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EX-32.2 - CERTIFICATION - Creatd, Inc.f10k2020ex32-2_creatdinc.htm
EX-32.1 - CERTIFICATION - Creatd, Inc.f10k2020ex32-1_creatdinc.htm
EX-31.2 - CERTIFICATION - Creatd, Inc.f10k2020ex31-2_creatdinc.htm
EX-31.1 - CERTIFICATION - Creatd, Inc.f10k2020ex31-1_creatdinc.htm
EX-23.1 - CONSENT OF ROSENBERG RICH BAKER BERMAN, P.A. - Creatd, Inc.f10k2020ex23-1_creatdinc.htm
EX-4.1 - DESCRIPTION OF SECURITIES REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT - Creatd, Inc.f10k2020ex4-1_creatdinc.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 2020

 

or

 

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

 

Commission File Number 001-39500

 

CREATD, INC.

(Exact Name of Registrant as Specified in Its Charter) 

 

Nevada   87-0645394

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

     
2050 Center Avenue, Suite 640, Fort Lee, NJ   07024
(Address of Principal Executive Offices)   (Zip Code)

 

(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

 

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

 

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

 

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

 

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

 

Indicate by 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, smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.   (Check One)

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

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

 

As of March 31, 2021, the Company had 10,684,514 shares of its common stock, par value $0.001 per share, outstanding.

 

As of June 30, 2020, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the shares of common stock, par value $0.001 per share held by non-affiliates of the registrant was approximately $131,469,518 based on $13.20 (on a post-reverse stock split basis), the closing price of the registrant’s common stock, par value $0.001 per share on that date.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page No.
PART I   1
     
Item 1. Description of the Business 1
     
Item 1A. Risk Factors 11
     
Item 1B. Unresolved Staff Comments 26
     
Item 2. Properties 26
     
Item 3. Legal Proceedings 26
     
Item 4. Mine Safety Disclosures 26
     
PART II   27
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27
     
Item 6 Selected Financial Data 28
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
     
Item 8. Financial Statements and Supplementary Data F-1
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36
     
Item 9A. Controls and Procedures 36
     
Item 9B. Other Information 37
     
PART III   38
     
Item 10. Directors, Executive Officers and Corporate Governance 38
     
Item 11. Executive Compensation 43
     
Item 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters 44
     
Item 13. Certain Relationships, Related Transactions and Director Independence 45
     
Item 14. Principal Accounting Fees and Services 47
     
PART IV   48
     
Item 15. Exhibits, Financial Statement Schedules 48
     
  Exhibit Index  
     
Item 16 Form 10-K Summary 53
     
  Signatures 54

 

i

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Annual Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, potential growth or growth prospects, future research and development, sales and marketing and general and administrative expenses, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” in this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Annual Report are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Annual Report or to conform statements to actual results or revised expectations, except as required by law.

 

You should read this Annual Report and the documents that we reference herein and have filed with the SEC as exhibits to this Annual Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

 

ii

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

Creatd, Inc. (“CRTD,” “the Company,” or “Creatd”) is a creator-first technology company and the parent company of the Vocal platform. Our mission is to empower creators, entrepreneurs, and brands through technology and partnership. We accomplish this through Creatd’s three main business pillars: Vocal Ventures, Creatd Partners, and our newest initiative, Recreatd. At its core, Creatd centers around the philosophy that creators are the driving force that propels success in the digital realm. This philosophy is represented by a framework we call the Creatd Cycle, which operates on the premise that creators produce content that attracts audiences, who in turn attract brands who are interested in reaching those audiences and the ability to generate new installations around bespoke ecosystems such as health and wellness, sports, and education.

 

Creatd’s first pillar, Vocal Ventures, houses our proprietary technology platforms, including Creatd’s flagship product, the Vocal platform, and its 36 wholly owned-and-operated creator communities. Through Vocal, creators can create and share their stories in a way that helps them get discovered by their ideal audiences and be rewarded for their creativity. Similarly, brands can access their ideal consumers and drive conversions for their products and services. The Vocal platform’s scalable and unique underlying agile framework lends itself well to future acquisitions and white-label opportunities for Creatd’s technology because of the ease with which other platforms can be integrated into our ecosystem.


Creatd Partners, Creatd’s second pillar, houses our brand-oriented initiatives, including our agency businesses, Vocal for Brands and Seller’s Choice, as well as its corporate ventures and investments. Both of these agencies serve a multitude of clients, while the venture arm looks to make direct investments in the ones that have significant upside opportunity. Creatd Partners pairs Creatd’s resources and Vocal’s proprietary technology, which were built to simultaneously amplify creators’ discoverability and potential reward and help direct-to-consumer brands achieve conversions and reach their target audiences, while generating value for all of Creatd’s stakeholders.  

 

Recreatd is the pillar which houses Creatd’s intellectual property and legacy media assets, including acquired artwork, photographs and media memorabilia. Recreatd represents an initiative by Creatd to revitalize transmedia content, utilizing Vocal Ventures’ technology, data, and marketing capabilities to reboot archival media assets and e-commerce properties. Creatd has a history of successfully executing such acquisition and assimilation projects, including its resuscitation of General Media properties such as the iconic women’s magazine, Viva, into digital communities and absorbing once-defunct content communities like Creators Media (which at one time was valued at $50MM). Creatd has a vast collection of intellectual property and legacy content, including a documentary about the life of Bob Guccione directed by Barry Avrich; Till Human Voices Wake Us, a short film starring Lindsay Lohan and directed by famed photographer Indrani; No One’s Pet, the biography of Penthouse Pet Sheila Kennedy authored by renown film critic Glenn Kenny; and The Mind’s Eye, The Art of Omni. The Company’s ability to leverage its technology to revitalize this content represents a significant value proposition for media companies and publishers that are sitting on vast collections of content that are of supreme quality but are not in a suitable format for today’s consumer.

 

1

 

 

Vocal

 

Vocal, Creatd’s flagship product, is a robust, proprietary technology platform that provides best-in-class tools, safe and curated communities, and monetization opportunities that enable creators to find a receptive audience and get rewarded. Through Vocal, content creators can get discovered and monetize their content by connecting to their ideal audiences and partnering with the brands that want to reach those audiences.

 

Since its initial launch in 2016, Vocal has grown to be one of the fastest growing communities for content creators of all kinds, including writers, musicians, podcasters, photographers, and more; as of March 2021, Vocal has reached over 900,000 freemium creators and over 20,000 Vocal+ paid subscribers across its 36 owned and operated niche communities. 

 

Vocal provides a large stage for creators to connect with fans and find new audiences. In addition to enabling access to millions of unique monthly visitors, the platform provides creators with a full suite of tools and services for content creation, discovery, distribution, and monetization, including:

 

 

Easy-to use, rich media content editor: Vocal’s storytelling tools enable creators to produce beautiful and engaging stories in a simple, user-friendly interface, and incorporate rich-media content of all kinds, including streaming content, photos, videos, podcasts, product links, written text, and more. Vocal’s open canvas content creation editor makes it easy to create high-quality and engaging stories, and is a cost effective alternative to managing a blog content management system (CMS).

 

 

Numerous Monetization Features: Both of Vocal’s membership tiers–Vocal freemium and the Vocal+ premium tier – provide multiple monetization opportunities for creators. Creators can earn money i) every time their story is read, ii) by competing in Challenges, iii) by receiving ‘tips’ and ‘bonuses’ iv) by collaborating on branded content campaigns through the company’s in-house agency, Vocal for Brands. For freemium members, content ‘reads’ are monetized at a rate of $3.80 per 1,000 reads (calculated based on time on page, scrolling behavior, and other internal metrics), whereas Vocal+ members monetize at $6.00 per 1,000 reads. These rates are subject to change based on market trends or the introduction of additional features and plan tiers.

 

 

Brand-safe advertising platform: Vocal was designed to target consumers in an authentic, non-interruptive way. Brand partnerships and collaborations allow companies tap into the power of Vocal through campaign-optimized stories, authored by real Vocal creators, that build brand affinity, trust, and drive sales.

 

  Transparent Performance Data: Creators can view their “Stats” at any time to view their individual performance data, such as how many Reads a given story received, how much money they have earned, and how many Tips, Bonuses, or ‘Likes,’ they received. Additionally, Vocal users have the ability to view key metrics such as community-specific data and Vocal+ membership data.

 

  Valuable Audience: The nature of Vocal’s genre-specific (niche) community structure is such that it generates a positively selected audience, a quality which makes Vocal an attractive prospect for creators and brands alike. In a niche community, audiences are inherently more likely to be interested in the particular content housed in that community.

 

Vocal+ is Creatd’s premium subscription membership program. Vocal+ members pay a membership fee for premium features, including receiving increased earnings for their content, reduced platform processing fees for Tips received, a Vocal+ badge on their creator page, eligibility to participate in exclusive Vocal+ Challenges, and more. Vocal+ offers a strong value proposition for new creators, as well as the over 900,000 freemium users registered to Vocal. Creators may sign up for a Vocal+ membership when they create an account, or they can upgrade an existing Vocal Free account to a Vocal+ account at any time. The current cost of a Vocal+ membership is either $9.99 per month or $99 annually. From time to time, the Company offers Vocal+ subscriptions at a discount for a predetermined number of months as a promotion for new subscribers.

 

Vocal for Brands

 

Digital audiences have become increasingly wary of traditional display and programmatic advertising tactics. Intrusive ads like pop-ups have proven to disrupt the consumer experience, leading to trends such as the fact that over 25% of internet users have ad blockers installed. Brands are actively seeking trustworthy and safe platforms like Vocal to drive engagement through non-interruptive brand storytelling and deliver invaluable performance metrics that help optimize their marketing efforts.

 

2

 

 

Creatd’s internal content studio, Vocal for Brands, pairs leading brands with authentic creators to produce marketing campaigns that are non-interruptive, engaging, and direct-response driven. The key value propositions for brands include:

 

  Authentic Storytelling: Our internal data group partners brands with real Vocal creators to tell their brand’s story in a way that is both engaging and trustworthy. In addition, brands can opt to sponsor a Challenge, which effectively yield a collection of crowdsourced branded content for brands and help them reach a wider audience.
     
  Valuable Audience: Vocal’s first-party data provides an opportunity to create highly targeted and segmented audiences to promote branded content. Most importantly, Vocal’s technology helps brands target the right audience by utilizing and applying that first-party data.
     
  Transparent Analytics: For every campaign we produce, our brand clients have access to story performance data, engagement data, behavioral data, and interest data. Brands can apply this data to further increase awareness and optimize audience targeting.

 

Vocal’s first-party data enables our team to create highly targeted and segmented audiences for Vocal for Brands campaigns, and help the brand reach their ideal audience. Brands can access story performance data, engagement data, behavioral data, and sentiment data, all of which is used to further optimize the campaign’s success. The combination of Vocal’s hyper-engaged audiences, user-generated communities, and brand-safe environment help brands achieve maximum ROAS (return on ad spend).

 

Vocal for Brands typically collects fixed fees ranging from $10,000 to $110,000, depending on campaign duration and specific client objectives. To date, Vocal for Brands’ client roster includes up-and-coming direct to consumer (DTC) brands such as IAC’s Vimeo, Moleskine, New York Post’s Decider, Lull, Daily Harvest, Cleancult, and more.

 

With the introduction of Challenges in early first quarter 2020, brands can now tap into Vocal’s network content creators and encourage them to interact with, learn about and promote their brand while benefiting from Vocal’s brand-safe, moderated, and curated environment. Vocal Challenges have a unique ability to capture the hearts and minds of the creative community and drive meaningful engagement. Challenges combine thought-provoking story prompts and sizable reward potential, which work to inspire creators and drive them toward participation. Brands can similarly capitalize on this combined effect by collaborating with Vocal on a sponsored Challenge, prompting the creation of high-quality stories that are centered around the brand’s mission and further disseminated through creators’ respective social channels and promotional outlets.

 

Seller’s Choice

 

In addition to Vocal for Brands, Creatd supports brands by providing managed and performance marketing services through Seller’s Choice. an in-house marketing agency for DTC (direct-to-consumer) and e-commerce clients. Acquired by Creatd in September 2019, Seller’s Choice provides direct-to-consumer brands with design, development, strategy, and sales optimization services. Its status as an Amazon Solution Provider and its weighty operational structure made it an ideal candidate for acquisition in late 2019. Creatd’s business model is built to absorb distressed operational infrastructures, integrate the few best components, and shed the non-essential costs.

 

Creatd Partners


Creatd Partners is the Company’s corporate venture arm, as well as the business division that encompasses management of Seller’s Choice and Vocal for Brands. Creatd Partners invests in qualified brands who are aligned with our corporate mission, such as direct-to-consumer brands, digital platforms, and technologies that support entrepreneurs and the creator economy. Creatd Partners was established with the aim of nurturing high-potential, early-stage companies that can meaningfully benefit by leveraging Creatd’s technology, resources and proven capacity to optimize visibility, reach, and conversions for direct-to-consumer products and services. Creatd Partners investments are subject to the completion of rigorous due diligence and independent valuation assessment and may encompass a combination of financial and operational support in exchange for an equity stake in the business. 

 

Creatd Partners’ first investment is Plant Camp, a direct-to-consumer food company that creates healthy and nutritional upgrades to classic foods and was launched in December 2020. The Company has made three further investments, the most notable of which is an equity investment in the health and wellness DTC beverage space. Additionally, Creatd Partners is currently exploring future opportunities that fit its criteria and risk profile, seeking partner companies that combine a quality product, seasoned founders, and the ability to leverage Creatd’s platform technology.

 

3

 

 

Moderation and Compliance

 

One of the key differentiating factors between Vocal and most other user-generated content platforms is the fact that each story submitted to Vocal is run through the Company’s proprietary moderation process before it goes live on the platform. The decision to implement moderation into the submission process was in direct response to the rise of misinformation and bad actors on many social platforms. In response to these inherent pitfalls within the content landscape, Vocal’s proprietary moderation system combines the algorithmic detection of copyrighted material, hate speech, graphic violence, and nudity, and human-led curation to ensure the quality and safety of each story published on Vocal, thus fostering a safe and trustworthy environment for creators, audiences, and brands. Moderation and compliance are more important than ever in a world where ambiguity can systematically damage value. Vocal’s enforcement of community guidelines and emphasis on content moderation protects the platform, its creators, and Creatd shareholders.

 

Trust and safety are paramount to the Vocal ecosystem. We follow best practices when handling personally identifiable information, with guidance from the European Union’s General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and the Digital Millennium Copyright Act (DMCA).

 

Platform Compliance Policies include:

 

  Human-led, technology assisted moderation of every story submitted;
     
  Algorithmic detection of hate speech, nudity, and copyright infringement;
     
  Brand, creator, and audience safety enforced through community watch; and
     
  The rejection of what we consider toxic content, with the understanding that diverse opinions are encouraged.

 

Technology Development

 

Vocal’s proprietary technology is built on Keystone, the same underlying open-source framework used by industry-leaders such as Atlassian, a $43-billion Australian technology company. Some of the key differentiating elements of Vocal’s technology are speed, sustainability, and scalability. The Company continues to invest heavily in research and development to continuously improve and innovate its platform, with the goal of optimizing the user experience for creators. Vocal’s architecture allows it to do more with less cost and provides a model capable of turning a profit.

 

4

 

 

Additionally, the Vocal platform and its underlying technology allows us to maintain an advantageous capital-light infrastructure. By using cloud service providers, we are able to focus on platform and revenue growth rather than building and maintaining the costly internal infrastructures that have materially affected so many legacy media platforms. Vocal’s technology has been specifically designed and built to scale without a material corresponding increase in operational costs. While our users can embed rich media, such as video, audio, and product links, into their Vocal stories, the rich media content is hosted elsewhere (such as YouTube, Instagram, Vimeo, Shopify, Spotify, etc.). Thus, our platform can accommodate rich media content of all kinds without bearing the financial or operational costs associated with hosting the rich media itself. In addition to the benefits this framework affords to the Company, it is the additional benefit to our content creators, in that a creator can increase their monetization; for example, a creator can embed their YouTube video into a Vocal story and thus derive earnings from both platforms when their video is viewed.

