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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: September 30, 2020

 

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. 001-39500

 

Creatd, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

2050 Center Avenue Suite 640

Fort Lee, New Jersey 07024

(Address of principal executive offices)

 

(201) 258-3770

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001   CRTD   The Nasdaq Stock Market LLC
         
Common Stock Purchase Warrants   CRTDW   The Nasdaq Stock Market LLC

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer 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 November 16, 2020, there were 8,653,395 shares outstanding of the registrant’s common stock.

 

 

 

 

 

  

 

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020

 

TABLE OF CONTENTS

 

    Page
Special Note Regarding Forward-Looking Statements and Other Information Contained in this Report ii
     
  PART I – FINANCIAL INFORMATION 1
     
Item 1. Condensed Consolidated Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 51
     
Item 4. Controls and Procedures 51
     
  PART II – OTHER INFORMATION 52
     
Item 1. Legal Proceedings 52
     
Item 1A.  Risk Factors 52
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53
     
Item 3. Defaults Upon Senior Securities 53
     
Item 4. Mine Safety Disclosures 53
     
Item 5. Other Information 53
     
Item 6. Exhibits 54
     
Signatures 55

 

- i -

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

AND OTHER INFORMATION CONTAINED IN THIS REPORT

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

our ability to continue as a going concern;

 

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

 

our ability to obtain additional capital, which may be difficult to raise as a result of our limited operating history or any number of other reasons;

 

our ability provide digital content that is useful to users;

 

our ability to retain existing users or add new users;

 

competition from traditional media companies;

 

general economic conditions and events and the impact they may have on us and our users; and

 

other factors discussed in this Form 10-Q.

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.

 

You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Unless otherwise stated or the context otherwise requires, the terms “Creatd,” “we,” “us,” “our” and the “Company” refer collectively to Creatd, Inc. and its subsidiaries.

  

Except where indicated, all share and per share data in this Form 10-Q, including the unaudited condensed consolidated financial statements, reflect the 1-for-20 reverse stock split of the Company’s common stock (which also adjusted the number of authorized shares of common stock) effected on July 30, 2019 and the 1-for-3 reverse stock split of the Company’s issued and outstanding common stock effected on August 17, 2020 (which did not adjust the number of authorized shares of common stock).

 

- ii -

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Creatd, Inc. 

September 30, 2020

 

Index to the Condensed Consolidated Financial Statements

 

Contents   Page(s)
     
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019   2
     
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)   3
     
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)   4
     
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)   8
     
Notes to the Condensed Consolidated Financial Statements (unaudited)   9

 

1

 

 

Creatd, Inc.

Condensed Consolidated Balance Sheets

 

   September 30, 2020   December 31, 2019 
   (Unaudited)     
         
Assets        
         
Current Assets        
Cash  $2,897,385   $11,637 
Prepaid expenses   -    4,127 
Accounts receivable, net   90,319    50,849 
Note receivable – related party   11,450    11,450 
Marketable securities   200,000    - 
Total Current Assets   3,199,154    78,063 
           
Property and equipment, net   40,032    42,363 
           
Intangible assets   992,455    1,087,278 
           
Goodwill   1,035,795    1,035,795 
           
Deposits and other assets   197,243    16,836 
           
Operating lease right of use asset   258,249    311,711 
           
Total Assets  $5,722,928   $2,572,046 
           
Liabilities and Stockholders’ Deficit          
           
Current Liabilities          
Accounts payable and accrued liabilities  $1,339,024   $1,763,222 
Demand loan   50,000    225,000 
Convertible Notes - related party, net of debt discount   -    20,387 
Convertible Notes, net of debt discount and issuance costs   174,469    2,896,425 
Current portion of operating lease payable   79,816    105,763 
Note payable - related party, net of debt discount   3,295    5,129,342 
Note payable, net of debt discount and issuance costs   990,122    660,000 
Unrecognized tax benefit   68,000    68,000 
Deferred revenue   37,421    50,691 
Warrant liability   -    10,000 
           
Total Current Liabilities   2,742,147    10,928,830 
           
Non-current Liabilities:          
Note payable   401,764    - 
Operating lease payable   176,623    201,944 
           
Total Non-current Liabilities   578,387    201,944 
           
Total Liabilities   3,320,534    11,130,774 
           
Commitments and contingencies          
           
Stockholders’ Deficit          
Series A Preferred stock, $0.001 par value, 0 and 31,581 shares issued and outstanding, respectively   -    - 
Series B Preferred stock, $0.001 par value, 0 and 8,063 shares issued and outstanding, respectively   -    - 
Series D Preferred stock, $0.001 par value, 0 and 914 shares issued and outstanding, respectively   -    - 
Common stock par value $0.001: 100,000,000 shares authorized; 8,662,745 issued and 8,653,395 outstanding as of September 30, 2020 and 3,059,646 issued and 3,006,362 outstanding as of December 31, 2019   8,663    3,059 
Additional paid in capital   67,812,570    36,391,819 
Accumulated deficit   (65,302,489)   (44,580,437)
Accumulated other comprehensive income   (28,790)   (5,995)
Less: Treasury stock, 9,350 and 53,283 shares, respectively   (87,560)   (367,174)
    2,402,394    (8,558,728)
           
Total Liabilities and Stockholders’ Deficit  $5,722,928   $2,572,046 

 

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

  

2

 

  

Creatd, Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 

   For the Three Months Ended   For the Three Months Ended   For the Nine Months Ended   For the Nine Months Ended 
   September 30, 2020   September 30, 2019   September 30, 2020   September 30, 2019 
                 
Net revenue  $424,814   $91,386   $1,040,496   $132,901 
                     
Gross margin   424,814    91,386    1,040,496    132,901 
                     
Operating expenses                    
Compensation   5,203,931    531,502    7,470,629    1,803,113 
Consulting fees   739,503    412,394    2,291,609    810,025 
Research and development   158,528    11,349    329,803    366,247 
General and administrative   1,346,716    792,664    3,333,520    1,917,154 
                     
Total operating expenses   7,448,678    1,747,909    13,425,561    4,896,539 
                     
Loss from operations   (7,023,864)   (1,656,523)   (12,385,065)   (4,763,638)
                     
Other income (expenses)                    
Other income   437,657    -    515,442    - 
Interest expense   (512,650)   (164,439)   (1,379,386)   (329,040)
Accretion of debt discount and issuance cost   (6,370,557)   (111,027)   (6,697,778)   (228,017)
Settlement of vendor liabilities   -    -    (126,087)   - 
Loss on marketable securities   (17,495)   -    (7,453)   - 
Loss on extinguishment of debt   (88,734)   (2,022)   (623,774)   (83,171)
Gain on settlement of debt   -    -    470    - 
                     
Other expenses, net   (6,551,779)   (277,488)   (8,318,566)   (640,228)
                     
Loss before income tax provision   (13,575,643)   (1,934,011)   (20,703,631)   (5,403,866)
                     
Income tax provision   -    -    -    - 
                     
Net loss  $(13,575,643)  $(1,934,011)  $(20,703,631)  $(5,403,866)
                     
Deemed dividend   18,421    -    18,421    - 
Inducement expense   -    -    -    (7,628)
                     
Net loss attributable to common shareholders   (13,594,064)   (1,934,011)   (20,722,052)   (5,396,238)
                     
Other comprehensive income                    
                     
Currency translation gain (loss)   5,735    -    (22,795)   - 
                     
Comprehensive loss  $(13,569,908)  $(1,934,011)  $(20,726,426)  $(5,403,866)
                     
Per-share data                    
Basic and diluted loss per share  $(3.20)  $(0.65)  $(5.91)  $(2.05)
                     
Weighted average number of common shares outstanding   4,254,300    2,966,440    3,506,393    2,633,406 

 

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

  

3

 

  

Creatd, Inc.

