See the accompanying notes to the condensed
consolidated financial statements
* Denotes a loss of less than $(0.01) per share.
See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the condensed
consolidated financial statements
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
Note 1. Nature of Business
Throughout this report, the terms “our,”
“we,” “us,” and the “Company” refer to LifeApps Brands Inc., including its subsidiaries.
The accompanying unaudited condensed consolidated financial statements of LifeApps Digital Media Inc. at September 30, 2016
and 2015 have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial
statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes thereto included in our annual report on Form
10-K for the year ended December 31, 2015. In management's opinion, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation to make our financial statements not misleading have been included. The results of
operations for the periods ended September 30, 2016 and 2015 presented are not necessarily indicative of the results to be expected
for the full year. The December 31, 2015 balance sheet has been derived from our audited financial statements included in our
annual report on Form 10-K for the year ended December 31, 2015.
We are building health, fitness and
sports communities across multiple digital platforms including mobile apps, digital sports and fitness publications, sports and
fitness products, sporting events, gateway platforms, online websites and social media.
Note 2. Summary of Significant Accounting
Policies
The accompanying financial statements
have been prepared in conformity with generally accepted accounting principles (“GAAP”), which contemplates our continuation
as a going concern. We have incurred losses to date of $2,701,003. To date we have funded our operations through advances from
a related party, issuance of convertible debt, and the sale of our common stock. We intend to raise additional funding through
third party equity or debt financing. There is no certainty that funding will be available as needed. These factors raise substantial
doubt about our ability to continue operating as a going concern. Our ability to continue our operations as a going concern, realize
the carrying value of our assets, and discharge our liabilities in the normal course of business is dependent upon our ability
to raise capital sufficient to fund our commitments and ongoing losses, and ultimately generate profitable operations.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and our wholly owned subsidiaries, LifeApps Inc. and Sports One Group Inc. All
material inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
Financial Instruments
The estimated fair values for financial
instruments were determined at discrete points in time based on relevant market information. These estimates involved uncertainties
and could not be determined with precision. The carrying amounts of accounts receivable, accounts payable and accrued liabilities
approximated fair value because of the short-term maturities of these instruments. The fair value of notes payable approximated
to their carrying value as generally their interest rates reflected our effective annual borrowing rate.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
Intangibles
Intangibles, which include websites
and databases acquired, internet domain name costs, and customer lists, are being amortized over the expected useful lives which
we estimate to be three to five years. In accordance with Financial Accounting Standards Board (“FASB”), Accounting
Standards Codification (“ASC”) Topic 350
Intangibles – Goodwill and Other
(“ASC 350”), the
costs to obtain and register internet domain names were capitalized.
Fixed Assets
Fixed assets consists of furniture
and equipment and are stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated
on a straight line basis over the estimated useful lives of the assets. The estimated useful lives used for financial statement
purposes is 3 years.
Derivative Financial Instruments:
We do not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments to determine if
such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued
at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial
instruments, we used a Black Scholes valuation model to value the derivative instruments at inception and on subsequent valuation
dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as
equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months
of the balance sheet date.
Revenue Recognition
Revenue is derived primarily from the
sale of sports and fitness apparel and equipment, and software applications designed for use on mobile devices such as smart phones
and tablets. Revenue is recognized only when persuasive evidence of an arrangement exists, the fee is fixed or determinable, the
product or service has been delivered, and collectability is probable.
We sell our software directly via Internet
download through third party agents. We recognize revenue when payment is received from the agent. Payment is received net of
commission paid to the agent, usually 70% to us and 30% to the agent. We record the net amount received as revenue.
We also publish and sell digital magazines
through the internet. Magazines can be purchased as individual volumes or as a subscription. To date we have not had any subscription
sales.
Cost of Revenue
Cost of revenue includes the cost of
amounts paid for articles, photography, editorial and production cost of the magazine and ongoing web hosting costs. Cost of revenue
related to product sales includes the direct cost of those products sold.
Research and development, Website
Development Costs, and Software Development Costs
All research and development costs
are expensed as incurred. Software development costs eligible for capitalization under ASC 350-50,
Website Development Cost
,
and ASC 985-20,
Software-Costs of Software to be Sold, Leased or Marketed
, were not material to our financial statements
for the periods ended September 30, 2016 and 2015. Research and development expenses amounted to $0 and $0 for three months ended
September 30, 2016 and 2015, respectively and $200 and $7,797 for nine months ended September 30, 2016 and 2015, respectively.