 

Application of First-Party Data

 

Creatd’s business intelligence and marketing teams identify and target individual creators, communities, and brands, utilizing empirical data harnessed from the Vocal platform. The team’s ability to apply its proprietary first-party data works to reduce acquisition costs for new creators and to help provide brands with conversions and an ideal targeted audience. In this way, our ability to apply first-party data is one of the value-drivers for the Company and the key advantages of its closed ecosystem strategy, which we refer to as the Creatd Cycle.

 

In its simplest definition, first-party data is data that you collect directly from your customers. Even the most simplistic blog website is collecting some degree of first-party data; Creatd’s edge is in its application of that data. Our organization is constantly collecting a tremendous amount of first-party behavioral data extracted from the Vocal platform. To date, we have collected hundreds of millions of data points around our customers and our audiences.

 

Importantly, we do not sell that data, that being a common monetization opportunity for many other businesses. Instead, we use our collected first-party data for the purposes of bettering the platform. Specifically, our data helps us understand the behaviors and attributes that are common among the creators, brands, and audiences within our ecosystem. We then pair our first-party Vocal data with third-party data from distribution platforms such as Facebook and Snapchat to provide a more granular profile of our creators, brands, and audiences.

 

It is through generating this valuable first-party data that we can continually enrich and refine our targeting capabilities for branded content promotion and creator acquisition, and specifically, to reduce our creator acquisition costs (CAC) and subscriber acquisition costs (SAC). Lower acquisition costs combined with increasing lifetime value (LTV) per subscriber, means that our enterprise value is accelerating each time we acquire a new user. We anticipate the lifetime value of our subscribers to increase as we introduce more features that cater to the needs of our creators. It is Vocal’s unique capability to collect and apply first-party behavioral data that allows us to simultaneously increase the LTV of our subscribers over time, while lowering the cost to acquire them. In fact, the link between incentivizing creators and lowering creator acquisition costs is a primary focus of the data science team, and an important consideration for every feature we develop for the Vocal platform.

 

Competition

 

The idea for Vocal came as a response to what Creatd’s founders recognized as systemic flaws inherent to the digital media industry and its operational infrastructures. Depreciating value of digital media business models built on legacy technology platforms created a unique opportunity for development of a creator-centric platform that could appeal to a global community and, at the same time, be capable of acquiring undervalued complimentary technology assets.

 

Creatd’s founders built the Vocal platform upon the general thesis that a closed and safe ecosystem utilizing first-party data to increase efficiencies could create a sustainable and defensible business model. Vocal was strategically developed to provide value for content creators, readers, and brands, and to serve as a home for the ever-increasing amount of digital content being produced and the libraries of digital assets lying dormant.

 

5

 

 

Vocal is most commonly discussed as a combination of:

 

Medium, a platform for writers built by former Twitter founder Ev Williams;

 

Reddit, a social news aggregation, web content rating, and discussion website; and

 

Patreon, a membership platform that provides business tools for content creators to run a subscription service.

 

Importantly, Creatd does not see Vocal as a substitute or competitor to segment-specific content platforms, such as Vimeo, YouTube, Instagram, or SoundCloud. We don’t want to replace anyone; we built Vocal to be accretive to the entire digital ecosystem. In fact, one of the most powerful components of our technology is the fact that Vocal makes it easy for creators to embed their existing published content, including videos, songs, podcasts, photographs, and more, directly into Vocal. We see this as a growth opportunity by building partnerships with the world’s greatest technology companies and to further spread our roots deeper into the digital landscape.

 

Revenue Model

 

Creatd’s revenues are primarily generated through:

 

  Creator Subscriptions: Vocal+ subscription offering provides creators with increased monetization and access to premium tools and features. At approximately $10 per month, Vocal+ offers creators a strong value proposition for freemium users to upgrade, while providing a scalable source of monthly recurring gross revenue for Creatd. Management projects 100,000 paid subscribers in 2021.

 

Marketing Partnerships: Vocal partners with leading brands and creators through its internal content studio, Vocal for Brands, to produce influencer and content marketing campaigns, including sponsored Challenges, that leverage the power of Vocal. Branded stories and Challenges are optimized for conversions, distributed to a targeted audience based on Vocal’s first-party data, and are optimized for conversions to maximize revenue growth.

 

Managed Services: Creatd’s in-house marketing agency for e-commerce, Seller’s Choice, provides direct-to-consumer brands with design, development, strategy, and sales optimization services.

 

Platform Processing Fees and Microtransactions: With Tipping and other types of microtransactions, audiences can engage and support their favorite Vocal creators by actively investing in their creativity. Vocal takes a platform processing fee on all transactions. Each Tip sent on Vocal generates revenue for the Company in the form of platform processing fees. For Vocal Free creators, we retain a 7% platform processing fee for every Tip exchanged. For Vocal+ creators, we retain a 2.9% platform processing fee.

 

Affiliate sales: Vocal generates revenue through affiliate marketing relationships, which pays the Company a percentage of purchases made on our platform. Affiliate relationships include Amazon, Skimlinks, Tune, and more. This represents a unique opportunity in the post-pandemic environment where brands need expansive distribution pipelines such as Vocal to reach broader audiences.

 

E-commerce: Our e-commerce strategy involves revitalizing archival imagery and media content in dormant legacy portfolios. Our curation and data capabilities have helped us create scalable and definable value for our internal collection of media assets through financing, trademarking, licensing, and production opportunities. Creatd has an exclusive license to leverage the stories housed on Vocal, reimagining them for films, episodic shows, games, graphic novels, collectibles, books, and more. 

 

Growth Strategy:

 

Continued growth is likely to be achieved by focusing on the following key areas:

 

  Creator Growth: Vocal brings new creators, their audience, and brands to its platform through organic growth, performance marketing, and brand-building campaigns that drive awareness. As the Vocal team continues to collect first-party behavioral data, we are able to further refine an ideal user profile and hone a specific targeting strategy to effectively scale the platform’s creator base. Our product roadmap includes new features that will work to incentivize creators to help us expand the Vocal network organically; upcoming features include creator referrals and gated content, which will enable creators to utilize Vocal’s microtransaction capabilities to charge recurring fees for exclusive content. With these new features, creators will have further opportunities to get discovered and earn on Vocal, which works to the benefit of the entire platform.
     
  Brand Partnerships: Continued investment in new product offerings for brand storytelling on Vocal with the goal of increasing the value to brands in the form of analytics, audience engagement, and conversion data for their products and services. The Vocal for Brands in-house content studio is constantly evolving in order to elevate brand relationships, both qualitatively and quantitatively.
     

6

 

     
  Licensing and Transmedia Opportunities: In collaboration with other production and media companies, as well as with our expanding user base, we look for content that can be leveraged for adaptation to film, television, digital shorts, books, and comic series. We believe that Vocal’s ever-expanding community of creators and influencers affords us with the unique opportunity to cultivate these relationships. This initiative is referred to by the Company as Recreatd.
     
  White Label Opportunities: White-labeling Vocal’s underlying platform architecture can be utilized for application in a range of industries, including use by sports franchises, trade companies, education organizations, companies in the financial sector, and others. An example of a white label installation of Vocal currently on our drawing board is a platform called Give. The idea behind Give is to borrow Vocal’s topic-specific community structure and adapt it for the non-profit sector. The Give platform would function as a network of vetted, verified organizations for which creators can raise awareness, funding or discussions using Vocal’s existing features like storytelling tools, community engagement, and microtransactions. Give will provide charities with the tools and resources to capture attention and donations in what is a saturated non-profit space.
     
  Vocal Global: Vocal Global is Creatd’s new market expansion strategy for applying Vocal’s technology to international platform opportunities. While the U.S., U.K., and Canada represent the vast majority of our audience, we believe there will be significant demand for our product in overseas markets–including Asia, the Middle East, and South America–particularly for foreign language installations of the product, an initiative which Creatd refers to as “Content Without Borders.”

 

Acquisition Strategy

 

Creatd’s hybrid finance and design culture is key to its acquisition strategy. Acquisition targets are companies that meet a set of opportunistic or financial standards or that are part of specific digital environments that are accretive and can seamlessly integrate into Creatd’s existing revenue lines. Creatd will continue to make strategic acquisitions when presented with opportunities that are in the interest of shareholder value.

 

Corporate History and Information

 

We were 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.

 

On February 5, 2016 (the “Merger Closing Date”), we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with GPH Merger Sub, Inc., a Nevada corporation and our wholly-owned subsidiary (“Merger Sub”), and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), pursuant to which the Merger Sub was merged with and into Jerrick, with Jerrick surviving as our wholly-owned subsidiary (the “Merger”). Pursuant to the terms of the Merger Agreement, we acquired, through a reverse triangular merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 475,000 shares of our common stock, par value $0.001 per share (“Common Stock”). Additionally, we assumed 33,415 shares of Jerrick’s Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred Stock (the “Jerrick Series B Preferred”).

 

Upon closing of the Merger on February 5, 2016, the Company changed its business plan to our current plan.

 

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In connection with the Merger, on the Merger Closing Date, we entered into a Spin-Off Agreement with Kent Campbell (the “Spin-Off Agreement”), pursuant to which Mr. Campbell purchased (i) all of our interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all of our interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 13,030 shares of our common stock held by Mr. Campbell. In addition, Mr. Campbell assumed all of our debts, obligations and liabilities, including any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.

 

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

 

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

 

On July 25, 2019, we filed a certificate of amendment to our articles of incorporation, as amended (the “Amendment”), with the Secretary of State of the State of Nevada to effectuate a one-for-twenty (1:20) reverse stock split (the “Reverse Stock Split”) of our common stock without any change to its par value. The Amendment became effective on July 30, 2019. The number of shares of authorized common stock was proportionately reduced as a result of the Reverse Stock Split. The number of shares of authorized preferred stock was not affected by the Reverse Stock Split. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share.

 

All share and per share amounts for the common stock indicated in this Form 10-K have been retroactively restated to give effect to the Reverse Stock Split.

 

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 July 13, 2020, upon approval from our board of directors and stockholders, we filed Second Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada for the purpose of increasing our authorized shares of Common Stock to 100,000,000.

 

On August 13, 2020, we filed a certificate of amendment to our second amended and restated articles of incorporation (the “Amendment”), with the Secretary of State of the State of Nevada to effectuate a one-for-three (1:3) reverse stock split (the “August 2020 Reverse Stock Split”) of our common stock without any change to its par value. The Amendment became effective on August 17, 2020. No fractional shares were issued in connection with the August 2020 Reverse Stock Split as all fractional shares were rounded down to the next whole share. All share and per share amounts of our common stock listed in this Form 10-K have been adjusted to give effect to the August 2020 Reverse Stock Split.

 

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. 

 

Recent Developments

 

Nasdaq Letter of Reprimand

 

On January 4, 2021, the Company received a letter from the staff of The Nasdaq Capital Market (the “Exchange”) notifying the Company that the Exchange had determined to delist the Company’s common stock and warrants from the Exchange based on the Company’s non-compliance with the Exchange’s (i) $5 million stockholders’ equity requirement for initial listing pursuant to Nasdaq Listing Rule 5505(b), (ii) the $2.5 million stockholders’ equity requirement or any of the alternatives for continued listing pursuant to Nasdaq Listing Rule 5550(b), and (iii) the Company’s failure to provide material information to the Exchange pursuant to Nasdaq Listing Rule 5250(a)(1).

 

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On February 11, 2021, the Company met with the Exchange’s Hearings Panel (the “Panel”) with respect to such determination, in accordance with the Exchange’s rules and, pursuant to such request by the Company to appeal, the delisting of the Company’s securities and the Form 25 Notification of Delisting filing was stayed pending the Panel’s decision.

 

On March 9, 2021, the Exchange notified the Company that the Panel had determined to continue the listing of the Company on the Exchange. Notwithstanding the Panel’s determination to continue the listing of the Company’s securities on the Exchange, the Panel issued a public reprimand letter to the Company, pursuant to Listing Rule 5815(c)(1)(D), based on its finding “that the Company failed to meet the initial listing criteria with respect to stockholders’ equity and failed to provide Nasdaq with material information with respect to that deficiency.” Specifically, the Panel found that the Company failed to comply with Listing Rule 5250(a)(1), requiring it to notify Nasdaq of certain significant developments that led to the Company’s prior representations about its ability to satisfy the initial listing requirements being inaccurate. In reaching its determination to continue the listing of the Company on Nasdaq, the Panel acknowledged that the Company has since demonstrated compliance with the initial listing requirement for stockholders’ equity and all other applicable initial listing requirements. The Panel also determined that the violations were inadvertent and that the Company had relied on advice of counsel at the time in its interactions with the Nasdaq staff (“Staff”). The Panel also acknowledged the Company’s efforts to implement structural changes within the Company to avoid similar misstatements in the future and that would allow for proper accounting and disclosure on an ongoing basis.

 

A Panel Monitor has been implemented under Listing Rule 5815(d)(4)(A) for a period of one year from the date of the Letter. In the event that the Company becomes deficient with respect to any continued listing requirement, the Company will not be afforded the opportunity to submit a compliance plan for Staff’s consideration and Staff will issue a Delist Determination Letter and promptly schedule a new hearing under Listing Rule 5810(c)(2), at which the Company may present a compliance plan for the Panel’s consideration. In the event of a new hearing, any suspension or delisting action would be stayed pending the completion of the hearings process and the expiration of any additional extension period granted by the Panel following the hearing.

 

Sale of Series E Convertible Preferred Stock

 

On December 29, 2020 (the “Effective Date”), the Company entered into securities purchase agreements (the “Purchase Agreement”) with thirty-three accredited investors (the “Investors”), whereby, at the closing, the Investors have agreed to purchase from the Company an aggregate of (i) 7,778 shares of the Company’s Series E Convertible Preferred Stock, par value $0.001 per share (the “Series E Preferred Stock”); and (ii) 2,831,715 warrants (the “Warrants”) to purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). The Series E Preferred Stock is convertible into a total of 1,887,810 shares of Common Stock (the “Conversion Shares”). The combined purchase price of one Conversion Share and one and a half Warrant was $4.12. The aggregate purchase price for the Series E Preferred Stock and Warrants was $7,777,777.77. The closing for the purchase of 7,738 shares of Series E Preferred Stock, convertible into 1,878,101 shares of Common Stock, and 2,817,152 Warrants occurred on between December 29 and December 31, 2020. The closing for the remaining 40 shares of Series E Preferred Stock, convertible into 9,709 shares of Common Stock, and 14,563 Warrants occurred on January 4, 2021.

 

Appointment of New Director

 

On October 27, 2020, the Board of the Company increased the size of the Board to six members and appointed LaBrena Martin to fill that newly-created vacancy and serve as a member of the Board. In connection with her appointment to the Board, the Board appointed Ms. Martin to serve as a member of the Audit and Compensation Committees and as the Chair of the Nominating and Corporate Governance Committee. Ms. Martin will hold office until the next annual meeting of stockholders, or until her successor is duly elected and qualified or her earlier resignation or removal.

 

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Over-Allotment Option Exercise

 

As previously reported on a Current Report on Form 8-K of the Company, on September 15, 2020, the Company consummated an underwritten public offering (the “Offering”) of 1,725,000 units of securities (the “Units”), with each Unit consisting of (i) one share of common stock, par value $0.001 per share (“Common Stock”), and (ii) one five-year warrant to purchase one share of Common Stock at an exercise price of $4.50 per share (the “Warrants”), pursuant to that certain Underwriting Agreement, dated September 10, 2020, by and between the Company and The Benchmark Company, LLC, acting as the representative (the “Representative”) of the several underwriters named therein (collectively, the “Underwriters”).

 

The Units were sold at a price of $4.50 per Unit, generating gross proceeds to the Company of $7.7625 million. The Company granted the Underwriters a 45-day option to purchase up to 258,750 shares of Common Stock and/or 258,750 Warrants to purchase Common Stock to cover over-allotments, if any.