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

For the Three Months Ended September 30, 2020 (Unaudited)

 

   Series A Preferred Stock   Series B Preferred Stock   Series D Preferred Stock   Common Stock   Treasury stock   Additional
Paid In
   Accumulated   Other
Comprehensive
   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Income   Equity 
                                                         
Balance, June 30, 2020        -   $       -         -   $      -    -   $        -    3,327,398   $3,327    (7,461)  $(60,162)  $39,075,664   $(51,708,425)  $(34,525)   (12,724,121)
                                                                       
Shares issued with note payable   -    -    -    -    -    -    6,667    7    -    -    71,322    -    -    71,329 
                                                                       
Stock based compensation   -    -    -    -    -    -    91,167    91    -    -    4,582,674    -    -    4,582,765 
                                                                       
Stock warrants issued with note payable   -    -    -    -    -    -    -    -    -    -    326,364    -    -    326,364 
                                                                       
Purchase of treasury stock   -    -    -    -    -    -    -    -    (1,889)   (27,398)   -    -    -    (27,398)
                                                                       
Recognition of intrinsic value of beneficial conversion features – convertible notes   -    -    -    -    -    -    -    -    -    -    5,498,313    -    -    5,498,313 
                                                                       
Cash received for common stock and warrants   -    -    -    -    -    -    1,725,000    1,725    -    -    7,025,962    -    -    7,027,687 
                                                                       
Common stock and warrants issued upon conversion of notes payable   -    -    -    -    -    -    3,512,513    3,513    -    -    11,213,850    -    -    11,217,363 
                                                                       
Foreign currency translation adjustments   -    -    -    -    -    -    -    -    -    -    -    -    5,735    5,735 
                                                                       
Dividends   -    -    -    -    -    -    -    -    -    -    18,421    (18,421)   -    - 
                                                                       
Net loss for the three months ended September 30, 2020   -    -    -    -    -    -    -    -    -    -    -    (13,575,643)   -    (13,575,643)
                                                                       
Balance, September 30, 2020   -   $-    -   $-    -   $-    8,662,745   $8,663    (9,350)  $(87,560)  $67,812,570   $(65,302,489)  $(28,790)  $2,402,394 

 

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

 

4

 

 

Creatd, Inc.

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

For the Nine Months Ended September 30, 2020 (Unaudited)

 

   Series A Preferred Stock   Series B Preferred Stock   Series D Preferred Stock   Common Stock   Treasury stock   Additional
Paid In
   Accumulated   Other
Comprehensive
   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Income   Equity 
                                                         
Balance, December 31, 2019        -   $     -         -   $     -         -   $     -    3,059,646   $3,060    (53,283)  $(367,174)  $36,391,818   $(44,580,437)  $(5,995)  $(8,558,728)
                                                                       
Shares issued with notes payable   -    -    -    -    -    -    14,774    15    -    -    130,244    -    -    130,259 
                                                                       
Stock based compensation   -    -    -    -    -    -    141,167    141    -    -    5,167,633    -    -    5,167,774 
                                                                       
Shares issued to settle vendor liabilities   -    -    -    -    -    -    23,565    24    -    -    235,607    -    -    235,631 
                                                                       
Conversion of warrants to stock   -    -    -    -    -    -    7,239    7    -    -    (4,236)   -    -    (4,229)
                                                                       
Conversion of options to stock   -    -    -    -    -    -    229,491    229    -    -    1,405,436    -    -    1,405,665 
                                                                       
Stock warrants issued with note payable   -    -    -    -    -    -    -    -    -    -    1,078,501    -    -    1,078,501 
                                                                       
Cancellation of Treasury stock   -    -    -    -    -    -    (50,650)   (51)   50,650    349,030    (348,979)   -    -    - 
                                                                       
Purchase of treasury stock   -    -    -    -    -    -    -    -    (6,717)   (69,416)   -    -    -    (69,416)
                                                                       
Recognition of intrinsic value of beneficial conversion features – convertible notes   -    -    -    -    -    -    -    -    -    -    5,498,313    -    -    5,498,313 
                                                                       
Cash received for common stock and warrants   -    -    -    -    -    -    1,725,000    1,725    -    -    7,025,962    -    -    7,027,687 
                                                                       
Common stock and warrants issued upon conversion of notes payable   -    -    -    -    -    -    3,512,513    3,513    -    -    11,213,850    -    -    11,217,363 
                                                                       
Foreign currency translation adjustments   -    -    -    -    -    -    -    -    -    -    -    -    (22,795)   (22,795)
                                                                       
Dividends   -    -    -    -    -    -    -    -    -    -    18,421    (18,421)   -    - 
                                                                       
Net loss for the nine months ended September 30, 2020   -    -    -    -    -    -    -    -    -    -    -    (20,703,631)   -    (20,703,631)
                                                                       
Balance, September 30, 2020   -   $-    -   $-    -   $-    8,662,745   $8,663    (9,350)  $(87,560)  $67,812,570   $(65,302,489)  $(28,790)  $2,402,394 

 

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

 

5

 

 

Creatd, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

For the Three Months ended September 30, 2019

 

   Series A
Preferred Stock
   Series B
Preferred Stock
   Series D
Preferred Stock
   Common Stock   Treasury stock   Additional
Paid In
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
Balance, June 30, 2019           -          -          -          -          -          -    2,943,569    2,944    (49,950)   (362,174)   35,247,809    (40,007,294)   (5,118,715)
                                                                  
Shares issued for acquisition   -    -    -    -    -    -    111,111    111    -    -    1,166,558    -    1,166,669 
                                                                  
Stock warrants issued with note payable             -    -    -    -    -    -    -    -    8,197    -    8,197 
                                                                  
Purchase of treasury stock and warrants   -    -    -    -    -    -    -    -    (66,667)   (30,000)   (5,000)   -    (35,000)
                                                                  
Inducement expense   -    -    -    -    -    -    -    -    -    -    -    -    - 
                                                                  
Net loss for the three months ended September 30, 2019   -    -    -    -    -    -    -    -    -    -    -    (1,934,011)   (1,934,011)
                                                                  
Balance, September 30, 2019   -    -    -    -    -    -    3,054,680    3,055    (116,617)   (392,174)   36,417,564    (41,941,305)   (5,912,860)

 

6

 

 

Creatd, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2019

 

   Series A
Preferred Stock
   Series B
Preferred Stock
   Series D
Preferred Stock
   Common Stock   Treasury stock   Additional
Paid In
   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                                                     
Balance, December 31, 2018           -         -          -          -          -          -    2,158,447    2,158    (9,222)   (52,341)   34,104,644    (36,545,065)   (2,490,604)
                                                                  
Stock based compensation   -    -    -    -    -    -    41,742    42    -    -    434,042    -    434,084 
                                                                  
Cash received for common stock and warrants   -    -    -    -    -    -    43,322    43    -    -    649,786    -    649,829 
                                                                  
Tender offering   -    -    -    -    -    -    700,058    700    -    -    (700)   -    - 
                                                                  
Stock issuance cost   -    -    -    -    -    -    -    -    -    -    (178,146)   -    (178,146)
                                                                  
Stock warrants issued with note payable   -    -    -    -    -    -    -    -    -    -    336,975    -    336,975 
                                                                  
Purchase of treasury stock and warrants   -    -    -    -    -    -    -    -    (107,394)   (339,833)   (95,594)   -    (435,427)
                                                                  
Shares issued for acquisition   -    -    -    -    -    -    111,111    111    -    -    1,166,558    -    1,166,669 
                                                                  
Inducement expense   -    -    -    -    -    -    -    -    -    -    -    7,626    7,626 
                                                                  
Net loss for the nine months ended September 30, 2019   -    -    -    -    -    -    -    -    -    -    -    (5,403,866)   (5,403,866)
                                                                  
Balance, September 30, 2019   -    -    -    -    -    -    3,054,680    3,054    (116,617)   (392,174)   36,417,565    (41,941,305)   (5,912,860)

 

7

 

 

Creatd, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   For the Nine Months Ended   For the Nine Months Ended 
   September 30,
2020
   September 30,
2019
 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(20,703,631)  $(5,403,866)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   116,614    11,922 
Accretion of debt discount and issuance cost   6,697,778    228,017 
Inducement expense   -    7,626 
Share-based compensation   6,577,558    441,412 
Bad debt expense   52,849    - 
Gain on settlement of debt   (470)   - 
Loss on settlement of vendor liabilities   126,087    - 
Gain on marketable securities   7,453    - 
Loss on extinguishment of debt   623,774    83,171 
Non cash lease expense   53,462    (76,317)
Changes in operating assets and liabilities:   -      
Prepaid expenses   -    669 
Accounts receivable   (92,319)   (49,532)
Deposits and other assets   (5,407)   - 
Deferred revenue   (13,270)   57,003 
Accounts payable and accrued expenses   1,578,302    (7,912)
Operating lease liability   (51,268)   - 
Net Cash Used In Operating Activities   (5,032,488)   (4,707,807)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Issuance of note receivable   -    (11,450)
Cash paid for property and equipment   (19,460)   (27,887)
Purchase of marketable securities   (238,272)   - 
Sale of marketable securities   36,048    - 
Deposits   (175,000)   - 
Cash consideration for  acquisition   -    (368,004)
Net cash received in business combination   -    16,049 
Net Cash Used In Investing Activities   (396,684)   (391,292)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Cash overdraft   -    (33,573)
Net proceeds from issuance of notes   1,396,649    - 
Repayment of notes   (447,024)   (50,000)
Proceeds from issuance of demand loan   440,000    100,000 
Repayment of demand Loan   (90,000)   - 
Proceeds from issuance of convertible note   2,904,255    1,993,025 
Repayment of convertible notes   (1,658,001)   - 
Proceeds from issuance of convertible notes - related party   50,000      
Proceeds from issuance of note payable - related party   152,989    3,406,500 
Repayment of note payable - related party   (983,752)   (329,000)
Proceeds from issuance of common stock and warrants   6,662,015    649,829 
Cash paid for stock issuance costs   -    (35,000)
Purchase of treasury stock and warrants   (89,416)   (435,428)
Net Cash Provided By Financing Activities   8,337,715    5,266,353 
           