Research and development expenses were included in general and administrative expenses.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
Advertising Costs
We recognize advertising expense when
incurred. Advertising expense was $130 and $185 for the three months ended September 30, 2016 and 2015, respectively and $130
and $3,036 for nine months ended September 30, 2016 and 2015, respectively.
Rent Expense
We recognize rent expense on a straight-line
basis over the reasonably assured lease term as defined in ASC Topic 840,
Leases
(“ASC 840”). Our lease is
short term and will be renewed on a month to month basis. Rent expense was $2,110 and $1,252 for the for three months ended September
30, 2016 and 2015, respectively and $5,685 and $4,606 for the for nine months ended September 30, 2016 and 2015, respectively.
Equity-Based Compensation
Stock-based compensation is presented
in accordance with the guidance of ASC Topic 718,
Compensation – Stock Compensation
(“ASC 718”). Under
the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards on the date of grant
using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over the requisite service periods in our consolidated statements of operations.
Income Taxes
The provision for income taxes is
determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes
(“ASC 740”). Under
this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive
model for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions
taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the for three and nine months ended
September 30, 2016 and 2015 we did not have any interest, penalties or any significant unrecognized uncertain tax positions.
Earnings per share
We calculate earnings per share in
accordance with ASC Topic 260
Earnings Per Share
, which requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Diluted
earnings per share represent basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock
options and warrants. The diluted earnings per share were not calculated because we recorded net losses for the for three months
and nine months ended September 30, 2016 and 2015, and the outstanding stock options and warrants are anti-dilutive.
Recent Pronouncements
From time to time, new accounting pronouncements
are issued that we adopt as of the specified effective date. We believe that the recently issued standards that are not yet effective
may not have an impact on our results of operations and financial position.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
Note 3. Fixed Assets
At September 30, 2016 and December
31, 2015, fixed assets consisted of the following:
|
|
2016
|
|
|
2015
|
|
Furniture and Equipment
|
|
$
|
7,670
|
|
|
$
|
7,670
|
|
Less accumulated depreciation
|
|
|
(7,670
|
)
|
|
|
(7,021
|
)
|
|
|
$
|
-
|
|
|
$
|
649
|
|
The amount charged to depreciation
expense furniture and equipment was $0 and $639 for of the three months ended September 30, 2016 and 2015, respectively and was
$649 and $1,919 for of the nine months ended September 30, 2016 and 2015, respectively.
Note 4. Intangible Assets
At September 30 2016 and December 31,
2015, intangible assets consist of the following:
|
|
2016
|
|
|
2015
|
|
Internet domain names
|
|
$
|
58,641
|
|
|
$
|
58,641
|
|
Less accumulated amortization
|
|
|
(58,641
|
)
|
|
|
(55,062
|
)
|
|
|
$
|
-
|
|
|
$
|
3,580
|
|
|
|
|
|
|
|
|
|
|
Website and data bases
|
|
$
|
56,050
|
|
|
$
|
56,050
|
|
Less accumulated amortization
|
|
|
(56,050
|
)
|
|
|
(51,380
|
)
|
|
|
$
|
-
|
|
|
$
|
4,760
|
|
|
|
|
|
|
|
|
|
|
Customer and supplier lists
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
Less accumulated amortization
|
|
|
(3,150
|
)
|
|
|
(2,475
|
)
|
|
|
$
|
1,350
|
|
|
$
|
2,025
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
$
|
119,191
|
|
|
$
|
119,191
|
|
|
|
|
(117,841
|
)
|
|
|
(108,917
|
)
|
|
|
$
|
1,350
|
|
|
$
|
10,274
|
|
The amount charged to amortization
expense for all intangibles was $225 and $9,027 for the three months ended September 30, 2016 and 2015, respectively and was $8,925
and $27,082 for the nine months ended September 30, 2016 and 2015, respectively.
Estimated future amortization expense
related to the intangibles as of September 30, 2016 is as follows:
Year Ended December 31,
|
|
|
|
2016
|
|
|
225
|
|
2017
|
|
|
900
|
|
2018
|
|
|
225
|
|
|
|
$
|
1,350
|
|
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
Note 5. Amounts Due Related Parties
Parties, which can be a corporation
or an individual, are considered to be related if we have the ability, directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and operating decisions. Companies are also considered to be related
if they are subject to common control or common significant influence.
Amount
due to related parties represent cash advances, salary accruals and amounts paid on our behalf by officers and shareholders of
the Company. These advances are non-interest bearing, short term in nature and due on demand. The balance at September 30, 2016
and December 31, 2015, was $494,539 and $329,554, respectively. Salary accruals for each period amounted to $112,500
and
net cash advances amounted to $52,485 and $72,750, respectively for the nine months ended September 30, 2016 and 2015.