 

On October 6, 2020, the Underwriters partially exercised the over-allotment option and on October 8, 2020, purchased an additional 258,750 Warrants, generating gross proceeds, before deducting underwriting discounts and commissions, of $2,587.50.

 

Appointment of Chief Operating Officer

 

Effective September 28, 2020, the board of directors of the Company appointed Laurie Weisberg as Chief Operating Officer of the Company. Ms. Weisberg also currently serves as a member of the Company’s board of directors.

 

Employees

 

As of March 31, 2021, we had 42 full-time employees and 12 part-time employees. None of our employees are subject to a collective bargaining agreement, and we believe our relationship with our employees to be good.

 

We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. Our human capital resources objectives include identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.

 

Corporate Information

 

The Company’s address is 2050 Center Avenue Suite 640 Fort Lee, NJ 07024. The Company’s telephone number is (201) 258-3770. Our website is https://creatd.com. The information on, or that can be accessed through, this website is not part of this Form 10-K, and you should not rely on any such information in making the decision whether to purchase the Common Stock.

 

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ITEM 1A. RISK FACTORS

 

You should consider carefully the following risk factors, together with all of the other information included or incorporated in this Annual Report. Each of these risk factors, either alone or taken together, could adversely affect our business, financial condition and results of operations, and adversely affect the value of an investment in our Common Stock. There may be additional risks that we do not know of or that we believe are immaterial that could also impair our business and financial condition.

 

Risks Related to our Business

 

The Company is a development stage business and subject to the many risks associated with new businesses.

 

Our current line of business has a limited operating history and our business is subject to all of the risks inherent in the establishment of a new business enterprise. Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with development and expansion of a new business enterprise. We have incurred losses and may continue to operate at a net loss for at least the next several years as we execute our business plan. We had a net loss of approximately $24.2 million for the year ended December 31, 2020, and a working capital and accumulated deficit of approximately $3.0 million and approximately $71.8 million, respectively.

 

Our financial situation creates doubt whether we will continue as a going concern.

 

There can be no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain funding or additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working capital is not available, we may be forced to discontinue operations, which would cause investors to lose their entire investment.

 

Based on the report from our independent auditors dated March 31, 2021, management stated that our financial statements for the year ended December 31, 2020, were prepared assuming that we would continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. 

 

We are not profitable and may never be profitable.

 

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

 

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

 

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

 

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

 

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

 

  a significant portion of our cash flows could be required to be used to service such indebtedness;
     
  a high level of debt could increase our vulnerability to general adverse economic and industry conditions;
     
  any covenants contained in the agreements governing such outstanding indebtedness could limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments;
     
  a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, our competitors may be able to take advantage of opportunities that our indebtedness may prevent us from pursuing; and
     
  debt covenants to which we may agree may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry.

 

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

 

Although our shares and warrants have been approved for listing on The Nasdaq Capital Market, our shares and warrants may be subject to potential delisting if we do not meet or continue to maintain the listing requirements of The Nasdaq Capital Market, and, pursuant to the recent letter of reprimand, we are subject to a Panel Monitor.

 

Our shares and warrants have been approved for listing on The Nasdaq Capital Market (“Nasdaq”) ; however, to keep our listing on Nasdaq, we are required to maintain: (i) a minimum bid price of $1.00 per share, (ii) a certain public float, (iii) a certain number of round lot shareholders and (iv) one of the following: a net income from continuing operations (in the latest fiscal year or two of the three last fiscal years) of at least $500,000, a market value of listed securities of at least $35 million or a stockholders’ equity of at least $2.5 million.

 

On January 4, 2021, we were notified by Nasdaq that it had determined to delist our common stock and warrants from Nasdaq based on our non-compliance with Nasdaq’s (i) $5 million stockholders’ equity requirement for initial listing, (ii) the $2.5 million stockholders’ equity requirement or any of the alternatives for continued listing, and (iii) our failure to provide material information to Nasdaq. We appealed Nasdaq’s determination and submitted such appeal to the Exchange’s Hearings Panel (the “Panel”), which request stayed any suspension or delisting action by Nasdaq at least until the hearing process concludes and any extension granted by the Panel expires. In an oral hearing that took place on February 11, 2021, we presented to the Panel a detailed plan to evidence stockholders’ equity of $5 million and addressed the other matters raised by Nasdaq. On March 9, 2021, Nasdaq notified us that our securities would continue to be listed on Nasdaq; however, a letter of reprimand was issued and a Panel Monitor has been implemented under Listing Rule 5815(d)(4)(A) for the period ending on March 9, 2022.

 

In the event that the Company becomes deficient with respect to any continued listing requirement, the Company will not be afforded the opportunity to submit a compliance plan for Nasdaq’s consideration and Nasdaq will issue a Delist Determination Letter and promptly schedule a new hearing under Listing Rule 5810(c)(2), at which we may present a compliance plan for the Panel’s consideration. In the event of a new hearing, any suspension or delisting action would be stayed pending the completion of the hearings process and the expiration of any additional extension period granted by the Panel following the hearing.

 

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In the event that during the Panel Monitor period we become deficient with respect to any continued listing requirement, we would need to appeal to the Panel, and if such appeal is ultimately unsuccessful, our common stock and warrants could be delisted from Nasdaq. If our securities are delisted, trading will most likely take place on the OTC Marketplace operated by OTC Markets Group Inc. An investor is likely to find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and many investors may not buy or sell our common stock due to difficulty in accessing over-the-counter markets, or due to policies preventing them from trading in securities not listed on a national exchange or other reasons, and our ability to issue additional securities for financing or other purposes, or otherwise to arrange for any financing we may need in the future, may also be materially and adversely affected if our common stock is not traded on a national securities exchange. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations, including our ability to attract and retain qualified executives and employees and to raise capital.

 

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

 

We expect that we will have adequate financing for the next 12 months. However, in the event that we exceed our expected growth, we would need to raise additional capital. There is no assurance that additional equity or debt financing will be available to us when needed, on acceptable terms, or even at all. Our limited operating history makes investor evaluation and an estimation of our future performance substantially more difficult. As a result, investors may be unwilling to invest in us or such investment may be offered on terms or conditions that are not acceptable. In the event that we are not able to secure financing, we may have to scale back our growth plans or cease operations.

 

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

 

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

 

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

 

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

 

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If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.

 

The size of our user base and our user’s level of engagement are critical to our success. Our financial performance will be significantly determined by our success in adding, retaining, and engaging active users of our products, particularly Vocal. We anticipate that our active user growth rate will generally decline over time as the size of our active user base increases, and it is possible that the size of our active user base may fluctuate or decline in one or more markets, particularly in markets where we have achieved higher penetration rates. If people do not perceive Vocal to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other content management systems and publishing platforms that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficult to measure, particularly as we introduce new and different products and services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:

 

  users increasingly engage with other competitive products or services;
     
  we fail to introduce new features, products or services that users find engaging or if we introduce new products or services, or make changes to existing products and services, that are not favorably received;
     
  user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our products and services;
     
  there are decreases in user sentiment due to questions about the quality or usefulness of our products or our user data practices, or concerns related to privacy and sharing, safety, security, well-being, or other factors;
     
  we are unable to manage and prioritize information to ensure users are presented with content that is appropriate, interesting, useful, and relevant to them;
     
  we are unable to obtain or attract engaging third-party content;
     
  users adopt new technologies where our products may be displaced in favor of other products or services, or may not be featured or otherwise available;
     
  there are changes mandated by legislation, regulatory authorities, or litigation that adversely affect our products or users;
     
  technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such as security breaches or failure to prevent or limit spam or similar content;
     
  we adopt terms, policies, or procedures related to areas such as sharing, content, user data, or advertising that are perceived negatively by our users or the general public;
     
  we elect to focus our product decisions on longer-term initiatives that do not prioritize near-term user growth and engagement;
     
  we make changes in how we promote different products and services across our family of apps;
     
  initiatives designed to attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third parties, or otherwise;
     
  we fail to provide adequate customer service to users, marketers, developers, or other partners;
     

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  we, developers whose products are integrated with our products, or other partners and companies in our industry are the subject of adverse media reports or other negative publicity, including as a result of our or their user data practices; or
     
  our current or future products, such as our development tools and application programming interfaces that enable developers to build, grow, and monetize mobile and web applications, reduce user activity on our products by making it easier for our users to interact and share on third-party mobile and web applications.

 

If we are unable to maintain or increase our user base and user engagement, our revenue and financial results may be adversely affected. Any decrease in user retention, growth, or engagement could render our products less attractive to users, marketers, and developers, which is likely to have a material and adverse impact on our revenue, business, financial condition, and results of operations. If our active user growth rate continues to slow, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive revenue growth. 

 

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

 

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

 

Acquisitions may disrupt growth.

 

We may pursue strategic acquisitions in the future. Risks in acquisition transactions include difficulties in the integration of acquired businesses into our operations and control environment, difficulties in assimilating and retaining employees and intermediaries, difficulties in retaining the existing clients of the acquired entities, assumed or unforeseen liabilities that arise in connection with the acquired businesses, the failure of counterparties to satisfy any obligations to indemnify us against liabilities arising from the acquired businesses, and unfavorable market conditions that could negatively impact our growth expectations for the acquired businesses. Fully integrating an acquired company or business into our operations may take a significant amount of time. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with acquisitions and other strategic transactions. These risks may prevent us from realizing the expected benefits from acquisitions and could result in the failure to realize the full economic value of a strategic transaction or the impairment of goodwill and/or intangible assets recognized at the time of an acquisition. These risks could be heightened if we complete a large acquisition or multiple acquisitions within a short period of time.  

 

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

 

Maintaining and enhancing our brands’ profiles may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain the brands’ profiles, or if we incur excessive expenses in this effort, our business and operating results could be harmed. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands’ profiles may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to be a technology leader and to continue to provide attractive products and services, which we may not do successfully.

 

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

 

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

 

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If we are unable to protect our intellectual property, the value of our brands and other intangible assets may be diminished, and our business may be adversely affected.

 

We rely and expect to continue to rely on a combination of confidentiality, assignment, and license agreements with our employees, consultants, and third parties with whom we have relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, to protect our proprietary rights. In the United States and internationally, we have filed various applications for protection of certain aspects of our intellectual property, and we currently hold a number of registered trademarks and issued patents in multiple jurisdictions and have acquired patents and patent applications from third parties.  Third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business. In any or all of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we have generally taken measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to ours and compete with our business. In addition, we regularly contribute software source code under open source licenses and have made other technology we developed available under other open licenses, and we include open source software in our products. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brands and other intangible assets may be diminished and competitors may be able to more effectively mimic our products, services, and methods of operations. Any of these events could have an adverse effect on our business and financial results. 

 

We are subject to payment processing risk.

 

We accept payments using a variety of different payment methods, including credit and debit cards and direct debit. We rely on third parties to process payments. Acceptance and processing of these payment methods are subject to certain certifications, rules and regulations. To the extent there are disruptions in our or third-party payment processing systems, material changes in the payment ecosystem, failure to recertify and/or changes to rules or regulations concerning payment processing, we could be subject to fines and/or civil liability, or lose our ability to accept credit and debit card payments, which would harm our reputation and adversely impact our results of operations. 

 

We are subject to risk as it relates to software that we license from third parties.

 

We license software from third parties, much of which is integral to our systems and our business. The licenses are generally terminable if we breach our obligations under the license agreements. If any of these relationships were terminated or if any of these parties were to cease doing business or cease to support the applications we currently utilize, we may be forced to spend significant time and money to replace the licensed software.

 

Failures or reduced accessibility of third-party software on which we rely could impair the availability of our platform and applications and adversely affect our business.

 

We license software from third parties for integration into our Vocal platform, including open source software. These licenses might not continue to be available to us on acceptable terms, or at all. While we are not substantially dependent upon any third-party software, the loss of the right to use all or a significant portion of our third-party software required for the development, maintenance and delivery of our applications could result in delays in the provision of our applications until we develop or identify, obtain and integrate equivalent technology, which could harm our business.

 

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Any errors or defects in the hardware or software we use could result in errors, interruptions, cyber incidents or a failure of our applications. Any significant interruption in the availability of all or a significant portion of such software could have an adverse impact on our business unless and until we can replace the functionality provided by these applications at a similar cost. Furthermore, this software may not be available on commercially reasonable terms, or at all. The loss of the right to use all or a significant portion of this software could limit access to our platform and applications. Additionally, we rely upon third parties’ abilities to enhance their current applications, develop new applications on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. We may be unable to effect changes to such third-party technologies, which may prevent us from rapidly responding to evolving customer requirements. We also may be unable to replace the functionality provided by the third-party software currently offered in conjunction with our applications in the event that such software becomes obsolete or incompatible with future versions of our platform and applications or is otherwise not adequately maintained or updated.

 

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

 

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

 

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

 

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

 

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

 

Security breaches could harm our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Changes to federal, state or international laws or regulations applicable to our company could adversely affect our business.

 

Our business is subject to a variety of federal, state and international laws and regulations, including those with respect privacy, data, and other laws. These laws and regulations, and the interpretation or application of these laws and regulations, could change. In addition, new laws or regulations affecting our business could be enacted. These laws and regulations are frequently costly to comply with and may divert a significant portion of management’s attention. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business. 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our website addresses, or domain names, are critical to our business. We currently own more than 415 domain names. However, the regulation of domain names is subject to change, and it may be difficult for us to prevent third parties from acquiring domain names that are similar to ours, that infringe our trademarks or that otherwise decrease the value of our brands. If we are unable to obtain or maintain key domain names for the various areas of our business, our ability to operate and grow our business may be impaired.

 

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

 

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

 

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

 

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

 

Unfavorable global economic, business, or political conditions could adversely affect our business, financial condition or results of operations.

 

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside of our control, including the impact of health and safety concerns, such as those relating to the current COVID-19 coronavirus (“COVID-19”) pandemic.

 

On January 30, 2020 the World Health Organization declared COVID-19 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.

 

Additionally, the global financial crisis in connection with the COVID-19 pandemic has caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our Vocal platform and our ability to raise additional capital when needed on acceptable terms, if at all. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.

 

Our board of directors recently concluded that we needed to restate previously issued financial statements as a result of a change in accounting for a make-whole provision.

 

On March 13, 2021, our audit committee concluded, after consultation with management and the Company’s financial consulting firm, that our previously issued unaudited financial statements for the period ended September 30, 2020, included in the Company’s Quarterly Reports of Form 10-Q for the period ended September 30, 2020, should no longer be relied upon as a result of the change in accounting for a make-whole provision. We concluded that a derivative liability of $3,041,688 should have been recorded as of September 30, 2020. The adjustments resulting therefrom, which are non-cash in nature, but has no impact on previously reported cash, total assets, and revenues.

 

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Risks Related To Our Common Stock 

 

The price of our common stock may be subject to wide fluctuations.

 

Even though we have our shares listed with The Nasdaq Capital Market,, the market price of our Common Stock may be highly volatile and subject to wide fluctuations in response to a variety of factors and risks, many of which are beyond our control.  In addition to the risks noted elsewhere in this Form 10-K, some of the other factors affecting our stock price may include:

 

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

 

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

 

You may lose all of your investment.

 

Investing in our common stock involves a high degree of risk. As an investor, you might never recoup all, or even part of, your investment and you may never realize any return on your investment. You must be prepared to lose all your investment.

 

We may, in the future, issue additional shares of common stock, which would reduce investors’ percent of ownership and dilute our share value

 

Our Second Amended and Restated Articles of Incorporation authorize the issuance of 100,000,000 shares of common stock, and 20,000,000 shares of preferred stock. Currently the Company has 1,374 shares of Preferred Series E stock outstanding. Additionally, as of March 31, 2021 there are outstanding (i) warrants to purchase 6,272,944 shares of our common stock; (ii) options exercisable into 2,010,687 shares of our common stock; and (iii) 333,495 shares underlying the conversion of Preferred Series E shares.