Effect of exchange rate changes on cash   (22,795)   - 
           
Net Change in Cash   2,885,748    167,254 
           
Cash - Beginning of Year   11,637    - 
           
Cash - End of period  $2,897,385   $167,254 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Year for:          
Income taxes  $-   $- 
Interest  $175,626   $42,262 
           
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Settlement of vendor liabilities  $475,220   $- 
Deferred offering costs  $-   $143,146 
Beneficial conversion feature on convertible notes  $5,498,313   $- 
Warrants issued with debt  $1,079,213   $336,975 
Shares issued with debt  $130,264   $- 
Issuance of common stock for prepaid services  $585,000   $- 
Cancellation of Treasury stock  $349,030      
Operating Lease liability  $-   $288,790 
Option liability  $-   $7,328 
Conversion of note payable and interest into convertible notes  $385,000   $- 
Conversion of Demand loan into notes payable  $150,000   $- 
Common stock and warrants issued upon conversion of notes payable  $11,217,362   $- 
Promissory Note issued for acquisition  $-   $660,000 
Shares issued for acquisition  $-   $1,166,669 
Conversion of note payable and interest into convertible notes  $385,000   $- 
Conversion of note payable- related party and interest into convertible notes- related party  $-   $20,000 

 

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

 

8

 

 

Creatd, Inc.

September 30, 2020

Notes to the Condensed Consolidated Financial Statements

 

Note 1 – Organization and Operations

  

Creatd, Inc., formerly Jerrick Media Holdings, Inc. (“we,” “us,” the “Company,” or “Creatd”), is a technology company focused on the development of digital communities, marketing branded digital content, and e-commerce opportunities. Creatd’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 Creatd’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.

 

The Company was originally 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. (“GTPH”) as part of its plan to diversify its business.

 

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 “Merger”) 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, pursuant to the Merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 475,000 shares of GTPH’s common stock. In connection therewith, GTPH acquired 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 39,091 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.

   

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.

  

On September 11, 2019, the Company acquired 100% of the membership interests of Seller’s Choice, LLC, a New Jersey limited liability company (“Seller’s Choice”). Seller’s Choice is digital e-commerce agency based in New Jersey (see Note 4).

 

On September 9, 2020, the Company filed a certificate of amendment with the Secretary of State of the State of Nevada to change our name to “Creatd, Inc.”, which became effective on September 10, 2020. 

   

9

 

 

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 the accounting principles generally accepted in the United States of America.

    

Basis of Presentation

 

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and following the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or any other interim period or for any other future year. These unaudited condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC. The balance sheet as of December 31, 2019 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with U.S. 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 and (b) general economic conditions.

  

10

 

 

(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.
   
(v) Operating lease estimates and assumptions: These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We estimate the incremental borrowing rate for each lease based on an evaluation of our credit ratings and the prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the terms of the lease.

   

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 September 30, 2020, the Company’s consolidated subsidiaries and/or entities are as follows:

 

Name of combined affiliate  State or other jurisdiction
of
incorporation
or organization
  Company
Ownership Interest
 
        
Jerrick Ventures LLC  Delaware   100%
Abacus Tech Pty Ltd  Australia   100%
Seller’s Choice, LLC  New Jersey   100%
Jerrick Global, LLC  Delaware   100%
Jerrick Investment Advisors LLC  Delaware   100%
Jerrick Partners LLC  Delaware   100%
Maven Tech LLC  Delaware   100%
OG Collection LLC  Delaware   100%
VMENA LLC  Delaware   100%
Vocal For Brands, LLC  Delaware   100%
Vocal Ventures LLC  Delaware   100%
What to Buy, LLC  Delaware   100%

 

All inter-company balances and transactions have been eliminated.  

 

11

 

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the Financial Accounting Standards Board (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 or liabilities 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, notes payable, convertible debt, accounts payable and accrued liabilities 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.

   

The assets or liabilities’ fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities that are measured at fair value on a recurring basis:

 

Fair Value Measurements as of

September 30, 2020

  

   Total   Quoted
Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)
   Quoted Prices
for Similar
Assets or
Liabilities in
Active
Markets
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                
Marketable securities - debt securities  $200,000   $          -   $          -   $200,000 
Marketable securities - equity securities   -    -    -    - 
Total assets  $200,000   $-   $-   $200,000 

 

12

 

 

The Company valued the initial value of debt securities, which are investments in convertible notes receivable, by assessing the separate values of the debt and equity components for similar instruments convertible into private company equity (Level 3). The investment was initially measured at cost, which was determined to approximate fair value due to the lack of marketability of the conversion shares underlying these convertible instruments and the expected recoverability of the note principal. The key assumption affecting the level 3 fair values would be collectability of the notes. The Company monitors for impairment indicators at each balance sheet date.

 

Marketable debt securities as of September 30, 2020 are as follows:

 

   Fair Value
Hierarchy
  Cost   Unrealized
Gains
(Loss)
   Fair
Value
 
Marketable securities - debt securities  3  $200,000   $                -   $200,000 

 

The change in net unrealized holding gain (loss) on debt securities available for sale that has been included in Accumulated Other Comprehensive Income as a separate component of Stockholder’s Equity for the nine months ended September 30, 2020 and 2019 was $0 and $0, respectively.

 

Our marketable equity securities are publicly traded stocks measured at fair value using quoted prices for identical assets in active markets and classified as Level 1 within the fair value hierarchy. Marketable equity securities as of September 30, 2020 are $0.

 

The change in net realized appreciation on equity trading securities that has been included in other expenses for the nine months ended September 30, 2020 and 2019 was $7,453 and $0, respectively.

 

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 fixtures  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.

 

13

 

 

Long-lived Assets Including Goodwill and Other Acquired Intangibles Assets

 

We evaluate the recoverability of property and equipment and acquired finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any significant impairment charges during the nine months ended September 30, 2020.  

 

Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. We routinely review the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If we change the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.

 

During the nine months ended September 30, 2020 the Company completed its annual impairment test of goodwill. The Company performed the qualitative assessment as permitted by ASC 350-20 and determined that the fair value of the reporting unit was more likely than not equal or greater than the carrying value, including Goodwill. Based on completion of this annual impairment test, no impairment was indicated.

 

Investments

 

The Company accounts for its investments in debt securities, in accordance with sub-topic 320-10 of the FASB ASC (“Sub-topic 320-10”).

 

Pursuant to Paragraph 320-10-35-1, investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the consolidated balance sheets at each balance sheet date. Unrealized holding gains and losses for available-for-sale debt securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized  except an available-for-sale debt security that is designated as being hedged in a fair value hedge, from which all or a portion of the unrealized holding gain and loss of shall be recognized in earnings during the period of the hedge, pursuant to paragraphs 815-25-35-1 through 815-25-35-4. The available-for-sale debt securities are measured at amortized cost if there is no readily determinable fair value.

 

The Company follows Paragraphs 326-30-35-1 through 326-30-35-4 to assess whether an investment is impaired in each reporting period. An investment in debt security is impaired if the fair value of the investment is less than its amortized cost. Impairment indicators include, but are not limited to the following: a. asset quality, or business prospects of the investee; b. a significant adverse change in the regulatory, economic, or technological environment of the investee; c. a significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates. If the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is either temporary or other than temporary. 

 

The following table sets forth a summary of the changes in marketable securities that are measured at fair value on a recurring basis:

 

   For the three months ended
September 30,
2020
   For the nine months ended
September 30,
2020
 
   Total   Total 
Beginning of period  $176 ,325   $- 
Purchase of marketable securities   71,989    238,272 
Loss on trading securities   (17,495)   (7,453)
Sale of marketable securities   (30,819)   (30,819)
September 30, 2020  $200,000   $200,000 

 

14

 

 

We invest in debt and equity securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in securities with maturities of two years or less and maintain a weighted average maturity of one year or less. As of September 30, 2020, all of our investments had maturities between one and two years.  

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB ASC 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 condensed 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.

