2.
GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As
of September 30, 2016, the Company had a cash balance of $420 and a working capital deficit (current liabilities exceeding current
assets) of $545,877. During the nine months ended September 30, 2016, the Company used net cash in operating activities of $116,507.
The Company has incurred net losses since inception. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern.
The
Company’s primary source of operating funds since inception has been cash proceeds from private placements of common stock
and warrants. The Company intends to raise additional capital through private issuances of debt and equity instruments, but there
can be no assurance that these funds will be available on terms acceptable to the Company, or will be sufficient to enable the
Company to fully execute on its business plan or sustain operations. If the Company is unable to raise sufficient additional funds,
it will have to develop and implement a plan to further extend payables, reduce overhead, or scale back its current business plan
until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be
successful.
chatAND,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016
(unaudited)
Accordingly,
the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization
of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented
in the financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated
financial statements do not include any adjustment that might result from the outcome of this uncertainty.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of
the Company’s stock, stock-based compensation, fair values relating to warrant and other derivative liabilities, the valuation
allowance related to deferred tax assets. Actual results may differ from these estimates.
Derivative
Instrument Liability
The
Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments
or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship
designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as
hedge relationships and the types of relationships designated are based on the exposures hedged. At September 30, 2016 and December
31, 2015, the Company did not have any derivative instruments that were designated as hedges.
At
September 30, 2016, the Company had outstanding convertible notes and warrants that contained embedded derivatives. These embedded
derivatives include certain conversion features and reset provisions. (See Note 5 and Note 6).
Net
Loss per Share
The
Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average
number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings
per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive
securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The
computation of basic and diluted loss per share for the three and nine months ended September 30, 2016 and 2015 excludes potentially
dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market
price of the common stock during the period.
chatAND,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016
(unaudited)
Potentially
dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
Convertible debt
|
|
|
6,855,000
|
|
|
|
-
|
|
Options to purchase common stock
|
|
|
5,370,000
|
|
|
|
5,370,000
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
4,807,309
|
|
Warrants to purchase
common stock
|
|
|
15,700,000
|
|
|
|
5,275,000
|
|
Totals
|
|
|
27,925,000
|
|
|
|
15,452,309
|
|
Recent
Accounting Pronouncements
There
are various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s financial position, results of
operations or cash flows.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the condensed consolidated financial statements except as disclosed in Note 10.
4.
INVESTMENTS
In
2014, we acquired substantially all the assets of Freeline Sports, Inc., an inactive California company in Chapter 7 bankruptcy
proceeds for cash payment of $250,000 and 5,000,000 shares of the our common stock, valued in aggregate of $1,350,000. The assets
acquired were primarily patents, copyrights and trademarks relating to sports equipment. Specifically, we acquired patents 7,059,613,
8,308,171 and Des567,318 for supporting a user’s foot with a personal transportation device.
Our
current plans and focus is the development of the assets acquired from Freeline Sports, Inc., we also may consider additional
or alternative opportunities, including a change in the primary focus of our efforts. For example, we could determine to acquire,
through a merger, share exchange, asset acquisition, plan of arrangement, recapitalization, reorganization or similar business
combination, one or more operating businesses, or control of such operating businesses through contractual arrangements, or additional
assets. We currently do not have any arrangement, agreement or understanding with respect to any such transaction and there can
be no assurance that we will evaluate or conclude one.
5.
NOTES PAYABLE
On
July 5, 2016, the Company issued a convertible note for $15,000 to a board member due one year from issuance with interest at
10% per annum due at maturity. The note is convertible into shares of the Company’s common stock, at any time, at a conversion
rate of $0.01 per share. The Note contains certain reset provisions should the Company issue or sell its common stock, options
or convertible securities less than the conversion price, then the existing conversion price in effect is reduced in the amount
to equal to new conversion price. In connection with the note, the Company issued 750,000 warrants to purchase the Company’s
common stock at $0.02 per share for fve years. The warrants also contain reset provisions as described above.
chatAND,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016
(unaudited)
On
August 10, 2016, the Company issued convertible notes in aggregate of $22,500 ( of which $7,500 to a board member) due one year
from issuance with interest at 10% per annum due at maturity. The note is convertible into shares of the Company’s common
stock, at any time, at a conversion rate of $0.10 per share. The Notes contain certain reset provisions should the Company issue
or sell its common stock, options or convertible securities less than the conversion price, then the existing conversion price
in effect is reduced in the amount to equal to new conversion price. In connection with the note, the Company issued 4,000,000
warrants to purchase the Company’s common stock at $0.10 per share for five years. The warrants also contain reset provisions
as described above.