 

Assuming all of the Company’s currently outstanding warrants and options are exercised and all convertible notes be converted, the Company would have to issue an additional 8,617,126 shares of common stock representing 79.2% of our current issued and outstanding common stock. As of the date of this filing, none of the Company’s outstanding convertible notes are currently convertible into Common Stock. The future issuance of this common stock would result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors and might have an adverse effect on any trading market for our common stock.

 

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Liability of directors for breach of duty is limited under Nevada law.

 

Nevada law provides that directors must discharge their duties as a director in good faith and with a view to the interests of the corporation. Under Nevada law, directors owe a fiduciary duty to the corporation, which is generally comprised of the duty of care and duty of loyalty to the corporation. Except under limited circumstances set forth in NRS 78.138(7), or unless our Second Amended and Restated Articles of Incorporation or an amendment thereto provide for greater individual liability (which ours does not provide), a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer, and the breach of those duties involved intentional misconduct, fraud or a knowing violation of law. Our stockholders’ ability to recover damages for fiduciary breaches may be reduced by this statute.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future and, as such, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, and any future loan arrangements we enter into may contain, terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

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Sales of a substantial number of shares of our common stock in the public market by certain of our stockholders could cause our stock price to fall.

 

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

  

We may issue additional shares of preferred stock in the future that may adversely impact your rights as holders of our common stock.

 

Pursuant to our Second Amended and Restated Articles of Incorporation, the aggregate number of shares of capital stock which we are authorized to issue is 120,000,000 shares, of which 100,000,000 shares are common stock, and 20,000,000 shares are “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue one or more series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. As of the date of this Form 10-K, we do have 1,374 shares of Preferred Series E stock outstanding.

 

The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our Company. In addition, advanced notice is required prior to stockholder proposals, which might further delay a change of control. Additionally, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of preferred stock, your rights as holders of common stock could be impaired thereby, including, without limitation, dilution of your ownership interests in us.

 

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Each of our Second Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide that the Eighth Judicial District Court of Clark County, Nevada will be the sole and exclusive forum for certain disputes which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers, employees or agents.

 

Each of our Second Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide that unless the Company consents in writing to the selection of an alternative forum, the Eighth Judicial District Court of Clark County, Nevada shall be the sole and exclusive forum for state law claims with respect to: (i) any derivative action or proceeding brought in the name or right of the Company or on its behalf, (ii)  any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders, (iii) any action arising or asserting a claim arising pursuant to any provision of Nevada Revised Statutes Chapters 78 or 92A or any provision of the Company’s Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce or determine the validity of the Company’s Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws. This exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.

 

Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. However, each of our Second Amended Articles of Incorporation and our Amended and Restated Bylaws contain a federal forum provision which provides that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company are deemed to have notice of and consented to this provision. As this provision applies to Securities Act claims, there may be uncertainty whether a court would enforce such a provision.

 

These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or its directors, officers or other employees, which may discourage such lawsuits against the Company and its directors, officers and other employees. Alternatively, if a court were to find our choice of forum provisions contained in either our Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions, which could harm its business, results of operations, and financial condition.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report contains forward-looking statements. These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “expects,” “plans,” “projects,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,” and other words of similar meaning.

 

These statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the section titled “Risk Factors” and elsewhere in this Annual Report.

 

Any forward-looking statement in this Annual Report reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our business, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Annual Report and the documents that we reference herein and therein and have filed as exhibits hereto and thereto completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This Annual Report also contains or may contain estimates, projections and other information concerning our industry, our business and the markets for our products, including data regarding the estimated size of those markets and their projected growth rates. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

The Company currently does not own any properties.  Our corporate headquarters consists of a total of 3,000 square feet and is located at 2050 Center Ave, Suite 640 and Suite 660, Fort Lee, NJ 07024. The current lease term is effective June 5, 2018 through July 5, 2023, with monthly rent of $7,693 for the first year and increases at a rate of 3% for each subsequent year thereafter.

 

We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional space will be available to accommodate any such expansion of our operations.  

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

On or about June 25, 2020, Home Revolution, LLC (“Home Revolution”) filed a lawsuit in the United States District Court for the District of New Jersey, Home Revolution, LLC, et al. v. Jerrick Media Holdings, Inc. et al., Case No. 2:20-cv-07775-JMV-MF. The Complaint alleges, among other things, that Creatd, Inc. breached the Membership Interest Purchase Agreement, as modified, and ancillary transaction documents in connection with the acquisition of Seller’s Choice, LLC, from Home Revolution in September 2019. The Complaint additionally alleges violation of the New Jersey Uniform Securities Law, violations of the Exchange Act and Rule 10b-5 thereunder, fraud, equitable accounting, breach of fiduciary duty, conversion and unjust enrichment. After filing the Complaint but prior to our Answer date, Home Revolution moved by order to show cause to have a receiver appointed by the Court to take over Creatd’s operations. 

 

We submitted an opposition, and after oral arguments on August 13, 2020, the Court denied the receiver request in its entirety. We then filed a Motion to Dismiss on August 14, 2020 on a number of grounds, the most significant of which is that this is a simple (alleged) breach of Promissory Note case. Creatd is current on all payments under the Note, and because both parties are New Jersey entities a mere breach of contract and/or collection-based case is not appropriately venued in federal court.  Upon receipt of our Motion to Dismiss, Home Revolution submitted an Amended Complaint, presumably in an effort to cure the problems with the Complaint which we identified in the Motion to Dismiss.  Home Revolution has subsequently initiated a series of atypical procedures and, as a result, has (without following the Federal Rules of Civil Procedure) moved for both default and to submit yet another newly Amended Complaint (the one precludes the other and vice versa). 

 

After we submitted a motion to clear up the above, the Court reinstated the matter to the docket and permitted Plaintiff to file the Second Amended Complaint (we had no objection).  We have filed a motion to dismiss the Second Amended Complaint.  That will take some time to be decided.  We expect no major event to occur for the next 12 months. Finally, we believe the lawsuit lacks merit and will vigorously challenge the action.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our Common Stock is listed on The Nasdaq Capital Market under the symbol “CRTD”.

 

Holders

 

As of March 31, 2021, there were approximately 222 registered holders of record of our Common Stock, and approximately 12 holders of record of our Series E Convertible Preferred Stock. Since certain shares of our Common Stock are held by brokers and other institutions on behalf of stockholders, the foregoing number of holders of our Common Stock is not representative of the number of beneficial holders of our Common Stock.

 

Dividends

 

To date, we have not paid cash dividends on our Common Stock and do not plan to pay such dividends in the foreseeable future. Our Board will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business conditions. Dividends, under the Nevada Revised Statutes, may only be paid from our net profits or surplus. To date, we have not had a fiscal year with net profits and, subject to a valuation by the Board of the present value of the Company’s assets, do not have surplus.

 

Unregistered Sales of Equity Securities

 

During the twelve months ended December 31, 2020, we issued securities that were not registered under the Securities Act and were not previously disclosed in a Current Report on Form 8-K or Quarterly Report on Form 10-Q as listed below. All of the securities discussed in this Item 2 were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.

 

Consultant Shares

 

During the 3 months ended December 31, 2020 the Company issued 20,762 shares to consultants.

 

Employee Shares

 

During the 3 months ended December 31, 2020 the Company issued 7,871 shares in lieu of compensation to employees.

 

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ITEM 6.  SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth in “Part I – Item 1A. Risk Factors.”

 

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

 

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

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Form 10-K.

 

We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

 

Overview

 

Creatd is the parent company and creator of Vocal, a robust and proprietary technology platform that uniquely serves creators, brands, and audiences by providing long-form storytelling tools, advanced social features, and monetization opportunities. Since launching in December 2016, Vocal has become home to nearly one million content creators, over 20,000 paid subscribers of its Vocal+ premium membership program and attracts over 10 million monthly visitors across its network of 36 wholly owned and operated niche communities as well as various social media channels.

 

At December 31, 2020, the Company had cash and marketable securities of approximately $8 million, and accounts receivable of $90,000.  The Company’s healthy cash position is principally due to the net cash proceeds of $7.0 million secured at year end 2020 from the successful completion of the Company’s Series E Convertible Preferred private placement.

 

2020 was a positioning year for the Company. Expenses during Fiscal Year 2020 encompassed numerous charges related to financing activities which are described as non-recurring. Though it is the case that the Company may require additional financing in 2021, the financings that occurred this year positioned the Company for ease and relative affordability of future financings.

 

Restatement of Previously Issued Interim Financial Statements

 

On March 13, 2021, our audit committee concluded, after consultation with management and the Company’s financial consulting firm, that our previously issued unaudited financial statements for the period ended September 30, 2020, included in the Company’s Quarterly Reports of Form 10-Q for the period ended September 30, 2020, should no longer be relied upon as a result of the change in accounting for a make-whole provision. We concluded that a derivative liability of $3,041,688 should have been recorded as of September 30, 2020. The adjustments resulting therefrom, which are non-cash in nature, but has no impact on previously reported cash, total assets, and revenues.

 

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Results of Operations

 

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital (deficit) at December 31, 2020 compared to December 31, 2019:

 

   December 31,
2020
  

December 31,

2019
(Revised)

   Increase /
(Decrease)
 
Current Assets  $8,083,726   $78,063   $8,005,663 
Current Liabilities  $4,968,427   $10,928,830   $(5,960,403)
Working Capital (Deficit)  $3,115,299   $(10,850,767)  $13,966,066 

 

At December 31, 2020, we had a working capital of $3,115,299 as compared to a working capital deficit of $(10,850,767) at December 31, 2019, an increase in working capital of $13,966,066. The increase is primarily attributable to an increase in cash as a result of the completion of the September 2020 $7.7 million Equity Raise, the Sale of $7.8 million of Series E Convertible Preferred Stock in December of 2020, an increase in marketable securities of $62,733, and promissory note increase of $561,539. This was offset by a decrease in demand loans, convertible notes, and related party debentures totaling $7,373,638. 

 

Net Cash

 

Net cash used in operating activities for the year ended December 31, 2020 and 2019, was $7,340,487 and $5,957,027, respectively. The net loss for the year ended December 31, 2020 and 2019 was $24,162,783 and $8,035,372, respectively. This change is primarily attributable to the net loss for the current period offset by share-based payments in the amount of $6,861,163 to employees and consultants for services rendered, the accretion of debt discount and debt issuance costs of $4,303,072 due to the incentives given with debentures, and a loss on extinguishment of debt of $5,586,012 in addition to a change in accounts payable and accrued expenses of $2,880,392. These increases were offset by a change in fair value of derivative liabilities and a change in fair value of derivative liabilities and a change in accounts receivable during the year ended December 31, 2020.

 

Net cash used in investing activities for the year ended December 31, 2020 and 2019 was $547,212 and $363,288, respectively. This change is attributable to the cash used to purchase marketable securities, property and equipment, and deposits for investments.

 

Net cash provided by financing activities for the year ended December 31, 2020 and 2019 was $15,814,083 and $6,337,947. During the year ended December 31, the Company was predominantly financed by net proceeds from the issuance of preferred series E, common stock, debt and related party notes of $6,670,417, $6,662,015 and $5,152,496, respectively to fund operations. These increases were offset by repayment of notes and related party notes of $2,150,666 and $983,752, respectively.

 

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Summary of Statements of Operations for the Year Ended December 31, 2020 and 2019:

 

   Year Ended December 31, 
   2020   2019 
Revenue  $1,212,870   $453,006 
Operating Expenses  $(17,496,205)  $(7,669,984)
Loss from operations  $(16,283,335)  $(7,216,978)
Other Expenses  $(7,929,448)  $(818,394)
Net loss  $(24,212,783)  $(8,035,372)
Loss per common share – basic and diluted  $(5.68)  $(2.93)

 

Net Revenue

 

Net Revenue was $1,212,870 for the year ended December 31, 2020, as compared to $453,006 for the comparable year ended December 31, 2019, an increase of $759,864. The increase in net revenue is primarily attributable to the launch and growth of Vocal+ paid subscribers, the rising price points for Vocal for Brands campaigns, and the integration of Seller’s Choice into Creatd following the Company’s successful acquisition in late third quarter 2019.  During 2020, management completed its corporate positioning to support its goal of reaching profitable revenue growth by securing funds necessary to eliminate its debt, attracting a marquee board and executive management talent, engaging a strategic senior marketing and sales effort, and uplisting to Nasdaq.

 

Creatd’s 2020 Creator Subscription revenues are reported net of the amounts paid to subscribers as cash prizes for winning Vocal Challenges and earnings through reads.  As Vocal+ was commercially launched early 2020, with Vocal Challenges following soon after, both progressively grew during the year. As Creatd Challenges increased in frequency, in conjunction with an increase in readership, payments to Vocal+ subscribers totaled $213,182 in 2020. Gross revenues (including payments to Vocal+ subscribers) were $1,426,052.

 

Going forward, with the continued release of advancements and new offerings to its Vocal technology platform and the resulting growth of vocal subscribers, unique monthly visitors and brand relationships, management anticipates reporting accelerated revenue growth for the foreseeable future.

 

Operating Expenses

 

Operating expenses for the year ended December 31, 2020 were $17,496,205 as compared to $7,669,984 for the year ended December 31, 2019. The increase of $9,826,221 in operating expenses is mainly related to non-recurring expenses totaling approximately $1,320,000 attributed to the Nasdaq up-listing and financing activities during the year, which included two offerings. In addition, the Company incurred $1,100,000 of non-cash charges related to employee option exchange for stock during second quarter, $4,100,000 in stock options granted for previously performed services to 13 members of the management team during the third quarter, and in fourth quarter $107,000 was expensed due to reimbursements from Covid-related pay cuts enacted for several weeks during 2020. The remainder of the increase in expenses is attributed to an increase in marketing totaling roughly $2,000,000, and a significant increase in personnel to 42 full time and 12 part-time, including the addition of a Chief Operating Officer and additions to the sales team with senior-level experience and long-standing brand relationships. Going forward, the Company expects operating expenses to materially decrease, potentially offset by a measured increase in support staff and consultants focused on revenue growth.  During 2020, the Company’s average monthly cash burn was approximately $658,000, slightly elevated from last year as the Company accommodated its growth strategy.

 

Loss from Operations

 

The Company incurred a loss from operations for the year ended December 31, 2020 of $16,283,335 as compared to $7,216,978 for the year ended December 31, 2019. The increase in the loss from operations is primarily due to non-cash stock-based payments to consultants and employees, one-time charges related to the Nasdaq up-listing, increase in personnel and the launch of the company’s first significant marketing campaign.

 

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Other Expenses

 

Other expenses for the year ended December 31, 2020 totaled $7,929,448 as compared to $818,394 for the year ended December 31, 2019. Other expenses during the year ended December 31, 2020 was comprised of interest expense of $1,376,902 on notes and related party notes as well as a non-cash change in derivative liability of 3,019,457. Additionally, other expenses included the non-cash, non-recurring accretion of debt discount and issuance cost of $(4,303,072) due to the incentives given with debentures and loss on extinguishment of liabilities of $(5,586,012) for incentives given to convert debt. During the year ended December 31, 2019, other expenses were comprised of interest expense of $612,830 on notes and related party notes and accretion of debt discount and issuance cost of $348,665 due to the incentives given with debentures, loss on extinguishment of liabilities of $162,860 for the incentives given to amend or convert debt.

 

Net Loss

 

Net loss attributable to common shareholders for the year ended December 31, 2020, was $27,348,485, or loss per share of $5.68, which included a non-cash deemed dividend charge of $3,135,702 related to fair value assigned to the series E preferred and warrants granted in financings during the year.  This compares to a net loss of $8,035,372, or loss per share of $2.93, for the year ended December 31, 2019.

 

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

 

Off-Balance Sheet Arrangements 

 

As of December 31, 2020, we had no off-balance sheet arrangements. 

 

Critical Accounting Policies

 

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

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, valuation of equity issuances and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve and impairment of intellectual property. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

The fair value measurement disclosures are grouped into three levels based on valuation factors:

 

Level 1 – quoted prices in active markets for identical investments

 

Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs)

 

Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments)

 

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The Company’s Level 1 assets/liabilities include cash, accounts receivable, marketable trading securities, accounts payable, prepaid and other current assets, line of credit and due to related parties. Management believes the estimated fair value of these accounts at December 31, 2020 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments or the use of market interest rates for debt instruments.