 

Foreign Currency

 

Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at our Consolidated Balance Sheet dates. Results of operations and cash flows are translated using the average exchange rates throughout the periods. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of stockholders’ equity in accumulated other comprehensive income. Gains and losses from foreign currency transactions, which are included in SG&A, have not been significant in any period presented.

 

Revenue Recognition

 

Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

We determine revenue recognition through the following steps:

 

identification of the contract, or contracts, with a customer;

 

identification of the performance obligations in the contract;

 

15

 

 

determination of the transaction price;

  

allocation of the transaction price to the performance obligations in the contract; and

 

recognition of revenue when, or as, we satisfy a performance obligation.

  

Revenue disaggregated by revenue source for the three and nine months ended September 30, 2020 and 2019 consists of the following:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Branded content  $165,500   $35,464   $290,228   $57,885 
Managed Services   183,648    54,767    566,005    60,937 
Creator Subscriptions   66,198    -    157,132    - 
Affiliate sales   8,400    1,155    24,744    6,816 
Other revenue   1,068    -    2,387    7,263 
   $424,814   $91,386   $1,040,496   $132,901 

    

During the three and nine months ended September 30, 2020, the Company recognized $100,000 in revenue from a related party for branded content services. The customer is a significant investee into which the Company has made deposits towards the investment of $175,000.

 

Branded Content

 

Branded content represents the revenue recognized from the Company’s obligation to create and publish branded articles for clients on the Vocal platform and promote said stories, tracking engagement for the client. The performance obligation is satisfied when the Company successfully publishes the articles on its platform and meets any required promotional milestones as per the contract. The revenue is recognized over time as the services are performed.

 

Below are the significant components of a typical agreement pertaining to branded content revenue:

 

The Company collects fixed fees ranging from $5,000 to $75,000.

 

The articles are created and published within three months of the signed agreement, or as previously negotiated with the client.

 

The articles are promoted per the contract and engagement reports are provided to the client.

 

The client pays 50% at signing and 50% upon completion.

 

Most contracts include provisions for clients to acquire content rights at the end of the campaign for a flat fee.

 

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Affiliate Sales

 

Affiliate sales represents the commission the Company receives when a purchase is made through affiliate links placed within content hosted on the Vocal platform. Affiliate revenue is earned on a “click through” basis, upon referring visitors, via said links, to an affiliate’s site and having them complete a specific outcome, most commonly a product purchase. The Company uses multiple affiliate platforms, such as Skimlinks, Amazon, and Tune, to form and maintain thousands of vendor relationships. Each vendor establishes their own commission percentage, which typically range from 2-20%. The revenue is recognized upon receipt as reliable estimates could not be made.

 

Subscription

 

Vocal+ is a premium subscription offering for Vocal creators.  In addition to joining for free, Vocal creators now have the option to sign up for a Vocal+ membership for either $9.99 monthly or $99 annually. Vocal+ subscribers receive access to value-added features such as increased rate of cost per mille (thousand) (“CPM”) monetization, a decreased minimum withdrawal threshold, a discount on platform processing fees, member badges for their profiles, access to exclusive Vocal+ Challenges, and early access to new Vocal features. Subscription revenues stem from both monthly and annual subscriptions, the latter of which is amortized over a twelve-month period. Any customer payments received are recognized over the subscription period, with any payments received in advance being deferred until they are earned.

 

Managed Services

 

The Company provides Studio/Agency Service offerings to business-to-business (B2B) and business-to-consumer (B2C) product and service brands which encompasses a full range of digital marketing and e-commerce solutions. The Company’s services include the setup and ongoing management of clients’ websites, Amazon and Shopify storefronts and listings, social media pages, search engine marketing, and other various tools and sales channels utilized by e-commerce sellers for sales and growth optimization. Contracts are broken into three categories Partners, Monthly Services, and Projects. Contract amounts for Partner and Monthly Services clients range from approximately $500-$7,500 per month while Project amounts vary depending on the scope of work. Partner and Monthly clients are billed monthly for the work completed within that month. Partner Clients may or may not have an additional billing component referred to as Sales Performance Fee, which is a fee based upon a previously agreed upon percentage point of the client’s total sales for the month. Some Partners may also have projects within their contracts that get billed and recognized as agreed upon project milestones are achieved.  

 

Deferred Revenue

 

Deferred revenue consists of billings and payments from clients in advance of revenue recognition. As of September 30, 2020 and December 31, 2019, the Company had deferred revenue of $37,421 and $50,691, respectively.

 

Accounts Receivable and Allowances

 

Accounts receivable are recorded and carried when the Company has performed the work in accordance with managed services, project, partner, consulting and branded content agreements. For example, we bill a managed service client monthly when we have updated their Amazon store, modified SEO or completed the other services listed in the agreement. For projects and branded content, we will bill the client and record the receivable once milestones are reached that are set in the agreement. We make estimates for the allowance for doubtful accounts and allowance for unbilled receivables based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from customers. During the nine months ended September 30, 2020 the Company recorded $52,849 as a reserve for doubtful accounts. As of September 30, 2020 and December 31, 2019, the Company has an allowance for doubtful accounts of $82,349 and $33,503, respectively.

 

Stock-Based Compensation

 

The Company recognizes compensation expense for all equity–based payments granted in accordance with Accounting Standards Codification (“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.

 

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

 

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

  

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

 

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 nine months ended September 30, 2020 and 2019 presented in these condensed consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

The Company had the following common stock equivalents at September 30, 2020 and 2019:

 

   September 30, 
   2020   2019 
Options   542,687    294,167 
Warrants   3,059,040    262,084 
Convertible notes - related party   -    1,770 
Convertible notes   -    188,265 
Totals   3,601,727    746,286 

 

Recently Adopted Accounting Guidance

 

The Company invests in equity and debt securities. The Company’s investments in debt securities are classified at the date of purchase as available-for-sale securities. Debt securities are reported at fair value with unrealized gains and losses, net of the related tax effect, reflected as an accumulated other comprehensive income component of stockholder’s equity until such gains or losses are realized. In accordance with Accounting Standards Update (“ASU”) 2016-01, Equity securities are now reported at fair value with unrealized gains and losses, net of the related tax effect, reflected as a gain or loss on the statement of operations.

 

18

 

 

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 adoption of ASU 2016-16 did not have a material impact on the Company’s condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). The updated guidance, which became effective for fiscal years beginning after December 15, 2019, did not have a material impact on the Company’s condensed consolidated financial statements. 

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The adoption of ASU 2018-13 did not have a material impact on the Company’s condensed consolidated financial statements.  

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance requires companies to apply the internal-use software guidance in ASC 350-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implementation costs or expense them as incurred. The adoption of ASU 2018-15 did not have a material impact on the Company’s condensed consolidated financial statements.

 

Recent Accounting Guidance Not Yet Adopted

 

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.

 

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2021 and interim periods within those annual periods and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying condensed 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, as of September 30, 2020, the Company had an accumulated deficit of $65.3 million, a net loss of $20.7 million and net cash used in operating activities of $5.0 million for the reporting period then ended. The Company is in default on debentures as of the date of this filing.  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.

 

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On January 30, 2020, the World Health Organization declared the COVID-19 novel coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial impact will be to the Company, capital raising efforts and our operations may be negatively affected.

 

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 that it will be able to do so on reasonable terms, or at all. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds by way of a public or private offering. 

 

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

  

Note 4 – Acquisition of Seller’s Choice

 

On September 11, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Seller’s Choice Purchase Agreement”) by and between the Company and Home Revolution, LLC, a Delaware limited liability company (the “Seller”). Pursuant to the Seller’s Choice Purchase Agreement, subject to the terms and conditions set forth therein, at the closing of the transactions contemplated by the Seller’s Choice Purchase Agreement (the “Seller’s Choice Closing”), the Company acquired 100% of the membership interests of Seller’s Choice. As a result of the transactions contemplated by the Seller’s Choice Purchase Agreement, Seller’s Choice became a wholly owned subsidiary of the Company (collectively, the “Seller’s Choice Acquisition”).

 

At the Seller’s Choice Closing, the aggregate consideration (the “Consideration”) paid to the Seller was as follows: (i) $340,000, in cash; (ii) 111,111 shares of the Company’s common stock; and (iii) a secured promissory note in the principal amount of $660,000 (the “Seller’s Choice Note”). In connection with the Seller’s Choice Note, the Company, Seller, and Seller’s Choice entered into a Security Agreement whereby the Seller’s Choice Note is secured by the assets of Seller’s Choice. 

 

Following the closing of the transaction, Seller’s Choice’s financial statements as of the Closing were consolidated with the Condensed consolidated financial statements of the Company. These amounts are provisional and may be adjusted during the measurement period.