The
Company has identified the embedded derivatives related to the above issued convertible notes and warrants. The accounting treatment
of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of
these notes and to fair value as of each subsequent reporting date which at September 30, 2016 was $61,809.
The
fair value of the embedded derivatives at issuance of the notes and warrants, determined using the Black Scholes Option Pricing
Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 116.59% to 118.83%, (3) weighted
average risk-free interest rate of 0.44% to 1.07%, (4) expected lives of 1.0 to 5.0 years, and (5) estimated fair value of the
Company’s common stock from $0.0435 per share.
The
initial fair value of the embedded derivatives of $208,922 was allocated as a debt discount up to the proceeds of the notes ($37,500)
with the remainder ($171,422) charged to current period operations as interest expense. For the three and nine months ended September
30, 2016, the Company amortized an aggregate of $35,470 and $92,182 of debt discounts to current period operations as interest
expense, respectively.
6.
DERIVATIVE LIABILITIES
Warrants
In
2016, in connection with the issuance of convertible notes payable (See Note 5) and in 2014, in connection with the sale of common
stock, the Company issued an aggregate of 4,750,000 and 5,000,000 common stock purchase warrants to purchase the Company’s
common stock with an exercise prices of $0.01 to $0.15 per share for five and three years with anti-dilutive (reset) provisions,
respectively.
The
Company has identified embedded derivatives related to the issued warrants. The accounting treatment of derivative financial instruments
requires that the Company record allocated fair value of the derivatives as of the inception date and to fair value as of each
subsequent reporting date.
At
September 30, 2016, the fair value of the reset provisions of $50,140 was determined using the Black-Scholes Option Pricing model
with the following assumptions: dividend yield: 0%; volatility: 130.13%; risk free rate: 0.45% to 1.14%; and expected life: 0.50
to 4.86 years. The Company recorded a gain on change in derivative liabilities of $134,634 during the three months ended September
30, 2016.
Debt
In
2016, the Company issued convertible notes with anti-dilutive (reset) provisions (See Note 5).
The
Company has identified embedded derivatives related to the issued notes. The accounting treatment of derivative financial instruments
requires that the Company record allocated fair value of the derivatives as of the inception date and to fair value as of each
subsequent reporting date.
chatAND,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016
(unaudited)
At
September 30, 2016, the fair value of the reset provisions of $12,516 was determined using the Black-Scholes Option Pricing model
with the following assumptions: dividend yield: 0%; volatility: 130.13%; risk free rate: 0.59%; and expected life: 0.76 to 0.86
years. The Company recorded a gain on change in derivative liabilities of $41,702 during the three months ended September 30,
2016.
7.
STOCKHOLDERS’ EQUITY
Preferred
stock
The
Company is authorized to issue up to 100,000,000 shares of preferred stock with a par value of $0.00001. At September 30, 2016
and December 31, 2015, no shares were issued and outstanding.
On
April 9, 2015, the Company filed a Form 8-K/A and Exhibit 10.1 Series A Convertible Preferred Stock Exchange Agreement. In this
filing the Company stated that it issued 4,807,309 shares of Series A Preferred Stock (the “Shares”) to 224 Stanhope
Note LLC (“Stanhope”) in exchange for 4,807,309 shares of common stock of the Company. However the Shares in fact
have not yet been issued pursuant to that certain Series A Convertible Preferred Stock Exchange Agreement (the “Agreement”),
dated April 2, 2015, between the Company and Stanhope because the Common Stock certificate has not yet been returned and therefore
the terms of the Agreement have not yet been met.
Common
stock
The
Company is authorized to issue up to 500,000,000 shares of common stock with a par value of $0.00001. At September 30, 2016 and
2015 there were 41,386,875 and 39,936,875 shares issued and outstanding, respectively.
8.
RELATED PARTY TRANSACTIONS
At
December 31, 2015 advances from shareholders and employees were granted 411,070 shares of common stock. These shares had an aggregate
grant fair date value of $77,367. This was in conjunction with the release and settlement agreements for Daniel and Michael Lebor.
Pursuant to Unanimous Board Written Consent dated 12/29/15, it was determined that Msssrs. Daniel and Michael Lebor were never
issued Options for their 2012 and 2013 Cash Advanced to the Company. During the 12/29/15 Board meeting it was determined stock
be issued with a $0.15 per share price.