 

The Company’s Level 2 assets/liabilities include certain of the Company’s notes payable and capital lease obligations. Their carrying value approximates their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.

 

The Company’s Level 3 assets/liabilities include goodwill, intangible assets, marketable debt securities, equity investments at cost, and derivative liabilities, when they are recorded at fair value due to an impairment charge. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

 

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 year ended December 31, 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 year ended December 31, 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 available-for-sale debt securities, in accordance with sub-topic 320-10 of the FASB ASC (“Sub-Topic 320-10”). Accrued interest on these securities is included in fair value and amortized cost.

 

Pursuant to Paragraph 320-10-35, investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized.

 

The Company follows FASB ASC 320-10-35 to assess whether an investment in debt securities is impaired in each reporting period. An investment in debt securities is impaired if the fair value of the investment is less than its amortized cost. If the Company intends to sell the debt security (that is, it has decided to sell the security), an other-than-temporary impairment shall be considered to have occurred. If the Company more likely than not will be required to sell the security before recovery of its amortized cost basis or it otherwise does not expect to recover the entire amortized cost basis of the security, an other-than-temporary impairment shall be considered to have occurred. The Company considers the expected cash flows from the investment based on reasonable and supportable forecasts as well as several other factors to estimate whether a credit loss exists. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.

 

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Derivative Liability

 

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

   

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

 

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

 

The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  The Company changed its method of accounting for the debt and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017 on a retrospective basis.

 

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

 

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;
     
  determination of the transaction price. The transaction price for any given subscriber could decrease based on any payments made to that subscriber. A subscriber may be eligible for payment through one or more of the monetization features offered to Vocal creators, including earnings through reads (on a cost per mille basis) and cash prizes offered to Challenge winners;
     
  allocation of the transaction price to the performance obligations in the contract; and
     
  recognition of revenue when, or as, we satisfy a performance obligation.

 

For more information see Note 2 within the consolidated financial statements.

 

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Deferred Revenue

 

Deferred revenue consists of billings and payments from clients in advance of revenue recognition. As of December 31, 2020 and 2019, the Company had deferred revenue of $88,637 and $50,691, 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.

 

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. The Company issues awards of equity instruments, such as stock options and restricted stock units, to employees and certain non-employee directors. Compensation expense related to these awards is based on the fair value of the underlying stock on the award date and is amortized over the service period, defined as the vesting period, using the straight-line method. The vesting period is generally five years. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock units. Compensation expense is reduced for actual forfeitures as they occur.  

 

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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.

 

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 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 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 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 consolidated financial statements.

 

In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): The mandatory effective dates for Credit Losses in this Update (ASU 2019-10) are as follows: 1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those 2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2019-10 had a material impact on the Company’s Consolidated Financial Statements because it deferred the adoption of ASU 2016-13.

 

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

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Creatd, Inc.

December 31, 2020 and 2019

Notes to the Consolidated Financial Statements

 

Contents   Page(s)
Report Of Independent Registered Public Accounting Firm   F-2
     
Consolidated Balance Sheets as of December 31, 2020 and 2019   F-5
     
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019   F-6
     
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2020 and 2019   F-7
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019   F-8
     
Notes to the Consolidated Financial Statements   F-9

 

F-1

 

  

  www.rrbb.com
ROSENBERG RICH BAKER BERMAN & COMPANY  
265 Davidson Avenue, Suite 210 ● Somerset, NJ 08873-4120 ● PHONE 908-231-1000 ● FAX 908-231-6894  
111 Dunnell Road, Suite 100 ● Maplewood, NJ 07040 ● PHONE 973-763-6363 ● FAX 973-763-4430  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Creatd, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Creatd, Inc. and Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related statements of comprehensive loss, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

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

 

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

 

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

 

Emphasis of Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had a significant accumulated deficit, and has incurred significant net losses and negative operating cash flows. 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 the financial statements. Management's evaluation of the events and conditions and management's plans regarding those matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

 

 

 

 

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS ● CENTER FOR AUDIT QUALITY ● PRIVATE COMPANIES PRACTICE SECTION ● PRIME GLOBAL ● REGISTERED WITH THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

  

F-2

 

 

 
ROSENBERG RICH BAKER BERMAN & COMPANY  

  

To the Board of Directors and

Stockholders of Creatd, Inc. and Subsidiaries

Page 2

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Revenue Recognition

 

As described in Note 2 to the consolidated financial statements, the Company recognizes revenue in accordance with FASB Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606"). ASC 606 requires the Company to apply the following steps: (1) identify the contract with the customers; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies the performance obligations.

 

For subscription revenue recognized by the Company, the transaction price is reduced for consideration payable to customers. Because such consideration is paid to both customers and "freemium" subscribers, it requires significant estimates as to the allocation and timing of these reductions in the transaction price. These estimates required auditor judgment and consideration of some subjective factors in evaluating the estimates.

 

How the Critical Matter Was Addressed in the Audit

 

The primary audit procedures we performed to address this critical audit matter included:

 

Gained detailed understanding of processes related to subscription revenue, including evaluation of controls within the Company and the results of an audit of internal controls at the external payment processing organization.

 

Verified the validity of customer payment data by testing the completeness and accuracy of the population of customer payments and by subscriber type.

 

Critically evaluated management's estimated allocations based on supportable information.

 

Fair Value of Private Company Investments

 

As described in Note 2 to the consolidated financial statements, the Company has made certain investments in private companies during 2020. For investments in equity securities that do not to have a readily determinable market value, the Company made the election to measure these securities at amortized cost in accordance with ASC 321-10-35 par.2. The Company performed a qualitative assessment to determine whether these investments could be impaired due to any decline in fair value below cost. For investments in available-for-sale debt securities, the Company measures these instruments at fair value and assesses whether a credit loss exists for any of these securities based on the guidance at ASC 320-10, Investments - Debt and Equity Securities.

 

F-3

 

 

 
ROSENBERG RICH BAKER BERMAN & COMPANY  

  

To the Board of Directors and

Stockholders of Creatd, Inc. and Subsidiaries

Page 3

 

The determination of fair value for these securities requires significant judgment and subjective evaluation of qualitative factors. In addition, the Company utilized a third-party valuation firm to assist in this determination, and the valuation process involves significant assumptions and estimates.

 

How the Critical Matter Was Addressed in the Audit

 

The primary audit procedures we performed to address this critical audit matter included:

 

Equity securities:

 

Reviewed and assessed management's evaluation of qualitative factors and relevant events and circumstances to determine whether the fair value of these securities was less than the amortized cost.

 

Corroborated that analysis with examination of third-party valuation reports and critically evaluated management assumptions or forecasts.

 

Available-for-sale debt securities:

 

Challenged assumptions about recoverability, including expected cash flows under the instruments.

 

Analyzed the results of a report by a third-party valuation firm for information that would support or contradict the expected cash flows by security.

 

Critically evaluated other qualitative factors considered by management and external information available in developing the existence and extent of a credit loss.

 

Rosenberg Rich Baker Berman, P.A.  
   
   
We have served as the Company's auditor since 2018.  
Somerset, New Jersey  
March 30, 2021  

 

F-4

 

 

Creatd, Inc.

Consolidated Balance Sheets

 

   December 31,
2020
   December 31,
2019
 
         
Assets        
         
Current Assets        
Cash  $7,906,782   $11,637 
Prepaid expenses   23,856    4,127 
Accounts receivable, net   90,355    50,849 
Note receivable – related party   -    11,450 
Marketable securities   62,733    - 
  Total Current Assets   8,083,726    78,063 
           
Property and equipment, net   56,258    42,363 
           
Intangible assets   960,611    1,087,278 
           
Goodwill   1,035,795    1,035,795 
           
Deposits and other assets   191,836    16,836 
           
Equity investments, at cost   217,096    - 
           
Operating lease right of use asset   239,158    311,711 
           
Total Assets  $10,784,480   $2,572,046 
           
Liabilities and Stockholders’ Deficit          
           
Current Liabilities          
Accounts payable and accrued liabilities  $2,638,688   $1,763,222 
Demand loan   -    225,000 
Derivative liabilities   42,231    - 
Convertible Notes - related party, net of debt discount   -    20,387 
Convertible Notes, net of debt discount and issuance costs   897,516    2,896,425 
Current portion of operating lease payable   79,816    105,763 
Note payable - related party, net of debt discount   -    5,129,342 
Note payable, net of debt discount and issuance costs   1,221,539    660,000 
Unrecognized tax benefit   -    68,000 
Deferred revenue   88,637    50,691 
Warrant liability   -    10,000 
           
  Total Current Liabilities   4,968,427    10,928,830 
           
Non-current Liabilities:          
Note payable   213,037    - 
Operating lease payable   157,820    201,944 
           
  Total Non-current Liabilities   370,857    201,944 
           
Total Liabilities   5,339,284    11,130,774 
           
Commitments and contingencies          
           
Stockholders’ Equity (Deficit)          
Series E Preferred stock, $0.001 par value, 7,738 and 0 shares issued and outstanding, respectively   8    - 
Common stock par value $0.001: 100,000,000 shares authorized; 8,736,378 issued and 8,727,028 outstanding as of December 31, 2020 and 3,059,646 issued and 3,006,362 outstanding as of December 31, 2019   8,737    3,059 
Additional paid in capital   77,505,013    36,391,819 
Subscription receivable   (40,000)   - 
Accumulated deficit   (71,928,922)   (44,580,437)
Accumulated other comprehensive income   (37,234)   (5,995)
Less: Treasury stock, 9,350 and 53,283 shares, respectively   (62,406)   (367,174)
    5,445,196    (8,558,728)
           
Total Liabilities and Stockholders’ Equity (Deficit)  $10,784,480   $2,572,046 

  

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

F-5

 

 

Creatd, Inc.

Consolidated Statements of Comprehensive Loss

 

   For the Year
Ended
   For the Year
Ended
 
   December 31,
2020
   December 31,
2019
 
         
Net revenue  $1,212,870   $453,006 
           
Operating expenses          
Research and development   257,431    1,131,180 
General and administrative   17,238,774    6,538,804 
           
Total operating expenses   17,496,205    7,669,984 
           
Loss from operations   (16,283,335)   (7,216,978)
           
Other income (expenses)          
Other income   512,071    292,387 
Interest expense   (1,376,902)   (612,830)
Accretion of debt discount and issuance cost   (4,303,072)   (348,665)
Change in derivative liability   3,019,457    - 
Impairment of note receivable   (11,450)   - 
Impairment of debt security   (50,000)   - 
Settlement of vendor liabilities   (126,087)   13,574 
Loss on marketable securities   (7,453)   - 
Loss on extinguishment of debt   (5,586,012)   (162,860)
           
Other expenses, net   (7,929,448)   (818,394)
           
Loss before income tax provision   (24,212,783)   (8,035,372)
           
Income tax provision   -    - 
           
Net loss  $(24,212,783)  $(8,035,372)
           
Deemed dividends   3,135,702    - 
           
Net loss attributable to common shareholders   (27,348,485)   (8,035,372)
           
Comprehensive loss          
           
Net loss   (24,212,783)   (8,035,372)
           
Currency translation gain (loss)   (31,239)   (5,995)
           
Comprehensive loss  $(24,244,022)  $(8,041,367)
           
Per-share data          
Basic and diluted loss per share  $(5.68)  $(2.93)
           
Weighted average number of common shares outstanding   4,812,153    2,741,137 

 

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

 

F-6

 

 

Creatd, Inc.

Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

For the year Ended December 31, 2020 and 2019

 

   Series E Preferred Stock   Common Stock   Treasury stock   Additional
Paid In
   Subscription   Accumulated   Other
Comprehensive
   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Receivable   Deficit   Income   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    -    -    437,064    -    -    -    437,106 
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   -    -    -    -    -    -    427,692    -    -    -    427,692 
Purchase of treasury stock and warrants   -    -    -    -    44,061    (314,833)   (271,658)   -    -    -    (586,491)
Shares issued for acquisition   -    -    111,111    111    -    -    1,166,558    -    -    -    1,166,669 
Inducement expense   -    -    -    -    -    -    -    -    -    -    - 
BCF issued with note payable   -    -    -    -    -    -    4,444    -    -    -    4,444 
Shares issued to settle vendor payable   -    -    4,966    5    -    -    52,135    -    -    -    52,140 
Foreign currency translation adjustments   -    -    -    -    -    -    -    -    -    (5,995)   (5,995)
Net loss for the year ended December 31, 2019   -    -    -    -    -    -    -    -    (8,035,372)   -    (8,035,372)
Balance, December 31, 2019   -    -    3,059,646    3,059    53,283    (367,174)   36,391,819    -    (44,580,437)   (5,995)   (8,558,728)
Shares issued with notes payable   -    -    59,774    60    -    -    243,685    -    -    -    243,745 
Stock based compensation   -    -    169,800    170    -    -    5,743,970    -    -    -    5,744,140 
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    -    -    1,116,802    -    -    -    1,117,031 
Stock warrants issued with note payable   -    -    -    -    -    -    1,078,501    -    -    -    1,078,501 
Cancellation of Treasury stock   -    -    (50,650)   (51)   (50,650)    374,184    (374,134)   -    -    -    - 
Purchase of treasury stock   -    -    -    -    3,024    (69,416)   -    -    -    -    (69,416)
Recognition of intrinsic value of beneficial conversion features – convertible notes   -    -    -    -    -    -    3,099,837    -    -    -    3,099,837 
Cash received for common stock and warrants   -    -    1,725,000    1,725    -    -    7,028,355    -    -    -    7,030,080 
Cash received for preferred series E and warrants   7,738    8                        6,710,417    (40,000)   -    -    6,670,425 
Common stock and warrants issued upon conversion of notes payable   -    -    768,225    769    -    -    3,182,898    -    -    -    3,183,667 
Common stock and warrants issued upon extinguishment of notes payable   -    -    2,744,288    2,744    -    -    9,915,790    -    -    -    9,918,534 
Foreign currency translation adjustments   -    -    -    -    -    -    -    -    -    (31,239)   (31,239)
Dividends   -    -    -    -    -    -    3,135,702    -    (3,135,702)   -    - 
Net loss for the year ended December 31, 2020   -    -    -    -    -    -    -    -    (24,212,783)   -    (24,212,783)
Balance, December 31, 2020   7,738   $8    8,736,378   $8,737    5,657  $(62,406)  $77,505,013   $(40,000)  $(71,928,922)  $(37,234)  $5,445,196 

 

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

 

F-7

 

 

Creatd, Inc.