 

Following the closing of the merger transaction the Company’s investment in Seller’s Choice consisted of the following:

 

   Shares   Amount 
Consideration paid:        
Cash paid       $340,000 
Common stock issued at closing (1)   111,111   $1,166,669 
Note payable        660,000 
Total consideration paid       $2,166,669 
           
Total consideration       $2,166,669 

 

(1)The common stock issued at the closing of the Seller’s Choice Acquisition had a closing price of $10.50 per share on the date of the transaction.

 

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The following presents the unaudited pro-forma combined results of operations of the Company with Seller’s Choice as if the entities were combined on January 1, 2019.

 

   Nine Months Ended 
   September 30,
2019
 
Revenues, net  $801,416 
Net loss attributable to common shareholders  $(5,438,813)
Net loss per share  $(2.07)
Weighted average number of shares outstanding   2,633,406 

 

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2019 or to project potential operating results as of any future date or for any future periods. 

 

The Company consolidated Seller’s Choice as of the closing date of the Seller’s Choice Acquisition, and the results of operations of the Company since that date include that of Seller’s Choice.  

 

Note 5 – Notes Payable

 

Notes payable as of September 30, 2020 and December 31, 2019 is as follows:

 

   Outstanding Principal as of       
   September 30,
2020
   December 31,
2019
 

Interest

Rate

   Maturity Date
Seller’s Choice Note   660,000   660,000   30%  September 2020
The First January 2020 Loan Agreement   -   -   6%  January 2020
The Second January 2020 Loan Agreement   -   -   5%  January 2020
The Third January 2020 Loan Agreement   -   -   10%  January 2020
The Fourth January 2020 Loan Agreement   -   -   7%  February 2020
The February 2020 Loan agreement   -   -   5%  March 2020
The First March 2020 Loan Agreement   -   -   25%  September 2020
The Second March 2020 Loan Agreement   -   -   19%  September 2021
The April 2020 PPP Loan Agreement   412,500   -   1%  April 2022
The May 2020 PPP Loan Agreement   282,432   -   1%  May 2022
The June 2020 Loan Agreement   -   -   15%  July 2020
The July 2020 Loan Agreement   -   -   5%  August 2020
The First September 2020 Loan Agreement   20,249   -   12.5%  March 2021
The Second September 2020 Loan Agreement   16,705   -   7%  September 2020
    1,391,886   660,000        
Less: Debt Discount   -   -        
Less: Debt Issuance Costs   -   -        
    1,391,886   660,000        
Less: Current Debt   (990,122)           
Total Long-Term Debt  $401,764 $         

 

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Seller’s Choice Note

 

On September 11, 2019, the Company entered into Seller’s Choice Purchase Agreement with Home Revolution LLC (see Note 4). As a part of the consideration provided pursuant to the Seller’s Choice Acquisition, the Company issued the Seller’s Choice Note to the Seller in the principal amount of $660,000. The Seller’s Choice Note bears interest at a rate of 9.5% per annum, and is payable on March 11, 2020 (the “Seller’s Choice Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts become due. Upon maturity the Company utilized an automatic extension up to 6 months. This resulted in a 5% increase in the interest rate every month the Seller’s Choice Note is outstanding. As of September 30, 2020 the company is in default on the Seller’s Choice note.

 

During the nine months ended September 30, 2020 the Company accrued interest of $104,578 and paid $68,970 of interest.

 

The First January 2020 Loan Agreement

 

On January 3, 2020, the Company entered into a loan agreement (the “First January 2020 Loan Agreement”) with an individual (the “First January 2020 Lender”) whereby the First January 2020 Lender issued the Company a promissory note of $250,000 (the “First January 2020 Note”). Pursuant to the First January 2020 Loan Agreement, the First January 2020 Note has an effective interest rate of 6%. As additional consideration for entering in the First January 2020 Loan Agreement, the Company issued the First January 2020 Lender 1,333 shares of the Company’s common stock. The maturity date of the First January 2020 Note was January 15, 2020 (the “First January 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First January 2020 Note were due.  

 

During the nine months ended September 30, 2020, the Company converted $250,000 in principal to the Third February 2020 Note (as defined below).

  

The Second January 2020 Loan Agreement

 

On January 14, 2020, the Company entered into a loan agreement (the “Second January 2020 Loan Agreement”) with an individual (the “Second January 2020 Lender”), whereby the Second January 2020 Lender issued the Company a promissory note of $10,000 (the “Second January 2020 Note”). Pursuant to the Second January 2020 Loan Agreement, the Second January 2020 Note has an effective interest rate of 5%. The maturity date of the Second January 2020 Note was January 24, 2020 (the “Second January 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second January 2020 Note were due. As additional consideration for entering in the Second January Loan Agreement, the Company issued a five-year warrant to purchase 50 shares of the Company’s common stock at a purchase price of $18.00 per share. The Company recorded a $580 debt discount relating to 50 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.

 

During the nine months ended September 30, 2020 the Company repaid $10,000 in principal and $500 in interest.

  

The Third January 2020 Loan Agreement

 

On January 22, 2020, the Company entered into a loan agreement (the “Third January 2020 Loan Agreement”) with an individual (the “Third January 2020 Lender”), whereby the Third January 2020 Lender issued the Company a promissory note of $15,000 (the “Third January 2020 Note”). Pursuant to the Third January 2020 Loan Agreement, the Third January 2020 Note has an effective interest rate of 10%. The maturity date of the Third January 2020 Note was January 29, 2020 (the “Third January 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Third January 2020 Note were due. As additional consideration for entering in the Third January Loan Agreement, the Company issued a five-year warrant to purchase 75 shares of the Company’s common stock at a purchase price of $18.00 per share. The Company recorded a $892 debt discount relating to 75 warrants issued to the Third January 2020 Lender 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.

  

During the nine months ended September 30, 2020 the Company repaid $15,000 in principal and $1,500 in interest.

 

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The Fourth January 2020 Loan Agreement

 

On January 23, 2020, the Company entered into a loan agreement (the “Fourth January 2020 Loan Agreement”) with an individual (the “Fourth January 2020 Lender”) whereby the Fourth January 2020 Lender issued the Company a promissory note of $135,000 (the “Fourth January 2020 Note”). Pursuant to the Fourth January 2020 Loan Agreement, the Fourth January 2020 Note has an effective interest rate of 7%. As additional consideration for entering in the First January 2020 Loan Agreement, the Company issued the Fourth January 2020 Lender 750 shares of the Company’s common stock. The maturity date of the Fourth January 2020 Note was February 23, 2020 (the “Fourth January 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Fourth January 2020 Note were due.

 

During the nine months ended September 30, 2020 the Company converted $135,000 in principal to the Second February 2020 Note (as defined below).

 

The February 2020 Loan Agreement

 

On February 25, 2020, the Company entered into a loan agreement (the “February 2020 Loan Agreement”) with an individual (the “February 2020 Lender”), whereby the February 2020 Lender issued the Company a promissory note of $15,000 (the “February 2020 Note”). Pursuant to the February 2020 Loan Agreement, the February 2020 Note has an effective interest rate of 5%. The maturity date of the February 2020 Note was March 3, 2020 (the “February 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the February 2020 Note were due. As additional consideration for entering in the February 2020 Loan Agreement, the Company issued a five-year warrant to purchase 75 shares of the Company’s common stock at a purchase price of $18.00 per share. The Company recorded a $801 debt discount relating to 75 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.

  

During the nine months ended September 30, 2020 the Company repaid $15,000 in principal and $750 in interest.

 

The First March 2020 Loan Agreement

 

On March 23, 2020, the Company entered into a loan agreement (the “First March 2020 Loan Agreement”) with an individual (the “First March 2020 Lender”) whereby the First March 2020 Lender issued the Company a promissory note of $11,000 (the “First March 2020 Note”). Pursuant to the First March 2020 Loan Agreement, the First March 2020 Note has an effective interest rate of 25%. The maturity date of the First March 2020 Note was September 23, 2020 (the “First March 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First March 2020 Note were due.

 

During the nine months ended September 30, 2020 the Company repaid $11,000 in principal and $2,695 in interest.

 

The Second March 2020 Loan Agreement

 

On March 26, 2020, the Company entered into a loan agreement (the “Second March 2020 Loan Agreement”) with an individual (the “Second March 2020 Lender”), whereby the Second March 2020 Lender issued the Company a promissory note of $17,000 (the “Second March 2020 Note”). Pursuant to the Second March 2020 Loan Agreement, the Second March 2020 Note has an effective interest rate of 19%. The maturity date of the Second March 2020 Note was September 17, 2020 (the “Second March 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second March 2020 Note were due.