On March 25, 2015, we entered into
a debt conversion agreement with our CEO and principal stockholder. The agreement provided the CEO with the right to convert $31,250
owed to him for working capital loans made to the Company for 1,666,667 restricted shares of our common stock. The conversion
price was based on the following formula - equal to the lesser of $1.02 or 60% of the lowest trade price ($0.0025) in the 25 trading
days previous to the conversion. (In the event that Conversion Shares are not deliverable by DWAC, an additional 10% discount
shall apply; if the shares are ineligible for deposit into the DTC system and only eligible for Xclearing deposit, an additional
5% discount shall apply; and in the case of both, an additional cumulative 15% discount shall apply.) The conversion price as
calculated was $0.01875 per share (post-split basis). We recognized a loss on conversion of $47,500, the difference between the
conversion price and the closing trading price on the date of the conversion.
Note 6. Convertible Notes Payable
During 2014, we executed a Promissory
Note (the “Note”) and received three draws totaling $135,000. The Note is due March 17, 2016 and provides for an original
issue discount of $15,185, which was to be amortized over 24 months, and face interest rate of 12% per annum. The Lender had the
right, at any time at its election to convert all or part of the outstanding and unpaid principal and accrued interest into shares
of our common stock. The conversion price is the lesser of $0.0485 or 60% of the lowest trading price in the 25 trading days prior
the conversion. The Note provides for additional penalties if we cannot deliver the underlying common stock on a timely basis.
The Note also provides that the principal amount may be increased, with the consent of the lender to $445,000.
We evaluated the terms of the conversion
features of the convertible debenture in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's
Own Stock and determined it is indexed to the Company's common stock and that the conversion features meet the definition of a
liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
We valued the conversion feature at
origination of all draws at $230,408 using the Black Scholes valuation model with the following assumptions: dividend yield of
zero, 1.25 to 2 years to maturity, risk free interest rate of 0.38% to 0.58% and annualized volatility of 97.34% to 146%. $135,000
of the value assigned to the derivative liability was recognized as a debt discount on the convertible debenture. The debt discount
was recorded as reduction (contra-liability) to the convertible debenture and is being amortized over the life of the convertible
debenture. The balance of $95,408 of the value assigned to the derivative liability was recognized as origination interest on
the derivative liability and expensed on origination.
LifeApps Brands
Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
We valued the derivative liability
and the end of each accounting period the difference in value is recognized as gain or loss. At September 30, 2015 we determined
the valuation using the Black-Sholes valuation model with the following assumptions: dividend yield of zero, 0.96 years to maturity,
risk free interest rate of 0.56% and annualized volatility of 167%. We recognized $189,660 of expense for the change in value
of the derivative for the nine months ended September 30, 2015.
During the nine months ended September
30, 2015, the lender converted $96,054 of the principal of the Note into 6,508,500 shares of our $0.001 common stock. The loans
were fully converted to common stock during August of 2015.
Note 7. Stockholders’ Equity
During the nine months ended September
30, 2015 we issued 13,816,186 shares of common stock as a result of conversion of debt. As more fully described in Notes 5 and
6 above, of the shares issued, 6,508,500 were to an unrelated note holder and 7,307,686 were to officers and/or directors of the
Company.
During the nine months ended September
30, 2016 we issued 597,545 shares of common stock in settlement of $8,058 in previously accrued legal services.
Note 8. Stock Based Compensation
In prior periods, our Board of Directors
adopted the 2012 Equity Incentive Plan (“2012 Plan”), which was approved by our shareholders. The 2012 Plan provided
for the issuance of up to 666,667 shares of our common stock. During October 2015 the Board of Directors amended the plan to increase
the number of shares issuable under the LifeApps Digital Media Inc. 2012 Equity Incentive Plan to 20,000,000, on a post-Reverse
Stock Split basis. The plan provides for the award of options, stock appreciation rights, performance share awards, and restricted
stock and stock units. The plan is administered by the Board of Directors. Pursuant to the 2012 Plan our Board of Directors granted
options to purchase 418,333 shares of our common stock in periods prior to December 31, 2015. All of those options have been cancelled
or lapsed as of September 30, 2016. On May 24, 2016 our Board of Directors granted options to purchase 15,000,000 shares of our
common stock to officers and or directors and a consultant. The options are exercisable quarterly from the grant date over a four-year
term.