Consolidated Statements of Cash Flows

 

 

   For the Year
Ended
   For the Year
Ended
 
   December 31,
2020
   December 31,
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(24,162,783)  $(8,035,372)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   157,760    57,492 
Impairment of note receivable   11,450    - 
Accretion of debt discount and issuance cost   4,303,072    348,665 
Share-based compensation   6,861,163    437,106 
Bad debt expense   53,692    33,503 
Change in fair value of derivative liabilities   (3,019,457)   - 
Loss on settlement of vendor liabilities   126,087    (13,574)
Loss on marketable securities   7,453    - 
Loss on extinguishment of debt   5,586,012    162,860 
Non-cash lease expense   72,553    60,764 
Changes in operating assets and liabilities:          
Prepaid expenses   (19,729)   (3,458)
Accounts receivable   (93,198)   (54,174)
Deposits and other assets   (4,829)   - 
Deferred revenue   37,946    41,686 
Accounts payable and accrued expenses   2,880,392    985,715 
Unrecognized tax benefit   (68,000)   68,000 
Warrant liability   -    10,000 
Operating lease liability   (70,071)   (56,240)
Net Cash Used In Operating Activities   (7,340,487)   (5,957,027)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Issuance of note receivable   -    (11,450)
Cash paid for property and equipment   (44,988)   (27,887)
Cash paid for marketable securities   (248,272)   - 
Sale of marketable securities   36,048    - 
Deposits   (175,000)   - 
Cash paid for equity investments in businesses   (115,000)   - 
Cash consideration for acquisition   -    (340,000)
Net cash received in business combination   -    16,049 
Net Cash Used In Investing Activities   (547,212)   (363,288)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Cash overdraft   -    (33,573)
Net proceeds from issuance of notes   1,501,661    - 
Repayment of notes   (492,665)   (50,000)
Proceeds from issuance of demand loan   440,000    250,000 
Repayment of demand Loan   (90,000)   (25,000)
Proceeds from issuance of convertible note   3,650,835    2,472,525 
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    4,186,500 
Repayment of note payable - related party   (983,752)   (501,500)
Proceeds from issuance of common stock and warrants   6,662,015    684,829 
Net cash received for preferred series E and warrants   6,670,417    - 
Cash paid for debt issuance costs   -    (35,000)
Cash paid for stock issuance costs   -    (35,000)
Purchase of treasury stock and warrants   (89,416)   (575,834)
Net Cash Provided By Financing Activities   15,814,083    6,337,947 
           
Effect of exchange rate changes on cash   (31,239)   (5,995)
           
Net Change in Cash   7,895,145    11,637 
           
Cash - Beginning of Year   11,637    - 
           
Cash - End of period  $7,906,782   $11,637 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash Paid During the Year for:          
Income taxes  $-   $- 
Interest  $178,461   $55,987 
           
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Settlement of vendor liabilities  $475,220   $32,500 
Conversion of marketable debt securities into equity securities  $102,096   $- 
Deferred offering costs  $-   $143,146 
Beneficial conversion feature on convertible notes  $3,099,837   $4,444 
Warrants issued with debt  $1,078,500   $427,692 
Shares issued with debt  $243,741   $- 
Issuance of common stock for prepaid services  $585,000   $- 
Cancellation of Treasury stock  $374,184   $- 
Operating Lease liability  $-   $349,997 
Conversion of note payable and interest into convertible notes  $385,000   $- 
Conversion of Demand loan into notes payable  $200,000   $- 
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  $-   $4,119 
Conversion of accounts payable and interest into convertible notes  $-   $318,678 
Conversion of interest into note payable - related party  $-   $128,992 
Leasehold improvements reclassified to right-of-use asset  $-   $22,478 

 

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

 

F-8

 

 

Creatd, Inc.

December 31, 2020 and 2019

Notes to the 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. 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. 

 

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.

 

Use of Estimates 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.

 

F-9

 

 

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 December 31, 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.   

 

Fair Value of Financial Instruments

 

The fair value measurement disclosures are grouped into three levels based on valuation factors:

 

  Level 1 – quoted prices in active markets for identical investments

 

  Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs)

 

  Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments)

 

The Company’s Level 1 assets/liabilities include cash, accounts receivable, marketable trading securities, accounts payable, prepaid and other current assets, line of credit and due to related parties. Management believes the estimated fair value of these accounts at December 31, 2020 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments or the use of market interest rates for debt instruments.

 

The Company’s Level 2 assets/liabilities include certain of the Company’s notes payable and capital lease obligations. Their carrying value approximates their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.

 

The Company’s Level 3 assets/liabilities include goodwill, intangible assets, marketable debt securities, equity investments at cost, and derivative liabilities, when they are recorded at fair value due to an impairment charge. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

 

F-10

 

 

The following table provides a summary of the relevant assets and liabilities that are measured at fair value on recurring basis:

 

Fair Value Measurements as of

December 31, 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  $62,733   $             -   $              -   $62,733 
Marketable securities - equity securities   -    -    -    - 
Goodwill   1,035,795    -    -    1,035,795 
Total assets  $1,098,528   $-   $-   $1,098,528 
                     
Liabilities:                    
Derivative liabilities  $42,231   $-   $-   $42,231 
Total Liabilities   42,231   $-   $-   $42,231 

 

The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on recurring basis as of December 31, 2020:

 

   Fair Value   Valuation Methodology  Unobservable Inputs
           
Marketable securities - debt securities  $62,733   Discounted cash flow analysis  Expected cash flows from the investment
            
Goodwill  $1,035,795   Qualitative assessment per ASC 350-20-35  Discounted cash flow models
           Qualitative
            
Derivative liabilities  $42,231   Monte Carlo simulations  Risk free rate
           Expected volatility
           Drift rate

 

The following table provides a summary of the relevant assets that are measured at fair value on non-recurring basis: 

 

Fair Value Measurements as of

December 31, 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:                
Equity investments, at cost  $217,096   $             -   $             -   $217,096 
Intangible assets   960,611    -    -    960,611 
Total assets  $1,177,707   $-   $-   $1,177,707 

 

F-11

 

 

The following table shows the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on non-recurring basis as of December 31, 2020:

 

    Fair Value     Valuation Methodology   Unobservable Inputs
               
Equity investments, at cost   $ 217,096     Qualitative assessment per ASC 321-10-35   Qualitative factors
                 
Intangible assets   $ 960,611     Lesser of cost or fair value  

Discounted cash flow models

Qualitative factors such as the value of customer attrition estimates, trade names and trademarks

 

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 December 31, 2020 are as follows:

 

    Fair
Value
Hierarchy
    Cost     Unrealized
Gains
(Loss)
    Fair
Value
 
Marketable securities - debt securities   3     $ 62,733     $             -     $ 62,733  
                                 

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 year ended December 31, 2020 and 2019 was $0 and $0, respectively.

 

The Company recognizes impairment on loans or notes receivable (that do not meet the definition of a debt security) when it is probable that it will be unable to collect all amounts due according to the contractual terms, and the amount of loss can be estimated. The loss is estimated based on the present value of expected cash flows. The Company recognized a $50,000 credit loss on debt marketable securities.

 

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 December 31, 2020 are $0.

 

The change in net realized depreciation on equity trading securities that has been included in other expenses for the year ended December 31, 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.

 

At times, cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurable limits. The Company has never experienced any losses related to these balances. As of December 31, 2020, and 2019, cash amounts in excess of $250,000 were not fully insured. The uninsured cash balance as of December 31, 2020 was approximately $7.7 million. The Company does not believe it is exposed to significant credit risk on cash and cash equivalents.

 

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. 

 

F-12

 

 

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 year ended December 31, 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 year ended December 31, 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

 

Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt securities not classified as held-to-maturity or as trading are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders’ equity.

 

The Company accounts for its investments in available-for-sale debt securities, in accordance with sub-topic 320-10 of the FASB ASC (“Sub-Topic 320-10”). Accrued interest on these securities is included in fair value and amortized cost.

 

Pursuant to Paragraph 320-10-35, investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized.

 

The Company follows FASB ASC 320-10-35 to assess whether an investment in debt securities is impaired in each reporting period. An investment in debt securities is impaired if the fair value of the investment is less than its amortized cost. If the Company intends to sell the debt security (that is, it has decided to sell the security), an other-than-temporary impairment shall be considered to have occurred. If the Company more likely than not will be required to sell the security before recovery of its amortized cost basis or it otherwise does not expect to recover the entire amortized cost basis of the security, an other-than-temporary impairment shall be considered to have occurred. The Company considers the expected cash flows from the investment based on reasonable and supportable forecasts as well as several other factors to estimate whether a credit loss exists. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.

 

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

 

   For the year
ended
December 31,
2020
 
   Total 
Beginning of period  $- 
Purchase of marketable securities   210,000 
Interest due at maturity   4,829 
Other than temporary impairment   (50,000)
Conversion of marketable securities   (102,096)
December 31, 2020  $62,733 

 

F-13

 

 

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

 

   For the year
ended
December 31,
2020
 
   Total 
Beginning of period  $- 
Purchase of marketable securities   38,272 
Loss on trading securities   (7,453)
Sale of marketable securities   (30,819)
December 31, 2020  $- 

 

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 December 31, 2020, all of our investments had maturities between one and three years. The marketable security investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. On October 2, 2020, the Company converted $102,096 of a marketable debt security into 1.3% equity investment. The Company recognized an allowance for a credit loss on debt marketable securities.

 

The following table sets forth a summary of the changes in equity investments, at cost that are measured at fair value on a non-recurring basis:

 

   For the year
ended
December 31,
2020
 
   Total 
Beginning of period  $- 
Purchase of equity investments   115,000 
Conversion of marketable securities   102,096 
December 31, 2020  $217,096 

 

The Company has elected to measure its equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An election to measure an equity security in accordance with this paragraph shall be made for each investment separately.

 

The Company performed a qualitative assessment considering impairment indicators to evaluate whether these investments were impaired. Impairment indicators that the Company considered included the following: a) a significant deterioration in the earnings performance, credit rating, asset quality or business prospects of the investee; b) a significant adverse change in the regulatory, economic or technology environment of the investee; c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates; d) a bona fide offer to purchase or an offer by the investee to sell the investment; e) factors that raise significant concerns about the investee’s ability to continue as a going concern.

 

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

 

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

 

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

 

F-14

 

 

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.

 

Derivative Liability

 

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

   

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

 

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

 

The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  The Company changed its method of accounting for the debt and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017 on a retrospective basis.

 

The Company utilizes an Geometric Brownian Motion (“GBM”) model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The inputs utilized in the application of the GBM model included a starting stock price, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.

 

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;

 

  determination of the transaction price. The transaction price for any given subscriber could decrease based on any payments made to that subscriber. A subscriber may be eligible for payment through one or more of the monetization features offered to Vocal creators, including earnings through reads (on a cost per mille basis) and cash prizes offered to Challenge winners;

  

  allocation of the transaction price to the performance obligations in the contract; and
     
  recognition of revenue when, or as, we satisfy a performance obligation.

 

F-15

 

 

Revenue disaggregated by revenue source for the year ended December 31, 2020 and 2019 consists of the following:

 

   Year Ended 
   December 31, 
   2020   2019 
Managed Services  $747,174   $283,332 
Branded content   353,025    107,335 
Creator Subscriptions   70,623    31,997 
Affiliate sales   33,748    15,300 
Other revenue   8,300    15,042 
   $1,212,870   $453,0066 

 

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. Revenue is recognized over time as service obligations and milestones in the contract are met.

 

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 and any required milestones are met.

 

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

 

 

The Company collects fixed fees ranging from $10,000 to $110,000.

     
  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.
     
  Most billing for contracts occurs 50% at signing and 50% upon completion of the services, with net payment terms varying per client.
     
  Most contracts include provisions for clients to acquire content rights at the end of the campaign for a flat fee.

 

Creator Subscriptions

 

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, though these amounts are occasionally subject to promotional discounts. 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.

 

The transaction price for any given subscriber could decrease based on any payments made to that subscriber. A subscriber may be eligible for payment through one or more of the monetization features offered to Vocal creators, including earnings through reads (on a cost per mille basis) and cash prizes offered to Challenge winners. Estimates are utilized for payments made for earnings through reads, by establishing the lifetime a subscriber has had a Vocal account, determining the percentage of that lifetime that the subscriber has been a paying customer, and applying that percentage to payments for earnings through reads in the relevant reporting period.

 

F-16

 

 

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.

 

Deferred Revenue

 

Deferred revenue consists of billings and payments from clients in advance of revenue recognition. As of December 31, 2020 and 2019, the Company had deferred revenue of $88,637 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 year ended December 31, 2020 the Company recorded $53,692 as a bad debt expense. As of December 31, 2020 and 2019, the Company has an allowance for doubtful accounts of $80,509 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.

 

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. The Company issues awards of equity instruments, such as stock options and restricted stock units, to employees and certain non-employee directors. Compensation expense related to these awards is based on the fair value of the underlying stock on the award date and is amortized over the service period, defined as the vesting period, using the straight-line method. The vesting period is generally five years. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock units. Compensation expense is reduced for actual forfeitures as they occur.

 

F-17

 

 

Income Taxes

 

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

 

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

 

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

 

During the year ended December 31, 2020 and 2019, we recognized a $507,242 and $292,383 respectively, benefit for research and development tax credits in other income on the Statements of Comprehensive Income (Loss). The tax credits were claimed on our previous Australian tax returns and were based upon a research and development costs paid to an Australian company.

 

Loss Per Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the year ended December 31, 2020 and 2019 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

The Company had the following common stock equivalents at December 31, 2020 and 2019:

 

   December 31, 
   2020   2019 
Options   541,021    911,500 
Warrants   3,228,235    742,221 
Convertible notes - related party   -    5,438 
Convertible notes   -    724,751 
Totals   3,769,256    2,383,910 

 

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.

 

In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): The mandatory effective dates for Credit Losses in this Update (ASU 2019-10) are as follows: 1. Public business entities that meet the definition of an SEC filer, excluding entities eligible to be SRCs as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those 2. All other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2019-10 had a material impact on the Company’s Consolidated Financial Statements because it deferred the adoption of ASU 2016-13.

 

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 consolidated financial statements.

 

F-18

 

 

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 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 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 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 consolidated financial statements.

 

Note 3 – Going Concern

 

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

 

As reflected in the consolidated financial statements, as of December 31, 2020, the Company had an accumulated deficit of $71.8 million, a net loss of $24.2 million and net cash used in operating activities of $7.3 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.

 

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.

 

F-19

 

 

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 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 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.

 

F-20

 

 

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.

 

   Year Ended 
   December 31,
2019
 
Revenues, net  $1,121,521 
Net loss attributable to common shareholders  $(8,176,763)
Net loss per share  $(2.90)
Weighted average number of shares outstanding   2,818,365 

 

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 – Property and Equipment

 

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

 

   December 31,
2020
   December 31,
2019
 
Computer Equipment  $284,928   $239,940 
Furniture and Fixtures   86,888    86,888 
Leasehold Improvements   -    - 
    371,816    326,828 
Less: Accumulated Depreciation   (315,558)   (284,465)
   $56,258   $42,363 

 

During the year ended December 31, 2019 the Company reclassified leasehold improvements to right of use asset in accordance with the adoption of ASU 2016-02. See Note 10.

 

Depreciation expense was $31,094 and $19,053 for the year ended December 31, 2020 and 2019, respectively.

 

Note 6 - Equity investments, at cost

 

The Company has elected to measure its equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An election to measure an equity security in accordance with this paragraph shall be made for each investment separately.

 

The Company performed a qualitative assessment considering impairment indicators to evaluate whether these investments were impaired. Impairment indicators that the Company considered included the following: a) a significant deterioration in the earnings performance, credit rating, asset quality or business prospects of the investee; b) a significant adverse change in the regulatory, economic or technology environment of the investee; c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates; d) a bona fide offer to purchase or an offer by the investee to sell the investment; e) factors that raise significant concerns about the investee’s ability to continue as a going concern.

 

On October 2, 2020, the Company converted $102,096 of its marketable debt security into 119,355 shares of preferred stock or a 1.3% equity investment in a private company.

 

On October 23, 2020, the Company entered into a membership interest purchase agreement whereas the Company purchased 3.8% ownership of a private company for $115,000.

 

F-21

 

 

Note 7 – Notes Payable

 

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

 

    Outstanding Principal as of            
    December 31,
2020
    December 31,
2019
    Interest
Rate
    Maturity Date
Seller’s Choice Note    $ 660,000      $ 660,000       30 %   September 2020
The First March 2020 Loan Agreement     -       -       25 %   September 2020
The Second March 2020 Loan Agreement     -       -       19 %   September 2021
The May 2020 PPP Loan Agreement     412,500       -       1 %   April 2022
The April 2020 PPP Loan Agreement     282,432       -       1 %   May 2022
The June 2020 Loan Agreement     -       -       15 %   July 2020
The September 2020 Loan Agreement     -       -       12.5 %   March 2021
The November 2020 Loan Agreement     23,716       -       14 %   May 2021
      1,378,648       660,000              
Less: Debt Discount     -       -              
Less: Debt Issuance Costs     -       -              
      1,378,648       660,000              
Less: Current Debt     (1,185,611 )     -              
Total Long-Term Debt   $ 193,037     $ -              

 

As of December 31, 2020, if PPP loans payable are not forgiven, remaining scheduled principal payments due on notes payable are as follows:

 

Twelve months ended December 31,    
2021  $1,185,611 
2022   193,037 
   $1,378,648 

 

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 December 31, 2020 the Company is in default on the Seller’s Choice note.