 

During the nine months ended September 30, 2020 the Company repaid $17,000 in principal and $1,398 in interest.

 

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The April 2020 PPP Loan Agreement

 

On April 30, 2020, Jerrick Ventures, LLC (“Jerrick Ventures”), the Company’s wholly-owned subsidiary, was granted a loan from PNC Bank, N.A. with a principal amount of $282,432 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated April 30, 2020 matures on April 30, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on October 30, 2020. The Note may be prepaid by Jerrick Ventures at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.

 

During the nine months ended September 30, 2020 the Company accrued interest of $1,684. 

 

The Company is in the process of returning the funds received from the Loan.

 

The May 2020 PPP Loan Agreement

 

On May 4, 2020, the Company was granted a loan from a banking institution with a principal amount of $412,500, pursuant to the Paycheck Protection Program (the “PPP”). The Loan, which was in the form of a Note dated May 4, 2020 matures on May 4, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on November 4, 2020. The Note may be prepaid by Jerrick Ventures at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Jerrick Ventures intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

 

During the nine months ended September 30, 2020 the Company accrued interest of $1,184. 

 

The June 2020 Loan Agreement

 

On June 30, 2020, the Company entered into a loan agreement (the “June 2020 Loan Agreement”) with a banking institution (the “June 2020 Lender”), whereby the June 2020 Lender issued the Company a promissory note of A$510,649 Australian dollar (“AUD”) or $351,692 United States Dollar (the “June 2020 Note”). Pursuant to the June 2020 Loan Agreement, the June 2020 Note has an effective interest rate of 15%. The maturity date of the June 2020 Note was July 31, 2020 (the “June 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the June 2020 Note were due in AUD currency. This loan was secured by the Australian research & development credit.

 

During the nine months ended September 30, 2020 the Company repaid A$510,649 in principal and A$14,814 in interest.

 

The July 2020 Loan Agreement

 

On July 30, 2020, the Company entered into a loan agreement (the “July 2020 Loan Agreement”) with an individual (the “July 2020 Lender”), whereby the July 2020 Lender issued the Company a promissory note of $5,000 (the “July 2020 Note”). Pursuant to the July 2020 Loan Agreement, the July 2020 Note has an effective interest rate of 5%. The maturity date of the July 2020 Note was August 06, 2020 (the “July 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the July 2020 Note were due. As additional consideration for entering in the July 2020 Loan Agreement, the Company issued a five-year warrant to purchase 25 shares of the Company’s common stock at a purchase price of $18.00 per share. The Company recorded a $316 debt discount relating to 25 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.

 

During the nine months ended September 30, 2020 the Company repaid $5,000 in principal and $250 in interest.

 

The First September 2020 Loan Agreement

 

On September 1, 2020, the Company entered into a loan agreement (the “First September 2020 Loan Agreement”) with an individual (the “First September 2020 Lender”) whereby the First September 2020 Lender issued the Company a promissory note of $25,000 (the “First September 2020 Note”). Pursuant to the First September 2020 Loan Agreement, the First September 2020 Note has an effective interest rate of 12.5%. The maturity date of the First September 2020 Note is March 1, 2021 (the “First September 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First September 2020 Note are due.

 

During the nine months ended September 30, 2020 the Company repaid $4,752 in principal and $0 in interest.

 

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The Second September 2020 Loan Agreement

 

On September 15, 2020, the Company entered into a loan agreement (the “Second September 2020 Loan Agreement”) with an individual (the “Second September 2020 Lender”), whereby the Second September 2020 Lender issued the Company a promissory note of $16,705 (the “Second September 2020 Note”). Pursuant to the Second September 2020 Loan Agreement, the Second September 2020 Note has an interest rate of 7%. The maturity date of the Second September 2020 Note is September 15, 2022 (the “Second September 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second September 2020 Note are due. The Second September 2020 Loan is secured by the tangible and intangible property of the Company.

 

During the nine months ended September 30, 2020 the Company accrued interest of $48.

 

Note 6 – Convertible Note Payable

 

Convertible notes payable as of September 30, 2020 and December 31, 2019 is as follows:

 

   Outstanding Principal
as of
              Warrants granted 
   September 30,
2020
   December 31,
2019
   Interest
Rate
   Conversion
Price
  

Maturity

Date

  Quantity   Exercise
Price
 
The February 2018 Convertible Note Offering                -    75,000    15%   12.00(*)  January – February 2020   84,639    12.00 
The March 2018 Convertible Note Offering   -    75,000    14%   12.00(*)  March – April 2020   80,114    12.00 
The February 2019 Convertible Note Offering   -    2,311,703    10%   15.00(*)  February – March 2020   44,396    18.00 
The November 2019 Convertible Note Offering   -    559,433    12%   13.50(*)  May – June 2020   -    - 
The First January 2020 convertible Loan Agreement   -    -    12%  $13.50(*)  July – August 2020   -    - 
The First February 2020 convertible Loan Agreement   -    -    10%  $12.00(*)  August 2020   -    - 
The Second February 2020 convertible Loan Agreement   -    -    12%  $13.50(*)  February 2021   6,666    15.00 
The Third February 2020 convertible Loan Agreement   -    -    12%  $13.50(*)  February 2021   41,665    15.00 
The April 2020 Convertible Note Offering   -    -    12%  $13.50(*)  October 2020   -    - 
The June 2020 Convertible Loan Agreement   -    -    12%  $ -(*)  June 2021   49,603    11.55 
The First July 2020 convertible Loan Agreement   -    -    10%  -(*)  June 2021   -    - 
The Second July 2020 convertible Loan Agreement   -    -    12%  -(*)  July 2021   6,667    12 
The July 2020 Convertible Note Offering   -    -    10%  12.75(*)  January – March 2021   30,589    12.75 
The August 2020 convertible Loan Agreement             10%  -(*)  August 2021   -    - 
The September 2020 convertible Loan Agreement   385,000    -    12%  -(*)  September 2021   85,555    5 
    385,000    3,021,136                        
Less: Debt Discount   (181,347)   (124,096)                       
Less: Debt Issuance Costs   (29,184)   (614)                       
    174,469    2,896,425                        
Less: Current Debt   (174,469)   (2,896,425)                       
Total Long-Term Debt  $-   $-                       

 

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

     

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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 “February 2018 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 exchanged for convertible debt in the February 2018 Offering. These conversions resulted in the issuance of 24,223 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 “February 2018 Unit” and collectively, the “February 2018 Units”), with each February 2018 Unit consisting of (a) a 15% Convertible Secured Promissory Note (each a “February 2018 Convertible Note” and together the “February 2018 Convertible Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“February 2018 Conversion Shares”) at a conversion price of $12.00 per share (the “February 2018 Note Conversion Price”), and (b) a five-year warrant (each a “February 2018 Offering Warrant and together the “February 2018 Offering Warrants”) to purchase common stock equal to one hundred percent (100%) of the shares into which the February 2018 Convertible Notes can be converted into (“February 2018 Warrant Shares”) at an exercise price of $12.00 per share (“February 2018 Warrant Exercise Price”). The February 2018 Offering Notes mature on the second (2nd) anniversary of their issuance dates. The February 2018 Offering Notes are secured by a second priority security interest in the Company’s assets up to $1,000,000.

 

The February 2018 Note Conversion Price and the February 2018 Offering Warrant Exercise Price 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 $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 60,416 February 2018 Offering 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 these notes to accretion of debt discount and issuance cost.

 

26

 

 

In connection with the February 2018 Convertible Note 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 (10%) of the Conversion Shares underlying the February 2018 Convertible Notes or 6,041 shares that had a fair value of $74,881, which was recorded as issuance cost and is being accreted over the life of these notes to accretion of debt discount and issuance cost.

    

During the year ended December 31, 2018, the Company converted $940,675 of principal and $86,544 of unpaid interest into the August 2018 Equity Raise.

 

During the year ended December 31, 2019 the Company repaid $19,758 in interest.

 

During the nine months ended September 30, 2020 the Company repaid $75,000 in principal and $781 in interest, and the February 2018 Convertible Notes are no longer outstanding.

 

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 “March 2018 Investors”) for aggregate gross proceeds of $770,000. In addition, $50,000 of the Company’s short-term debt, $767 accrued but unpaid interest and $140,600 of the Company’s vendor liabilities was exchanged for convertible debt within the March 2018 Convertible Note Offering. These conversions resulted in the issuance of 15,947 warrants with a fair value of $84,087. 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 “March 2018 Unit” and collectively, the “March 2018 Units”), with each March 2018 Unit consisting of (a) a 14% Convertible Secured Promissory Note (each a “March 2018 Note” and together the “March 2018 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion price of $12.00 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 $12.00 per share (“Exercise Price”). The March 2018 Notes mature on the second (2nd) anniversary of their issuance dates.