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Michael Lebor, Chief Executive
Officer
|
|
$
|
-
|
|
|
$
|
20,094
|
|
Former employees
|
|
|
-
|
|
|
|
57,273
|
|
|
|
$
|
-
|
|
|
$
|
77,367
|
|
Employment
agreements
As
of September 30, 2016, the Company does not have any employee accounts.
chatAND,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016
(unaudited)
9.
FAIR VALUE MEASUREMENT
The
Company adopted the provisions of Accounting Standards Codification subtopic 825-10,
Financial Instruments
(“ASC
825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the
fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the
principal or most advantageous market in which it would transact and considers assumptions that market participants would use
when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or
liabilities.
All
items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon
adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial
statements.
The
carrying value of the Company’s cash, accounts payable, short-term borrowings and other current assets and liabilities approximate
fair value because of their short-term maturity.
As
of September 30, 2016 and December 31, 2015, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The
Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in Note 5. While
the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in
a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values
using the methods discussed in Note 5 are that of volatility and market price of the underlying common stock of the Company.
As
of September 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges.
chatAND,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016
(unaudited)
The
derivative liability as of September 30, 2016, in the amount of $62,656 has a level 3 classification.
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative Liability
|
|
|
-
|
|
|
|
-
|
|
|
$
|
62,656
|
|
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of September
30, 2016 and for the nine months ended September 30, 2016:
|
|
Derivative
|
|
|
|
Liabilities
|
|
Balance, December 31, 2015
|
|
$
|
14,390
|
|
Transfers in (out):
|
|
|
|
|
Initial fair value of issued convertible
debt and warrant reset provisions
|
|
|
208,922
|
|
Total (gains) losses
|
|
|
-
|
|
Mark-to-market
|
|
|
(160,656
|
)
|
Balance, September 30, 2016
|
|
$
|
62,656
|
|
Net Gain for
the period included in earnings relating to the liabilities held at September 30, 2016
|
|
|
160,656
|
|
10.
SUBSEQUENT EVENTS
ITEM
2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
financial statements and the related notes appearing elsewhere in this Form 10-Q. This discussion and analysis may contain forward-looking
statements based on assumptions about our future business. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including, but not limited to, those set forth elsewhere in this
Form 10-Q.
Management’s
Analysis of Business
The
discussion and analysis of our financial condition and results of operations are based upon our financial statements, which are
prepared in conformity with accounting principles generally accepted in the United States of America. As such, we are required
to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available.
We base these estimates on our historical experience, future expectations and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for our judgments that may not be readily apparent from
other sources. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting
periods. These estimates and assumptions relate to estimates of the carrying amount of intangibles, stock based-compensation,
valuation allowances for deferred income taxes, accruals and other factors. We evaluate these estimates on an ongoing basis. Actual
results could differ from those estimates under different assumptions or conditions, and any differences could be material.
We
have not generated any revenues to date and had cash balances of $420 and $101,247 at September 30, 2016 and December 31, 2015,
respectively.
ChatAND
headquarters are at 244 5
th
Avenue, Suite C68, New York, NY 10001. Our telephone number is 917-818-2280.
Chat&
is a an up and coming sport action company that expects to fully develop and place into service its investment asset with the
relaunch of the Freeline Sports trademark and patented in-line skating technology.
The
Company is considered a pre-development company because it has not generated any revenue, has limited resources and has not established
operations to generate sufficient capital to complete its business plan.
Recent
Business Developments
In
2014, we acquired substantially all the assets of Freeline Sports, Inc., an inactive California company in Chapter 7 bankruptcy
proceeds for cash payment of $250,000 and 5,000,000 shares of the our common stock, valued in aggregate of $1,350,000. The assets
acquired were primarily patents, copyrights and trademarks relating to sports equipment. Specifically, we acquired patents 7,059,613,
8,308,171 and Des567,318 for supporting a user’s foot with a personal transportation device.
Our
current plans and focus is the development of the assets acquired from Freeline Sports, Inc., we also may consider additional
or alternative opportunities, including a change in the primary focus of our efforts. For example, we could determine to acquire,
through a merger, share exchange, asset acquisition, plan of arrangement, recapitalization, reorganization or similar business
combination, one or more operating businesses, or control of such operating businesses through contractual arrangements, or additional
assets. We currently do not have any arrangement, agreement or understanding with respect to any such transaction and there can
be no assurance that we will evaluate or conclude one.