 

During the year ended December 31, 2019 the Company repaid $0 in principal and $16,198 in interest on the Seller’s Choice Note.

 

During the year ended December 31, 2020 the Company accrued interest of $154,485 and paid $68,970 of interest.

 

F-22

 

 

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 year ended December 31, 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 year ended December 31, 2020, the Company repaid $17,000 in principal and $1,398 in interest.

 

The April 2020 PPP Loan Agreement

 

On April 30, 2020, the Company was granted a loan 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 the Company 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 year ended December 31, 2020, the Company accrued interest of $1,896. 

 

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

 

When the applications for PPP first opened up, there was limited available funding and much confusion surrounding the application process. The Company initially submitted its application for the May 2020 PPP Loan in early April but received no response in the aftermath of submitting the application. After consulting multiple advisors, the Company made the decision to apply elsewhere, due to the rampant media coverage of institutions running out of funding and the Company’s need for the capital and belief that if 2 separate loans were approved, the remaining application could simply be withdrawn.

 

Therefore, in late April, the company proceeded with applying for the April 2020 PPP Loan. After some conflicting communications regarding acceptance, the Company attempted to contact the lender to clarify but got no response. After continued attempts to follow up with both lenders, the Company received approval for the May 2020 PPP Loan and funding for the April 2020 PPP Loan on the same day, followed the next day by the funding of the May 2020 PPP Loan. The Company immediately separated the funds for the April 2020 PPP Loan into a separate reserved bank account with the intention of returning the funds. However, after several attempts to contact the lender with no response, the Company was faced with difficulty raising funds in the early-Covid economy and made the decision to utilize the funds for operations and pursue an installment repayment plan when they were able to reach the lender. As of the date of this filing, the Company has begun making repayments on the loan, absent a formal installment agreement due to difficulties reaching the lender. The Company intends to complete repayment before the end of 2021.

 

As each company is only permitted one loan under the CARES Act, there is a possibility the loan bay be called by the SBA and the Company would have to repay the loan in full at such time.

 

The May 2020 PPP Loan Agreement

 

On May 4, 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 $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 year ended December 31, 2020, the Company accrued interest of $2,724. 

 

The Company plans to apply for forgiveness of this loan and has begun discussions with the lender regarding that process.

 

F-23

 

 

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 year ended December 31, 2020 the Company repaid A$510,649 in principal and A$14,814 in interest.

 

The September 2020 Loan Agreement

 

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

 

During the year ended December 31, 2020, the Company repaid $25,000 in principal and $2,834 in interest.

 

The October 2020 Loan Agreement

 

On October 6, 2020, the Company entered into a secured loan agreement (the “October 2020 Loan Agreement”) with a lender (the “October 2020 Lender”), whereby the October 2020 Lender issued the Company a secured promissory note of A$74,300 AUD or $53,128 United States Dollars (the “October 2020 Note”). Pursuant to the October 2020 Loan Agreement, the October 2020 Note has an effective interest rate of 14%. The maturity date of the October 2020 Note is September 30, 2021 (the “October 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the October 2020 Loan Agreement are due. The loan is secured by the Australian research & development credit.

 

During the year ended December 31, 2020 the Company accrued A$2,451 in interest.

 

The November 2020 Loan Agreement

 

On November 24, 2020, the Company entered into a loan agreement (the “November 2020 Loan Agreement”) with a lender (the “November 2020 Lender”) whereby the November 2020 Lender issued the Company a promissory note of $34,000 (the “November 2020 Note”). Pursuant to the November 2020 Loan Agreement, the November 2020 Note has an effective interest rate of 14%. The maturity date of the November 2020 Note is May 25, 2021 (the “November 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the November 2020 Note are due.

 

During the year ended December 31, 2020, the Company repaid $10,284 in principal.

 

F-24

 

 

Note 8 – Convertible Note Payable

 

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

 

    Outstanding Principal
as of
                    Warrants granted  
    December 31,
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     341,880       -       12 %   $ - (*)   September 2021     85,555       5  
The October 2020 convertible Loan Agreement     169,400       -       6 %   $ - (*)   October 2021     -       -  
The First December 2020 convertible Loan Agreement     600,000       -       12 %   $ - (*)   December 2021     -       -  
The Second December 2020 convertible Loan Agreement     169,400       -       6 %   - (*)   December 2021     -       -  
      1,280,680       3,021,136                                      
Less: Debt Discount     (309,637 )     (124,096 )                                    
Less: Debt Issuance Costs     (73,527 )     (614 )                                    
      897,516       2,896,425                                      
Less: Current Debt     (897,516 )     (2,896,425 )                                    
Total Long-Term Debt   $ -     $ -                                      

 

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

F-25

 

 

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.

 

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.

 

F-26

 

 

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 year ended December 31, 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 year ended December 31, 2020, the Company converted $50,000 of principal and $17,949 of unpaid interest into the September 2020 Equity Raise.

 

During the year ended December 31, 2020, the Company repaid $25,000 in principal and $9,364 in interest.

 

F-27

 

 

The February 2019 Convertible Note Offering

 

During the year ended December 31, 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 year ended December 31, 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 year ended December 31, 2020, the Company converted $1,963,567 of principal and $416,786 of unpaid interest into the September 2020 Equity Raise.

 

During the year ended December 31, 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.

 

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 year ended December 31, 2020, the Company converted $559,433 of principal and $77,785 of unpaid interest into the September 2020 Equity Raise.

 

F-28

 

 

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 year ended December 31, 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”).

 

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. 

 

F-29

 

 

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 year ended December 31, 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 year ended December 31, 2020, the Company converted $125,000 of principal and $0 of unpaid interest into the September 2020 Equity Raise.

 

The Company recorded a Loss on extinguishment of debt of $136,115.

 

During the year ended December 31, 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%).

 

F-30

 

 

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 year ended December 31, 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 year ended December 31, 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. 

 

F-31

 

 

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 year ended December 31, 2020, the lender converted $59,200 of principal into the Second July 2020 Convertible Loan Agreement

 

During the year ended December 31, 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 year ended December 31, 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 year ended December 31, 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.

 

F-32

 

 

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 year ended December 31, 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 year ended December 31, 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. 

 

F-33

 

 

The October 2020 Convertible Loan Agreement

 

On October 2, 2020, the Company entered into a loan agreement (the “October 2020 Loan Agreement”) with an individual (the “October 2020 Lender”), whereby the October 2020 Lender issued the Company a promissory note of $169,400 (the “October 2020 Note”). Pursuant to the October 2020 Loan Agreement, the October 2020 Note has interest of twelve percent (6%). The October 2020 Note matures on the first (12th) month anniversary of its issuance date. 

 

Upon default the October 2020 Note is convertible into shares of the Company’s common stock, par value $0.001 per share (“Conversion Shares”) equal to 75% of average the lowest three trading prices of the Company’s common stock on the fifteen-trading day immediately preceding the date of the respective conversion.

 

The Company recorded a $19,400 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.

 

The First December 2020 convertible Loan Agreement

 

On December 9, 2020, the Company entered into a loan agreement (the “First December 2020 Loan Agreement”) with an individual (the “First December 2020 Lender”), whereby the First December 2020 Lender issued the Company a promissory note of $600,000 (the “First December 2020 Note”). Pursuant to the First December 2020 Loan Agreement, the First December 2020 Note has interest of twelve percent (12%).  As additional consideration for entering in the First December 2020 convertible Loan Agreement, the Company issued 45,000 shares of the Company’s common stock. The First December 2020 Note matures on the first (12th) month anniversary of its issuance date. 

 

Upon default the First December 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 $110,300 debt discount relating to original issue discount associated with this note. The Company recorded a $113,481 debt discount relating to 45,000 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.

 

The Second December 2020 Convertible Loan Agreement

 

On December 30, 2020, the Company entered into a loan agreement (the “Second December 2020 Loan Agreement”) with an individual (the “Second December 2020 Lender”), whereby the Second December 2020 Lender issued the Company a promissory note of $169,400 (the “Second December 2020 Note”). Pursuant to the Second December 2020 Loan Agreement, the Second December 2020 Note has interest of twelve percent (6%). The Second December 2020 Note matures on the first (12th) month anniversary of its issuance date. 

 

Upon default the Second December 2020 Note is convertible into shares of the Company’s common stock, par value $0.001 per share (“Conversion Shares”) equal to 75% of average the lowest three trading prices of the Company’s common stock on the fifteen-trading day immediately preceding the date of the respective conversion.

 

The Company recorded a $18,900 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.

 

F-34

 

 

Note 9 – Related Party

 

Note receivable

 

October 2019 Cacher Loan Agreement

 

On October 28, 2019, the Company entered into a loan agreement with Cacher Studios LLC (the “October 2019 Cacher Loan Agreement”) whereby Cacher Studios issued the Company a promissory note in the principal amount of $11,450 (the “October 2019 Cacher Note”). The October 2019 Cacher Note has a maturity date of October 28, 2020. Repayment is due from Cacher Studios LLC’s revenues, with 100% of net revenues due to the Company until $2,500 in principal has been repaid, and 50% of net revenues due to the Company thereafter. Cacher Studios LLC is owned and operated by Alexandra Frommer, daughter of Jeremy Frommer, the Company’s CEO. This investment is evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. The company recorded an impairment of $11,450.

 

Convertible notes

 

Convertible notes payable – related party as of December 31, 2020 and 2019 is as follows:

 

    Outstanding Principal as of                 Warrants granted  
    December 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.

 

F-35

 

 

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 year ended December 31, 2020 the lender forgave $400 of principal and $70 of unpaid interest. This was recorded as a gain on settlement of debt on the Consolidated Statements of Comprehensive Income (Loss).

 

The February 2019 Convertible Note Offering

 

During the year ended December 31, 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 year ended December 31, 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 of principal was converted from a promissory note into this offering.

 

During the year ended December 31, 2020, the Company converted $20,000 of principal and $3,065 of unpaid interest into the September 2020 Equity Raise.

 

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 $50,000. 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.

 

F-36

 

 

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 $9,812, the discount is being accreted over the life of the Debenture to accretion of debt discount and issuance cost.

 

The Company recorded a $21,577 debt discount relating to 3,922 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 year ended December 31, 2020, the Company converted $50,000 of principal and $630 of unpaid interest into the September 2020 Equity Raise.

 

Notes payable

 

Notes payable – related party as of December 31, 2020 and 2019 is as follows:

 

    Outstanding Principal as of                 Warrants granted  
    December 31,
2020
    December 31,
2019
    Interest
Rate
    Maturity
Date
    Quantity     Exercise
Price
 
The June 2018 Frommer Loan Agreement    $ -      $ 10,000       6 %     August 17, 2018       500      $ 12.00  
The July 2018 Schiller Loan Agreements     -       20,863       6 %     August 17, 2018       2,500       12.00  
The June 2019 Loan Agreement     -       4,825,000       12.5 %     December 3, 2019       -       -  
The December 2019 Gravitas Loan Agreement     -       300,000       6.7 %     March 1, 2020       -       -  
The First January 2020 Loan Agreement     -       -       6 %     January 2020       -       -  
The Second January 2020 Loan Agreement     -       -       5 %     January 2020       50       18.00  
The Third January 2020 Loan Agreement     -       -       10 %     January 2020       75       18.00  
The Fourth January 2020 Loan Agreement     -       -       7 %     February 2020       -       -  
The January 2020 Rosen Loan Agreement     -       -       -       February 2020       -       -  
The February 2020 Banner Loan Agreement     -       -       -       February 2020       49       18.00  
The February 2020 Frommer Loan Agreement     -       -       -       February 2020       15       18.00  
The February 2020 Loan Agreement     -       -       5 %     March 2020       75       18.00  
The July 2020 Loan Agreement     -       -       5 %     August 2020       25       18.00  
The September 2020 Goldberg Loan Agreement     16,705       -       7 %     September 2022       -       -  
The September 2020 Rosen Loan Agreement     3,295       -       7 %     September 2022       -       -  
      20,000       5,155,863                                  
Less: Debt Discount     (17,068 )     -                                  
Less: Debt Issuance Costs     -       (26,521 )                                
      2,932       5,129,342                                  
Less: Current Debt     (2,932 )     (5,129,342 )                                
    $ -     $ -                                  

 

F-37

 

 

The June 2018 Frommer Loan Agreement

 

On June 29, 2018, the Company entered into a loan agreement (the “June 2018 Frommer Loan Agreement”) with Jeremy Frommer, an officer and director of the Company, whereby the Company issued Frommer a promissory note in the principal amount of $10,000 (the “June 2018 Frommer Note”). As additional consideration for entering in the June 2018 Frommer Note Loan Agreement, the Company issued Frommer a four-year warrant to purchase 500 shares of the Company’s common stock at a purchase price of $12.00 per share. Pursuant to the June 2018 Frommer Loan Agreement, the June 2018 Frommer Note bears interest at a rate of 6% per annum and payable on the maturity date of August 17, 2018 (the “June 2018 Frommer Maturity Date”). On November 8, 2018, the Company executed upon an agreement that extended the maturity date of the June 2018 Frommer Agreement to March 7, 2019. As part of the extension agreement, the Company issued Frommer an additional 681 warrants to purchase common stock of the Company at an exercise price of $18.00. These warrants had a fair value of $4,645 which was recorded to loss on extinguishment of debt. On February 18, 2019 the Company executed upon an agreement that further extended the maturity date of the June 2018 Frommer Agreement to March 30, 2019. As part of the extension agreement, the Company issued Frommer an additional 692 warrants to purchase common stock of the Company at an exercise price of $18.00. On March 29, 2019, the Company entered into an agreement with Mr. Frommer that further extended the maturity date of this loan to May 15, 2019. On June 29, 2019 the Company entered into an agreement with Mr. Frommer that further extended the maturity date of this loan to December 15, 2019. On December 15, 2019 the Company entered into an agreement with Mr. Frommer that further extended the maturity date to May 15, 2020.

 

During the year ended December 31, 2020, the Company converted $10,000 of principal and $2,748 of unpaid interest into the September 2020 Equity Raise and the June 2018 Frommer Note is no longer outstanding.

 

The July 2018 Schiller Loan Agreement

 

On July 17, 2018, the Company entered into a loan agreement (the “Second July 2018 Schiller Loan Agreement”) with Schiller, a member of the Board, whereby the Company issued Schiller a promissory note in the principal aggregate amount of $25,000 (the “Second July 2018 Schiller Note”). As additional consideration for entering in the Second July 2018 Schiller Loan Agreement, the Company issued Schiller a four-year warrant to purchase 1,250 shares of the Company’s common stock at a purchase price of $12.00 per share. Pursuant to the Second July 2018 Schiller Loan Agreement, the Second July 2018 Schiller Note bears interest at a rate of 6% per annum and payable on the maturity date of August 17, 2018. Subsequent to the balance sheet date, on November 8, 2018 the Company executed upon an agreement that extended the maturity date of this loan to March 7, 2019. As part of the extension agreement, the Company issued Schiller warrants to purchase 1,698 shares of common stock of the Company at an exercise price of $18.00. On February 18, 2019 the Company executed upon an agreement that further extended the maturity date of the Second July 2018 Schiller Loan Agreement to March 7, 2019. As part of the extension agreement, the Company issued Schiller an additional 1,726 warrants to purchase common stock of the Company at an exercise price of $18.00. On March 29, 2019 the Company entered into an agreement with Mr. Schiller that further extended the maturity date of this loan to May 15, 2019. On December 15, 2019 the Company entered into an agreement that further extended the maturity date of this loan to May 15, 2020.

  

During the year ended December 31, 2019 $4,137 in principal was converted into the February 2019 Convertible Note Offering. 

 

During the year ended December 31, 2020 the Company repaid $20,863 in principal and $3,216 in interest.