 

The Conversion Price of the March 2018 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 $254,788 debt discount relating to 80,114 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.

 

During the year ended December 31, 2018, the Company converted $886,367 of principal and $51,293 of unpaid interest pursuant to the August 2018 Equity Raise.

 

During the nine months ended September 30, 2020, the Company converted $50,000 of principal and $17,949 of unpaid interest into the September 2020 Equity Raise (as defined in Note 8).

 

During the nine months ended September 30, 2020 the Company repaid $25,000 in principal and $9,364 in interest.

  

27

 

 

The February 2019 Convertible Note Offering

 

During the nine months ended September 30, 2019, the Company conducted an offering to accredited investors (the “February 2019 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “February 2019 Investors”) for aggregate gross proceeds of $1,993,025.

    

The February 2019 Convertible Note Offering consisted of (a) a 10% Convertible Promissory Note (each a “February 2019 Note” and together, the “February 2019 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $15.00 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company between February 21, 2019 and the date on which the Company’s consummates a listing onto a national securities exchange, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”), and (b) a four-year stock purchase warrant (each a “Warrant and together the “Warrants”) to purchase a quantity of shares of the Company’s common stock up to thirty-three percent (33%) of the number of shares of common stock into which the underlying Notes may be converted, at an exercise price of $18.00 per share (“Exercise Price”). During the nine months ended September 30, 2019 a total of 44,396 Warrants were issued in conjunction with The February 2019 Convertible Note Offering.

 

The February 2019 Notes mature on the first (1st) anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates, the principal and interest evidenced by the Note shall be mandatorily converted upon the earlier of (i) the listing of the Common Stock onto a national securities exchange, or (ii) upon a Qualified Offering.

 

The Conversion Price of the February 2019 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 $222,632 debt discount relating to 44,396 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.

 

During the nine months ended September 30, 2020, the Company converted $1,963,567 of principal and $416,786 of unpaid interest into the September 2020 Equity Raise.

 

During the nine months ended September 30, 2020 the Company repaid $348,136 in principal and $0 in interest.

 

The November 2019 Convertible Note Offering

 

During the year ended December 31, 2019, the Company conducted an offering to accredited investors (the “November 2019 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “November 2019 Investors”) for aggregate gross proceeds of $479,500. In addition, the Company converted $318,678 in Accounts Payable into this offering.

 

The November 2019 Convertible Note Offering consisted of (a) a 10% Convertible Promissory Note (each a “November 2019 Note” and together, the “November 2019 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a fixed conversion price equal to $13.50 per share.

 

The November 2019 Notes mature six months after the anniversary of their issuance dates. At any time on or after the maturity date, at the election of the Offering’s Purchaser, this Note may convert into Common Stock equal to the quotient obtained by dividing the outstanding principal and unpaid accrued interest of this Note on the date of such conversion by $13.50.

 

28

 

 

The Company recorded a $84,377 debt discount relating to an original issue discount equal to $79,933 and a beneficial conversion feature of $4,444. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

During the nine months ended September 30, 2020, the Company converted $559,433 of principal and $77,785 of unpaid interest into the September 2020 Equity Raise.

   

The January 2020 Convertible Note Offering

 

During the three months ended March 31, 2020, the Company conducted an offering to accredited investors (the “January 2020 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “January 2020 Investors”) for aggregate gross proceeds of $87,473.

 

The January 2020 Convertible Note Offering consisted of (a) a 12% Convertible Promissory Note (each a “January 2020 Note” and together, the “January 2020 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $13.50 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”).

 

The January 2020 Notes mature on the first (6th) month anniversary of their issuance dates. If an event of default occurs and is not cured within 30 days of the Company receiving notice, the notes will be convertible at 80% multiplied by the lowest VWAP of the common stock during the five (5) consecutive trading day period immediately preceding the date of the respective conversion, and a default interest rate of 24% will become effective.

 

The Conversion Price of the January 2020 Note 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 being reduced to such lower purchase price, subject to carve-outs as described therein.

 

The Company recorded a $12,473 debt discount relating to original issue discount associated with these notes. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

During the nine months ended September 30, 2020, the Company converted $87,473 of principal and $8,275 of unpaid interest into the September 2020 Equity Raise.

 

The First February 2020 Convertible Loan Agreement

 

On February 4, 2020, the Company entered into a loan agreement (the “First February 2020 Loan Agreement”) with an individual (the “First February 2020 Lender”), whereby the First February 2020 Lender issued the Company a promissory note of $85,000 (the “First February 2020 Note”). Pursuant to the First February 2020 Loan Agreement, the First February 2020 Note has interest of ten percent (10%).

 

The First February 2020 Note are convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $12.00 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”).

 

29

 

 

The First February 2020 Notes mature on the first (6th) month anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates and the Notes have not been repaid or an event of default occurs as defined in the Notes, the notes will be convertible at the lesser of the fixed conversion price or 65% multiplied by the lowest trade of the common stock during the twenty (20) consecutive trading day period immediately preceding the date of the respective conversion and a default interest rate of 15% will be applied. 

 

The Conversion Price of the First February 2020 Note 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 being reduced to such lower purchase price, subject to carve-outs as described therein.  

 

The Company recorded a $8,000 debt discount relating to original issue discount associated with these notes. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

During the nine months ended September 30, 2020 the Company repaid $158,065 in principal and $0 in interest.

 

The Second February 2020 Convertible Loan Agreement

 

On February 11, 2020, the Company entered into a loan agreement (the “Second February 2020 Loan Agreement”) with an individual (the “Second February 2020 Lender”), whereby the Second February 2020 Lender issued the Company a promissory note of $200,000 (the “Second February 2020 Note”). Pursuant to the Second February 2020 Loan Agreement, the Second February 2020 Note has interest of twelve percent (12%).  As additional consideration for entering in the Second February 2020 convertible Loan Agreement, the Company issued a five-year warrant to purchase 6,666 shares of the Company’s common stock at a purchase price of $15.00 per share.

 

The Second February 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $13.50 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”).

 

The Second February 2020 Note matures on the first (12th) month anniversary of its issuance date. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Date and the Note is unpaid, the note will be convertible at the lesser of the fixed conversion price or 75% multiplied by the lowest trade of the common stock during the twenty (20) consecutive trading day period immediately preceding the date of the respective conversion.

 

The Conversion Price of the First February 2020 Note is 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 being reduced to such lower purchase price, subject to carve-outs as described therein.

 

The Company recorded a $33,340 debt discount relating to original issue discount associated with this note. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

During the nine months ended September 30, 2020, the Company converted $125,000 of principal and $0 of unpaid interest into the September 2020 Equity Raise.

 

During the nine months ended September 30, 2020 the Company repaid $175,000 in principal and $0 in interest.

 

The Third February 2020 Convertible Loan Agreement

 

On February 25, 2020, the Company entered into a loan agreement (the “Third February 2020 Loan Agreement”) with an individual (the “Third February 2020 Lender”), whereby the Third February 2020 Lender issued the Company a promissory note of $1,500,000 (the “Third February 2020 Note”). The Company received proceeds of $864,950 and converted notes payable of $385,000 in exchange for the note (see Note 5).  Pursuant to the Third February 2020 Loan Agreement, the Second February 2020 Note has interest of twelve percent (12%).

  

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The Third February 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $4.50 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”).

 

The Third February 2020 Note matures on the first (12th) month anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates and the note is unpaid, the notes will be convertible at the lower of the fixed conversion price or 75% multiplied by the lowest trade of the common stock during the twenty (20) consecutive trading day period immediately preceding the date of the respective conversion.

 

The Conversion Price of the Third February 2020 Note 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 being reduced to such lower purchase price, subject to carve-outs as described therein.

 

In accordance with ASC 470-50, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the note exchange as described above as a debt extinguishment. The Company recorded a loss on debt extinguishment of $535,041. This represents the fair value of the warrants issued $445,705 and a debt premium of $89,336. The note has an effective interest rate of 24%. The Company recorded a debt discount of $160,714. This is made up of an original issue discount of $250,050 less a debt premium of $89,336.

 

During the nine months ended September 30, 2020, the Company converted $1,500,000 of principal and $100,603 of unpaid interest into the September 2020 Equity Raise.

 

The April 2020 Convertible Note Offering

 

During April of 2020, the Company conducted multiple closings of a private placement offering to accredited investors (the “April 2020 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “April 2020 Investors”) for aggregate gross proceeds of $350,010. The April 2020 Convertible Note Offering accrues interest at a rate of twelve percent per annum (12%). The April 2020 Convertible Note Offering mature on the six (6th) month anniversary of their issuance dates.

