Vocal editor and introduce social features. Further, 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 March 31, 2018 compared to December 31, 2017:

 

   March 31,
2018
   December 31,
2017
   Increase /
(Decrease)
 
Current Assets  $243,290   $112,376   $130,914 
Current Liabilities  $4,030,121   $4,159,644   $(129,523)
Working Capital Deficit  $(3,786,831)  $(4,047,268)  $260,437 

 

At March 31, 2018, we had a working capital deficit of $3,786,831, as compared to a working capital deficit of $4,047,268 at December 31, 2017, a decrease of $260,437. The decrease is primarily attributable to the increase in prepaid expenses, decrease in notes payable current, decrease in convertible notes current and decrease in line of credit.

 

These were offset by an increase in accrued dividends, increase in note payable related party and an increase in accounts payable.

 

Net Cash

 

Net cash used in operating activities for the three months ended March 31, 2018 and 2017, was $1,124,349 and $922,351 respectively. The net loss for the three months ended March 31, 2018 and 2017 was $2,093,630and $1,489,252, respectively. This change is primarily attributable to the net loss for the current period offset by share-based payments in the amount of $232,635 to employees and consultants for services rendered, the accretion of debt discount and debt issuance costs of $174,888 due to the incentives given with debentures, and a loss on extinguishment of debt of $342,366 for the incentives given to amend or convert debt. These increases were offset by gain on settlement of debt of $13,452, gain on settlement of vendor liabilities of $1,875 and a change in prepaid expenses of $18,802 from consulting contracts entered into during the three months ended March 31, 2018.

  

Net cash used in investing activities for the three months ended March 31, 2018 and 2017 was $0 and $0, respectively.

 

Net cash provided by financing activities for the three months ended March 31, 2018 and 2017 was $1,135,404 and $801,820. During the 2018 period, the Company was predominantly financed by issuance of notes and related party notes of $1,130,452 and $400,452, respectively to fund operations. These increases were offset by repayment of notes and related party notes of $148,000 and $125,000, respectively. The Company also paid $97,500 for debt issuance costs during the three months ended March 31, 2018.

 

Summary of Statements of Operations for the Three Months Ended March 31, 2018 and 2017:

 

   Three Months Ended 
   March 31,
2018
   March 31,
2017
 
Revenue  $16,249   $41,842 
Operating expenses  $(1,339,826)  $(1,069,853)
Loss from operations  $(1,323,577)  $(1,028,011)
Other expenses  $(770,053)  $(461,241)
Net loss  $(2,093,630)  $(1,489,252)
Loss per common share – basic and diluted  $(0.05)  $(0.04)

 

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Revenue

 

Revenue was $16,249 for the three months ended March 31, 2018, as compared to $41,842 for the comparable three months ended March 31, 2017, a decrease of $25,593. The decrease in 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 2018 on the development of its proprietary Vocal software platform to support the scalability of its business model.

 

Operating Expenses

 

Operating expenses for the three months ended March 31, 2018 were $1,339,826 as compared to $1,069,853 for the three months ended March 31, 2017. The increase of $269,973 in operating expenses is the result of a $208,501 increase in General and Administrative expenses related to the continued development of the Vocal platform, a $44,206 decrease in consulting and professional fees related to being a publicly traded company and a $60,019 increase in compensation.

 

Loss from Operations

 

Loss from operations for the three months ended March 31, 2018 was $1,323,577 as compared to loss of $1,028,011 for the three months ended March 31, 2017. 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 three months ended March 31, 2018 was $(770,053), as compared to $(461,241) for the three months ended March 31, 2017. Other expenses during the three months ended March 31, 2018 was comprised of interest expense of $(268,125) on notes and related party notes, accretion of debt discount and issuance cost of $(174,888) due to the incentives given with debentures and loss on extinguishment of debt of $(342,367) for the incentives given to amend or convert debt. These expenses were offset by the gain on settlement of debt of $13,452 as recorded during the three months ended March 31, 2018. During the three months ended March 31, 2017, other expenses were comprised of interest expense of $(57,387) on notes and related party notes, accretion of debt discount and issuance cost of $(293,180) due to the incentives given with debentures and loss on settlement of vendor liabilities of (110,674).

 

Net Loss

 

Net loss attributable to common shareholder for three months ended March 31, 2018, was $2,093,630, or loss per share of $0.05, as compared to a net loss of $1,489,252, or loss per share of $0.04, for the three months ended March 31, 2017.

 

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.

 

Off-Balance Sheet Arrangements 

 

As of March 31, 2018, we have no off-balance sheet arrangements. 

 

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Critical Accounting Policies

 

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

 

Use of Estimates

 

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

  

Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

Income Taxes

 

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

 

Derivative Liability

 

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

  

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

 

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

 

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

 

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

 

Adoption of ASU 2017-11

 

As noted above, in connection with the securities purchase agreement and debt transactions during the year ended December 31, 2017, the Company issued warrants and convertible notes, to purchase common stock with an exercise price of $0.20 and a five-year term. Upon issuance of the warrants and convertible notes, the Company evaluated the note agreement to determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain put features embedded in the warrants and convertible notes that potentially could result in a net cash settlement in the event of a fundamental transaction, requiring the Company to classify the warrants and convertible notes as a derivative liability. The Company changed its method of accounting for the convertible notes and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017 on a retrospective basis. Accordingly, the Company recorded the warrant derivative and conversion option derivative liabilities to additional paid in capital upon issuance.

 

Stock Based Compensation

 

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

 

Recent Accounting Pronouncements

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) are not effective to ensure that information required to be disclosed by us in report that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting.

 

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

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, filed with the SEC on May 17, 2018. 

 

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

 

Other than as disclosed in the financial notes above, there were no unregistered sales of the Company’s equity securities during the quarter ended March 31, 2018 that were not previously reported in a Current Report on Form 8-K. 

 

Item 3. Defaults Upon Senior Securities.

 

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

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits.

  

Exhibit No.   Description
     
4.1   Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed with the Commission on January 2, 2018)
     
4.2   Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed with the Commission on April 2, 2018)
     
10.1   Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Commission on January 2, 2018)
     
10.2   Form of Promissory Note (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Commission on January 2, 2018)
     
10.3   Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Commission on February 13, 2018)
     
10.4   Form of Promissory Note (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Commission on February 13, 2018)
     
10.5   Form of Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the Commission on April 2, 2018)
     
10.6   Form of Promissory Note (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the Commission on April 2, 2018)
     
31.1*   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
     
31.2*   Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
     
32.1*   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

  

* Filed herewith

 

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SIGNATURES

 

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

 

  JERRICK MEDIA HOLDINGS, INC.
     
Date: June 18, 2018 By: /s/ Jeremy Frommer
  Name:  Jeremy Frommer
  Title: Chief Executive Officer
    (Principal Executive Officer)
    (Principal Financial Officer)
    (Principal Accounting Officer)

 

 

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