 

The June 2019 Loan Agreement

 

On June 3, 2019, the Company entered into a loan agreement (the “June 2019 Loan Agreement”), pursuant to which the Company was to be indebted in the amount of $2,400,000, of which $1,200,000 was funded by September 30, 2019 and $1,200,000 was exchanged from the May 2016 Rosen Loan Agreement dated May 26, 2016 in favor of Rosen for a joint and several interest in the Term Loan pursuant to the Debt Exchange Agreement. The June 2019 Loan Agreement, the June 2019 Loan bears interest at a rate of 12.5% per annum, compounded annually and payable on the maturity date of December 3, 2019 (the “June 2019 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the June 2019. In connection with the conversion of the May 2016 Rosen Loan Agreement the Company recorded a debt discount of $92,752. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.

 

On July 29, 2019, the Company entered into the First Amendment Agreement to the June 2019 Loan Agreement pursuant to which the parties agreed to amend the June 2019 Loan Agreement and the June 2019 Security Agreement so as to (i) increase the principal aggregate amount of the June 2019 Loan to $2,500,000, and (ii) amend the provisions regarding the ranking of interest of such loan.

 

On August 12, 2019, the Company entered into the Second Amendment Agreement to the June 2019 Loan Agreement pursuant to which the parties agreed to further amend the June 2019 Loan Agreement and the June 2019 Security Agreement so as to (i) increase the principal aggregate amount of the June 2019 Loan to $3,000,000, and (ii) amend the provisions regarding the ranking of interest of such loan. 

 

On September 16, 2019, the Company entered into the Third Amendment Agreement to the June 2019 Loan Agreement pursuant to which the parties agreed to further amend the June 2019 Loan Agreement and the June 2019 Security Agreement so as to (i) increase the principal amount of the June 2019 Loan to $4,000,000; and (ii) amend the provisions therein with regard to the ranking of security interests.

 

F-38

 

 

On October 10, 2019 the Company and investors entered into the Fourth Amendment Agreement to the June 2019 Loan Agreement, whereby the parties thereto agreed to (i) increase the principal amount of the June 2019 Loan to $4,825,000; and (ii) amend the interest, conversion terms, and other covenants of the note.

 

On February 27, 2020, the Company entered into a fifth amendment agreement to the June 2019 Loan Agreement, whereby the parties agreed to amend Section 2.6 of the June 2019 Loan Agreement and provide for: (i) an additional 10% of shares to be issued at the time of conversion in the event that the price per share (or unit, as applicable) of securities issued in a Qualified Public Offering (as such term is defined in the Fifth Amendment) is below $15.00; and (ii) provide for the acceleration of all outstanding interest due on the Loan upon the consummation of a Qualified Public Offering.

 

During year ended December 31, 2020, the Company converted $4,325,000 of principal and $752,346 of unpaid interest into the September 2020 Equity Raise.

 

During the year ended December 31, 2020 the Company repaid $500,000 in principal and $0 in interest.

 

The December 2019 Gravitas Loan Agreement

 

On December 23, 2019, the Company entered into a loan agreement (the “December 2019 Gravitas Loan Agreement”), whereby the Company issued Gravitas a promissory note in the principal amount of $300,000 (the “December 2019 Gravitas Note”). Pursuant to the December 2019 Gravitas Loan Agreement, the December 2019 Gravitas Note has a flat interest payment of $20,000.  

 

During the year ended December 31, 2020 the Company repaid $300,000 in principal and $50,000 in accrued 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.  The Company recorded a $16,000 debt discount relating to the 1,333 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 these notes to accretion of debt discount and issuance cost.

 

During the year ended December 31, 2020, the Company converted $250,000 in principal to the Third February 2020 Note (as defined in Note 8).

 

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 year ended December 31, 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 year ended December 31, 2020, the Company repaid $15,000 in principal and $1,500 in interest.

 

F-39

 

 

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 year ended December 31, 2020, the Company converted $135,000 in principal to the Second February 2020 Note (as defined below).

 

The January 2020 Rosen Loan Agreement

 

On January 14, 2020, the Company entered into a loan agreement (the “January 2020 Rosen Loan Agreement”), whereby the Company issued a promissory note in the principal amount of $150,000 (the “January 2020 Rosen Note”). Pursuant to the January 2020 Rosen Loan Agreement, the January 2020 Rosen Note accrues interest at a fixed amount of $2,500 for the duration of the note.

 

During the year ended December 31, 2020 the Company repaid $150,000 in principal and $15,273 in interest.

 

The February Banner 2020 Loan Agreement

 

On February 15, 2020, the Company entered into a loan agreement (the “February 2020 Banner Loan Agreement”), whereby the Company issued a promissory note in the principal amount of $9,900 (the “February 2020 Note”) for expenses paid on behalf of the Company by an employee. Pursuant to the February 2020 Loan Agreement, the February 2020 Note bears interest at a rate of $495. As additional consideration for entering in the February 2020 Loan Agreement, the Company issued a five-year warrant to purchase 49 shares of the Company’s common stock at a purchase price of $18.00 per share.

 

During the year ended December 31, 2020 the Company repaid $9,900 in principal and $495 in interest.

 

The February 2020 Frommer Loan Agreement

 

On February 18, 2020, the Company entered into a loan agreement (the “February 2020 Frommer Loan Agreement”) with Jeremy Frommer, an officer of the Company, whereby the Company issued Frommer a promissory note in the principal amount of $2,989 (the “February 2020 Frommer Note”). As additional consideration for entering in the June 2018 Frommer Note Loan Agreement, the Company issued Frommer a five-year warrant to purchase 15 shares of the Company’s common stock at a purchase price of $18.00 per share. Pursuant to the February 2020 Frommer Loan Agreement, the note is payable on the maturity date of February 28, 2020 (the “February 2020 Frommer Maturity Date”).

 

During the year ended December 31, 2020 the Company repaid $2,989 in principal and $160 in interest.

 

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 year ended December 31, 2020, the Company repaid $15,000 in principal and $750 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 year ended December 31, 2020, the Company repaid $5,000 in principal and $250 in interest.

 

F-40

 

 

The September 2020 Goldberg Loan Agreement

 

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

 

Since the September 2020 Goldberg Note has a make-whole provision if the shares of the Company’s common stock issued to the lender in accordance with the Lender’s Exchange Agreement (see note 11) have a value equal to or less than $7,737,594 determined by using the lowest VWAP of the last 30 days prior to September 14, 2021. The principal amount of the September 2020 Goldberg Note shall increase by 200% of the difference the initial consideration and the September 14, 2021 value. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The make-whole feature of gave rise to a derivative liability of $2,557,275, of which $2,540,570 was recorded as a loss on extinguishment of debt and $16,705 as a debt discount. 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, 2020 the Company accrued interest of $347.

 

The September 2020 Rosen Loan Agreement

 

On September 15, 2020, the Company entered into a loan agreement (the “September 2020 Rosen Loan Agreement”) with Rosen whereby the Company issued a promissory note of $3,295 (the “September 2020 Rosen Note”). Pursuant to the September 2020 Rosen Loan Agreement, the September 2020 Rosen Note has an interest rate of 7%. The maturity date of the September 2020 Rosen Note is September 15, 2022 (the “September 2020 Rosen Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the note are due. The September 2020 Rosen Loan is secured by the tangible and intangible property of the Company.

 

Since the September 2020 Rosen Note has a make-whole provision if the shares of the Company’s common stock issued to the lender in accordance with the Lender’s Exchange Agreement (see note 11) have a value equal to or less than $554,924 determined by using the lowest VWAP of the last 30 days prior to September 14, 2021. The principal amount of the September 2020 Rosen Note shall increase by 200% of the difference the initial consideration and the September 14, 2021 value. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The make-whole feature of gave rise to a derivative liability of $504,413, of which $501,118 was recorded as a loss on extinguishment of debt and $3,295 as a debt discount. 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, 2020 the Company accrued interest of $67.

 

Demand loan

 

On June 13, 2019, Mark Standish, who was subsequently named Chairman of the Board, made non-interest bearing loans of $100,000 to the Company in the form of cash. The loan is due on demand and unsecured. During the year ended December 31, 2019 the Company repaid $25,000 of principal.

 

During the year ended December 31, 2020 the Company repaid $75,000 of principal.

 

On December 17, 2019, Standish made non-interest bearing loans of $150,000 to the Company in the form of cash. The loan is due on demand and unsecured.

 

During the year ended December 31, 2020 the Company repaid $150,000 of principal.

 

On March 27, 2020, a lender made non-interest bearing loans of $100,000 to the Company in the form of cash. The loan is due on demand and unsecured.

 

During the year ended December 31, 2020, the Company converted $100,000 of principal and $6,707 of unpaid interest into the September 2020 Equity Raise.

 

F-41

 

 

On April 9, 2020, a lender made non-interest bearing loans of $50,000 to the Company in the form of cash. The loan is due on demand and unsecured.

 

During the year ended December 31, 2020, the Company converted $50,000 of principal into the September 2020 Equity Raise.

 

On April 21, 2020, a lender made non-interest bearing loans of $100,000 to the Company in the form of cash. The loan is due on demand and unsecured.  

 

During the year ended December 31, 2020, the Company converted $100,000 of principal and $6,707 of unpaid interest into the September 2020 Equity Raise.

 

On July 6, 2020, a lender made non-interest bearing loans of $100,000 to the Company in the form of cash. The loan is due on demand and unsecured.  

 

During the year ended December 31, the Company converted $100,000 of principal and $6,707 of unpaid interest into the September 2020 Equity Raise.

 

On August 10, 2020, a lender made non-interest bearing loans of $40,000 to the Company in the form of cash. The loan is due on demand and unsecured.  

 

During the year ended December 31, 2020 the Company repaid $40,000 of principal.

 

On September 9, 2020, a lender made non-interest bearing loans of $50,000 to the Company in the form of cash. The loan is due on demand and unsecured.

 

During the year ended December 31, 2020 the Company repaid $50,000 of principal.

 

Officer compensation

 

During the year ended December 31, 2020 the Company paid $57,455 for living expenses for officers of the Company.

 

Note 10 – Derivative Liabilities

 

The Company has identified derivative instruments arising from a make-whole feature in the Company’s notes payable at December 31, 2020. For the terms of the make-whole features see the September 2020 Rosen Loan Agreement and the September 2020 Goldberg Loan Agreement in Note 9. The Company had no derivative assets measured at fair value on a recurring basis as of December 31, 2020.

 

The Company utilized a Geometric Brownian Motion (“GBM”) model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The inputs utilized in the application of the GBM model included a starting stock price, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate.

 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note adjusted to be on a continuous return basis to align with the GBM model.

 

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

 

Volatility: The Company calculates the expected volatility based on the company’s historical stock prices with a look back period commensurate with the period to maturity.

 

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

 

The following are the changes in the derivative liabilities during the year ended December 31, 2020.

 

    Year Ended
December 31, 2020
 
    Level 1     Level 2     Level 3  
Derivative liabilities as January 1, 2020   $             -     $             -     $ -  
Addition     -       -       3,061,688  
Conversion     -       -          
Extinguishment Expense                     -  
Changes in fair value     -       -       (3,019,457 )
Derivative liabilities as December 31, 2020   $ -     $ -     $ 42,231  

 

F-42

 

 

Note 11 – Stockholders’ Deficit

 

Shares Authorized

 

Prior to July 13, 2020, the Company was authorized to issue up to thirty-five million (35,000,000) shares of capital stock, of which fifteen million (15,000,000) shares are designated as common stock, par value $0.001 per share, and twenty million (20,000,000) are designated as “blank check” preferred stock, par value $0.001 per share. The designations, rights, and preferences of such preferred stock are to be determined by the Company’s board of directors.

 

On July 13, 2020, the Company filed the Second Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada, which authorize the issuance of 100,000,000 shares of common stock, and 20,000,000 shares of preferred stock.

 

Preferred Stock

 

Series E Convertible Preferred Stock

 

On December 29, 2020 the Company entered into securities purchase agreements with thirty-three accredited investors whereby the Investors have agreed to purchase from the Company an aggregate of 7,778 shares of the Company’s Series E Convertible Preferred Stock, par value $0.001 per share and 2,831,715 warrants to purchase shares of the Company’s common stock, par value $0.001 per share. The Series E Preferred Stock is convertible into a total of 1,887,810 shares of Common Stock. The combined purchase price of one Conversion Share and one and a half warrant was $4.12. The aggregate purchase price for the Series E Preferred Stock and warrants was $7,777,777.77. The Company has recorded $817,353 to stock issuance costs, which are part of Additional Paid-in Capital.

 

The warrants are exercisable for a term of five-years from the date of issuance, at an exercise price of $4.50 per share. The warrants provide for cashless exercise to the extent that there is no registration statement available for the underlying shares of Common Stock.

 

The placement agent for the transaction and received cash compensation equal to 10% of the aggregate purchase price and warrants to purchase 471,953 shares of the Company’s common stock, at an exercise price of $5.15 per share (the “PA Warrants”). The PA Warrants are exercisable for a term of five-years from the date of issuance.

 

Reverse Stock Split

 

On July 25, 2019, following board of directors approval, the Company filed a Certificate of Change to its Articles of Incorporation (the “Amendment”), with the Secretary of State of the State of Nevada to effectuate a one-for-twenty (1:20) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share, without any change to its par value. The Amendment became effective on July 30, 2019. The number of common stock authorized was proportionately reduced pursuant to Reverse Stock Split. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share.

 

On August 17, 2020, following board of directors approval, the Company filed a Certificate of Change to its Articles of Incorporation (the “Amendment”), with the Secretary of State of the State of Nevada to effectuate a one-for-twenty (1:3) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share, without any change to its par value. The Amendment became effective on August 17, 2020. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share.

 

All share and per share amounts for the common stock have been retroactively restated to give effect to the reverse split.

 

Common Stock

 

On January 4, 2019, the Company issued 100,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $240,000.

 

On January 3, 2019, the Company issued 25,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $70,050.

 

On January 30, 2020, the Company issued 50,000 shares of its restricted common stock to consultants in exchange for three months of services at a fair value of $585,000. These shares were recorded as common stock issued for prepaid services and will be expensed over the life of the consulting contract to share based payments. During the year ended December 31, 2020 the Company recorded $585,000 to share based payments.

 

On January 6, 2020, the Company issued 1,412 shares of its restricted common stock to settle outstanding vendor liabilities of $12,500. In connection with this transaction the Company also recorded a loss on settlement of vendor liabilities of $4,233.

 

F-43

 

 

On March 5, 2020, the Company issued 2,153 shares of its restricted common stock to settle outstanding vendor liabilities of $25,000. In connection with this transaction, the Company also recorded a gain on settlement of vendor liabilities of $1,098.

 

On March 13, 2020 the Company entered into an exchange agreement with a warrant holder. The company agreed to exchange 5,833 warrants for 5,000 shares of the company common stock. In connection with this agreement the company recorded a loss on conversion of warrants to stock of $5,772. 

 

On March 19, 2020, the Company issued 20,000 shares of its restricted common stock to settle outstanding vendor liabilities of $72,048. In connection with this transaction the Company also recorded a gain on settlement of vendor liabilities of $122,953.

 

On June 18, 2020, the Company issued 50,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $525,000.

 

On June 29, 2020 the Company entered into an exchange agreement with a warrant holder. The company agreed to exchange 5,833 warrants for 2,239 shares of the company common stock and $10,000.

 

On July 3, 2020, the Company issued 15,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $204,300.

 

On July 17, 2020 the Company issued 6,667 shares of its restricted common stock to the Second February 2020 Lender in connection with the Second July 2020 convertible Loan Agreement.

 

On August 15, 2020, the Company issued 6,167 shares of its restricted common stock to consultants in exchange for services at a fair value of $50,693.

 

On August 21, 2020, the Company issued 20,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $180,000.

 

On August 31, 2020, the Company issued 1,866 shares of its restricted common stock to consultants in exchange for services at a fair value of $15,842.

 

On September 11, 2020 the Second February 2020 Lender converted $125,000 of the ou