  

The April 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $13.50 per share after the maturity date or (ii) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”).

  

The Company recorded a $50,010 debt discount relating to original issue discount associated with these notes. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

During the nine months ended September 30, 2020, the Company converted $350,010 of principal and $16,916 of unpaid interest into the September 2020 Equity Raise.

 

The June 2020 Convertible Loan Agreement

 

On June 19, 2020, the Company entered into a loan agreement (the “June 2020Loan Agreement”) with an individual (the “June 2020 Lender”), whereby the June 2020 Lender issued the Company a promissory note of $550,000 (the “June 2020 Note”). Pursuant to the June 2020 Loan Agreement, the June 2020 Note has interest of twelve percent (12%).  As additional consideration for entering in the June 2020 convertible Loan Agreement, the Company issued a five-year warrant to purchase 49,603 shares of the Company’s common stock at a purchase price of $11.55 per share. The June 2020 Note matures on the first (12th) month anniversary of its issuance date.

  

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Upon default the June 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to the closing bid price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion.

 

The Company recorded a $67,500 debt discount relating to original issue discount associated with this note. The Company recorded a $274,578 debt discount relating to 49,603 warrants and 5,424 shares 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.

 

During the nine months ended September 30, 2020 the lender converted $59,200 of principal into the Second July 2020 Convertible Loan Agreement

 

During the nine months ended September 30, 2020 the Company repaid $490,800 in principal and $16,944 in interest.

 

The First July 2020 Convertible Loan Agreement

 

On July 01, 2020, the Company entered into a loan agreement (the “First July 2020 Loan Agreement”) with an individual (the “First July 2020 Lender”), whereby the First July 2020 Lender issued the Company a promissory note of $68,000 (the “First July 2020 Note”). Pursuant to the First July 2020 Loan Agreement, the First July 2020 Note has interest of twelve percent (10%).  The First July 2020 Note matures on June 29, 2021. 

  

Upon default the First July 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to 61% multiplied by the lowest trade of the common stock during the twenty (15) consecutive trading day period immediately preceding the date of the respective conversion.

 

During the nine months ended September 30, 2020 the Company repaid $68,000 in principal and $3,329 in interest.

 

The Second July 2020 Convertible Loan Agreement

 

On July 17, 2020, the Company entered into a loan agreement (the “Second July 2020 Loan Agreement”) with an individual (the “Second July 2020 Lender”), whereby the Second July 2020 Lender issued the Company a promissory note of $250,000 (the “Second July 2020 Note”). Pursuant to the Second July 2020 Loan Agreement, the Second July 2020 Note has interest of twelve percent (12%).  The Second July 2020 Note matures on July 17, 2021. 

  

Upon default the Second July 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to the closing bid price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion.

 

The Company recorded a $46,750 debt discount relating to original issue discount associated with this note. The Company recorded a $71,329 debt discount relating to 6,667 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.

 

During the nine months ended September 30, 2020 the Company repaid $250,000 in principal and $0 in interest.

 

 The July 2020 Convertible Note Offering

 

From July 2020 to September 2020, the Company conducted multiple closings of a private placement offering to accredited investors (the “July 2020 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “July 2020 Investors”) for aggregate gross proceeds of $390,000. The July 2020 Convertible Note Offering accrues interest at a rate of twelve percent per annum (12%). The July 2020 Convertible Note Offering mature on the six (6th) month anniversary of their issuance dates.

  

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The July 2020 Note Offering is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $12.75 per share after the maturity date or (ii) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”).

 

Upon default the July 2020 Convertible Note Offering is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to 61% multiplied by the lowest trade of the common stock during the twenty (15) consecutive trading day period immediately preceding the date of the respective conversion.

 

The conversion feature of the July 2020 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. 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 $38,215, the discount is being accreted over the life of the Debenture to accretion of debt discount and issuance cost.

 

The Company recorded a $158,078 debt discount relating to 30,589 July 2020 Convertible Note Offering 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 these notes to accretion of debt discount and issuance cost.

 

During the nine months ended September 30, 2020, the Company converted $390,000 of principal and $3,436 of unpaid interest into the September 2020 Equity Raise.

 

The August 2020 Convertible Loan Agreement

 

On August 17, 2020, the Company entered into a loan agreement (the “August 2020 Loan Agreement”) with an individual (the “August 2020 Lender”), whereby the August 2020 Lender issued the Company a promissory note of $68,000 (the “August 2020 Note”). Pursuant to the August 2020 Loan Agreement, the August 2020 Note has interest of twelve percent (12%).  The August 2020 Note matures on August 17, 2021.

  

Upon default the August 2020 Convertible Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to 61% multiplied by the lowest trade of the common stock during the twenty (15) consecutive trading day period immediately preceding the date of the respective conversion.

 

The Company recorded a $3,000 debt discount relating to original issue discount associated with this note. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

During the nine months ended September 30, 2020 the Company repaid $68,000 in principal and $0 in interest.

 

The September 2020 Convertible Loan Agreement

 

On September 23, 2020, the Company entered into a loan agreement (the “September 2020 Loan Agreement”) with an individual (the “September 2020 Lender”), whereby the September 2020 Lender issued the Company a promissory note of $385,000 (the “September 2020 Note”). Pursuant to the September 2020 Loan Agreement, the September 2020 Note has interest of twelve percent (12%).  The September 2020 Note matures on September 23, 2021. 

  

Upon default the Second July 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share equal to the closing bid price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion.

 

The Company recorded a $68,255 debt discount relating to original issue discount associated with this note. The Company recorded a $146,393 debt discount relating to 85,555 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.

 

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Note 7 – Related Party

 

Convertible notes

 

Convertible notes payable – related party as of September 30, 2020 and 2019 is as follows:

 

   Outstanding Principal as of           Warrants granted 
   September 30,
2020
   December 31,
2019
   Interest
Rate
   Maturity
Date
   Quantity   Exercise
Price
 
The March 2018 Convertible Note Offering                 -    400    14%   April 2020     19,950    12.00 
The February 2019 Convertible Note Offering   -    20,000    10%   May 2020     440    18.00 
The July 2020 Convertible Note Offering   -    -    10%   January 2020    3,922    12.75 
    -    20,400                     
Less: Debt Discount   -    (13)                    
Less: Debt Issuance Costs   -    -                     
    -    20,387                     
Less: Current Debt   -    (20,387)                    
Total Long-Term Debt  $-   $-                     

 

The March 2018 Convertible Note Offering

 

During the year ended December 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 $239,400.

 

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 “March 2018 Unit” and collectively, the “March 2018 Units”), with each March 2018 Unit consisting of (a) a 14% Convertible Secured Promissory Note (each a “March 2018 Note” and together the “March 2018 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion price of $12.00 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 $12.00 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 $84,854 debt discount relating to 19,950 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 these notes to accretion of debt discount and issuance cost.

  

During the year ended December 31, 2018, the Company converted $239,000 of principal and $15,401 of unpaid interest into the August 2018 Equity Raise.

 

During the nine months ended September 30, 2020 the lender forgave $400 of principal and $70 of unpaid interest. This was recorded as a gain on settlement of debt on the Condensed Consolidated Statements of Comprehensive Income (Loss).  

 

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The February 2019 Convertible Note Offering

 

During the Nine months ended September 30, 2019, the Company conducted an offering to accredited investors (the “February 2019 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “February 2019 Investors”) for aggregate gross proceeds of $20,000.

 

The February 2019 Convertible Note Offering consisted of (a) a 10% Convertible Promissory Note (each a “February 2019 Note” and together, the “February 2019 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $15.00 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company between February 21, 2019 and the date on which the Company’s consummates a listing onto a national securities exchange, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”), and (b) a four-year stock purchase warrant (each a “Warrant and together the “Warrants”) to purchase a quantity of shares of the Company’s common stock up to thirty-three percent (33%) of the number of shares of common stock into which the underlying Notes may be converted, at an exercise price of $18.00 per share (“Exercise Price”). During the nine months ended September 30, 2019 a total of 440 Warrants were issued in conjunction with The February 2019 Convertible Note Offering. 

 

The February 2019 Notes mature on the first (1st) anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates, the principal and interest evidenced by the Note shall be mandatorily converted upon the earlier of (i) the listing of the Common Stock onto a national securities exchange, or (ii) upon a Qualified Offering.

  

The Company recorded a $2,465 debt discount relating to 440 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.

 

During the year ended December 31, 2019, $20,000 in principal was converted from a promissory note into this Offering.