The fair value of the options granted,
$39,000, was estimated at the date of grant using the Black-Scholes option pricing model, with the following assumptions:
Expected life (in years)
|
|
|
4
|
|
Volatility
|
|
|
383
|
%
|
Risk Free interest rate
|
|
|
0.68
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
Stock based compensation expense for
the three month and nine month periods ended September 30, 2016 amounted to $2,437. There was no stock based compensation expense
recorded for the period ended September 30, 2015 as the prior year options were fully vested during 2014.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
The following is a summary of stock
option issued to employees and directors:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
240,000
|
|
|
$
|
0.57
|
|
|
|
.43
|
|
|
|
-
|
|
Granted
|
|
|
10,000,000
|
|
|
$
|
.0026
|
|
|
|
3.65
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
240,000
|
|
|
$
|
.057
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2016
|
|
|
10,000,000
|
|
|
$
|
.0026
|
|
|
|
3.65
|
|
|
|
-
|
|
Exercisable September 30, 2016
|
|
|
625,000
|
|
|
$
|
.0026
|
|
|
|
3.65
|
|
|
|
-
|
|
There will be approximately $23,400
of additional compensation expense recognized in future periods.
The following is a summary of stock
options issued to non-employees, excluding Directors:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value at
date of
grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
375,000
|
|
|
$
|
0.87
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
5,000,000
|
|
|
$
|
.0026
|
|
|
|
3.65
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
375,000
|
|
|
$
|
.87
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2016
|
|
|
5,000,000
|
|
|
$
|
0.0026
|
|
|
|
3.65
|
|
|
$
|
-
|
|
Exercisable September 30, 2016
|
|
|
312,500
|
|
|
$
|
-
|
|
|
|
3.65
|
|
|
$
|
-
|
|
There will be approximately $12,200
of additional compensation expense recognized in future periods.
Note 9. Outstanding Warrants
There were no warrants issued during
the periods ended September 30, 2016 or 2015. The following is a summary of outstanding warrants as of September 30, 2016:
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
|
|
Number
of
warrants
|
|
|
Exercise
price per
share
|
|
|
Average
remaining
term in
years
|
|
|
Aggregate
intrinsic
value at
date of
grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with private placement of units
in 2012
|
|
|
400,000
|
|
|
$
|
15.00
|
|
|
|
1.25
|
|
|
$
|
-
|
|
The warrants expire on June 20, 2017.
Note 10. Income Taxes
Income tax provision (benefit) for
the periods ended September 30, 2016 or 2015, is summarized below:
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(22,400
|
)
|
|
|
(63,800
|
))
|
State
|
|
|
(3,600
|
)
|
|
|
(10,300
|
))
|
Total deferred
|
|
|
(26,000
|
)
|
|
|
(74,100
|
))
|
Increase in valuation allowance
|
|
|
26,000
|
|
|
|
74,100
|
|
Total provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The provision for income taxes differs
from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources
and tax effects of the differences as of September 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Income tax provision at the federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
Increase in valuation allowance
|
|
|
(39.5
|
)%
|
|
|
(39.5
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Components of the net deferred income
tax assets at September 30, 2016 December 31, 2015 were as follows:
|
|
2016
|
|
|
2015
|
|
Net operating loss carryovers
|
|
$
|
519,000
|
|
|
$
|
501,100
|
|
Valuation allowance
|
|
|
(519,000
|
)
|
|
|
(501,100
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
September 30, 2016 and 2015
(Unaudited)
In accordance with ASC 740, at December
31, 2015 we determined that a valuation allowance should be recognized against deferred tax assets because, based on the weight
of available evidence, it is more likely than not (i.e., greater than 50% probability) that some portion or all of the deferred
tax asset will not be realized in the future. We recognized a reserve of 100% of the amounts of the deferred tax benefit in the
amount of $663,700.
As of September 30, 2016 we had cumulative
net operating loss carry forwards of $1,314,000 which expire from 2032 through 2036.
There are open statutes of limitations
for taxing authorities in federal and state jurisdictions to audit our tax returns from 2010 through the current period. Our policy
is to account for income tax related interest and penalties in income tax expense in the consolidated statement of operations.
There have been no income tax related interest or penalties assessed or recorded.
Note 11. Business Segments
We currently have two business segments;
(i) the sale of physical products (“Products”) and (ii) digital publishing (“Publishing”). The accounting
policies of the segments are the same as those described in the summary of significant accounting policies.
The publishing segment does not meet
the quantitative threshold for disclosure as outlined ASC Topic 280
Segment Reporting.
All of our revenue is generated in
the United States and accordingly no geographic segment reporting is included.
No customers accounted for more than
10% of our revenues in the periods September 30, 2016 and 2015.
Note 12. Subsequent Events
Management has evaluated all activity
and concluded that no subsequent events have occurred that would require recognition in these financial statements or disclosure
in the notes to these financial statements.