Results
of Operations
Three
months ended September 30, 2016 compared to three months ended September 30, 2015
Following
is a summary of expenses for the three months ended September 30, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
General and administrative
expense
|
|
$
|
28,900
|
|
|
$
|
15,527
|
|
General
and administrative expenses are summarized as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
21,297
|
|
|
$
|
6,091
|
|
Consultant
|
|
|
12,000
|
|
|
|
9,100
|
|
Other
|
|
|
(4,397
|
)
|
|
|
336
|
|
|
|
$
|
28,900
|
|
|
$
|
15,527
|
|
General
and administrative expense increased by $13,373 for the three months ended September 30, 2016, as compared to the three months
ended September 30, 2015. This increase is primarily due to legal and consulting fees.
These
costs are expected to increase in the future if additional funding becomes available and additional employees are hired. The Company
has had reduced funding since July 2012, resulting in payroll not being paid since July 2012 and a reduction in other costs until
funding becomes available.
Other
income (expense) consists of the following for the three months ended September 30, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
Interest expense
|
|
|
(210,791
|
)
|
|
|
(5,820
|
)
|
Gain (loss) on change in fair value
of derivative liability
|
|
|
176,336
|
|
|
|
97,583
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
(34,455
|
)
|
|
$
|
94,764
|
|
Interest
expense for the three months ended September 30, 2016 is primarily from amortization of debt discounts and non-cash interest incurred
relating to our issued convertible notes payable. The debt discounts amortization and non-cash interest incurred during the three
months ended September 30, 2016 and 2015 was $205,892 and $-0-, respectively.
Derivative
liability expense was calculated using the Black Scholes valuation method as described in Note 6 to the financial statements.
Nine
months ended September 30, 2016 compared to nine months ended September 30, 2015
Following
is a summary of expenses for the nine months ended September 30, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
General and administrative
expense
|
|
$
|
123,795
|
|
|
$
|
130,480
|
|
General
and administrative expenses are summarized as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
62,379
|
|
|
$
|
113,592
|
|
Consultant
|
|
|
57,375
|
|
|
|
18,800
|
|
Other
|
|
|
4,041
|
|
|
|
(1,912
|
)
|
|
|
$
|
123,795
|
|
|
$
|
130,480
|
|
General
and administrative expense decreased by $6,685 for the nine months ended September 30, 2016, as compared to the nine months ended
September 30, 2015. This decrease is primarily due to professional fees, net with increase in consulting fees.
These
costs are expected to increase in the future if additional funding becomes available and additional employees are hired. The Company
has had reduced funding since July 2012, resulting in payroll not being paid since July 2012 and a reduction in other costs until
funding becomes available.
Other
income (expense) consists of the following for the nine months ended September 30, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
Interest expense
|
|
|
(271,043
|
)
|
|
|
(7,988
|
)
|
Gain (loss) on change in fair value
of derivative liability
|
|
|
160,656
|
|
|
|
227,267
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
(110,387
|
)
|
|
$
|
219,279
|
|
Interest
expense for the nine months ended September 30, 2016 is primarily from amortization of debt discounts and non-cash interest incurred
relating to our issued convertible notes payable. The debt discounts amortization and non-cash interest incurred during the three
months ended September 30, 2016 and 2015 was $263,604 and $-0-, respectively.
Derivative
liability expense was calculated using the Black Scholes valuation method as described in Note 6 to the financial statements.
Liquidity
and Capital Resources and Going Concern
At
September 30, 2016 and December 31, 2015, the Company had current assets of $420 and $101,427; current liabilities of $546,297
and $442,122; and a working capital deficit of $545,877 and $340,695, respectively.
We
have not generated any revenues to date and have suspended active development activities. The Company has not had any cash available
other than nominal loans from shareholders and has discontinued accruing payroll. The Company’s continuing existence depends
upon its ability to find alternative sources of financing.
At
September 30, 2016 and December 31, 2015, we had no liquidity. The Company will require additional financing before it can implement
its business plan.
We
presently do not have any available credit, bank financing or other external sources of liquidity. Due to our historical operating
losses, our operations have not been a source of liquidity. We may seek additional capital in order to develop operations and
become profitable. In order to obtain capital, we may need to sell additional shares of common or preferred stock or borrow funds
from private lenders pursuant to instruments, which are junior to our outstanding secured debt instruments. There can be no assurance
that we will be successful in obtaining additional funding.
If
the above events do not occur or the Company is unable to implement its business plan, substantial doubt about the Company’s
ability to continue as a going concern exists.