If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:
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If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box, and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box, and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box, and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
RISK FACTORS
Investing in our offered securities involves a high degree of risk. You should carefully consider the following risks and all of the other information contained in this prospectus, including our consolidated financial statements and related notes, before investing in our securities. While we believe that the risks and uncertainties described below are the material risks currently facing us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect our business. If any of the following risks materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock and warrants could decline, and you may lose some or all of your investment.
Risks Related to our Business
We have a history of losses.
We incurred net losses of $2,667,051 and $1,673,094, respectively, for 2016 and 2015. At December 31, 2016 we had an accumulated deficit of $8,824,806. While our revenues increased 14% for 2016 from 2015, our selling, general and administrative expenses, or
“SG&A
”, increased 40% in 2016 from 2015. Included in this increase are non-cash expenses of amortization expense attributable to websites acquired and impairment losses associated with previously acquired websites of an aggregate of $347,907 for 2016 as compared to $252,436 for 2015.
We anticipate that our operating expenses will continue to increase and we may continue to incur losses in future periods until such time, if ever, as we are successful in significantly increasing our revenues and cash flow. There are no assurances that we will be able to significantly increase our revenues and cash flow to a level, which supports profitable operations and provides sufficient funds to pay our obligations.
Our auditors have raised substantial doubts as to our ability to continue as a going concern
.
Our consolidated financial statements have been prepared assuming we will continue as a going concern. We have experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of
$8,824,806
at
December 31,
2016. We have been and expect to continue funding our business until, if ever, we generate sufficient cash flow to internally fund our business, with and through sales of our securities. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We anticipate that our operating expenses will continue to increase and we will continue to incur substantial losses in future periods until we are successful in significantly increasing our revenues and cash flow. There are no assurances that we will be able to increase our revenues and cash flow to a level, which supports profitable operations and provides sufficient funds to pay our obligations. If we are unable to meet those obligations, we could be forced to cease operations in which event investors would lose their entire investment in our company.
There are no assurances we will successfully integrate the Black Helmet or Daily Engage Media businesses into our business which would adversely affect the combined company’s future results.
In December 2016 we closed our acquisition of the assets of the Black Helmet Apparel business and in March 2017 entered into an agreement to purchase Daily Engage Media. We intend to utilize a portion of the proceeds of this offering for this pending transaction. The success of these acquisitions will depend, in large part, on the ability of the combined company to realize anticipated benefits from combining the businesses of the companies. Our management has limited experience with integrating acquired companies' business and operations. The failure to successfully integrate and to successfully manage the challenges presented by the integration process may result in the failure to achieve some or all of the anticipated benefits of the transactions, which may have a material adverse effect on our operations and financial condition. Potential difficulties that may be encountered in the integration process include the following:
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the ability of the acquired companies to continue to report revenues at historic levels;
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possible loss by one or both of the acquired companies of material customers post-closing;
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using the combined company’s cash and other assets efficiently to develop the business of the combined company;
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potential unknown or currently unquantifiable liabilities associated with the acquisitions and the operations of the combined company;
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potential unknown and unforeseen expenses and delays associated with the acquisitions;
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performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by integrating the companies’ operations;
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necessary changes in the operations and culture of the acquired companies post-closing in order to accommodate the changes from privately-held companies to subsidiaries of a public company;
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significant increases in our operating expenses; and
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additional business, financial and operating risks we have yet to identify.
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There are no assurances that the acquisitions will ultimately result in the realization of the anticipated benefits. If we are unable to realize the perceived benefits from these acquisitions, we may be required to impair some or all of the goodwill associated with these acquisitions which would materially adversely impact our results of operations in future periods.
We could become subject to seasonal fluctuations in our revenues in future periods attributable to the sale of Black Helmet products and advertising sales by Daily Engage.
Historically, Black Helmet reported 40% of its annual revenues in the fourth quarter, principally between mid-November and the end of December. In addition, typically advertising technology companies such as Daily Engage report a material portion of their revenues during the fourth calendar quarter as a result of holiday related ad spend. It is anticipated that this seasonality will continue. Because of seasonal fluctuations, there can be no assurance that the results of any particular quarter will be indicative of results for the full year or for future years.
There are no assurances our transition to an advertising and subscription revenue based model will be successful
.
During the fourth quarter of 2015, we began to transition our company to a digital media company that will generate most of its revenue from the sales of advertising on its websites thereby reducing our dependence on product sales revenues. During
2017
we also plan to expand our current subscription offering to include subscriptions to certain of our additional websites. While we believe that this natural evolution of our model will permit us to concentrate our efforts on growing our highest profit opportunities through the leverage of our website portfolios and growing internet audience, there are no assurances we will be successful in these efforts. In addition to increasing our dependence on our relationship with Google until such time as we are able to launch the Bright Mountain Ad Network, we will become subject to significant competition from a variety of companies on a global scale with few barriers to entry in our market and many of these competitors have better name recognition and are better capitalized than our company. As a result, we may not be able to keep pace with our competitors’ marketing campaigns, pricing policies, and technological advances. We will also be required to adapt to rapidly changing technologies and industry standards and continually improve the speed, performance, features, ease of use and reliability of our websites. This includes making our products and services compatible and maintaining compatibility with multiple operating systems, desktop and mobile devices, and evolving network infrastructure. If we are unable to effectively adapt to competitive factors and compete effectively in the marketplace, it would have a material adverse effect on our business, results of operations, financial condition and the price of our common stock.
We do not know how long it will take us to establish the Bright Mountain Media Ad
Network or what the ultimate cost will be.
A key component of our strategy is the establishment of the Bright Mountain Media Ad Network, a programmatic advertising network which will both sell digital advertisements on our company owned websites as well as providing third party websites with modest traffic a means by which they may be able to sell their digital advertising inventory at higher
rates
based upon the highly targeted nature of our demographics. We have allocated a portion of the proceeds from this offering to
close this pending transaction with Daily Engage Media and to
fund the establishment of the network. However, as we are unable to predict when the Bright Mountain Media Ad
Network will be established or what the ultimate costs to us will be, we may be required to use substantially more funds than allocated which may reduce the amounts we spend in other identified areas.
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If we fail to detect advertising fraud or other actions that impact our advertising campaign performance, we could harm our reputation with advertisers or agencies, which would cause our revenue and business to suffer.
Once established, the Bright Mountain Media Ad
Network will rely on our ability to deliver successful and effective advertising campaigns. Some of those campaigns may experience fraudulent and other invalid impressions, clicks or conversions that advertisers may perceive as undesirable, such as non-human traffic generated by machines that are designed to simulate human users and artificially inflate user traffic on websites. These activities could overstate the performance of any given advertising campaign and could harm our reputation. It may be difficult for us to detect fraudulent or malicious activity on websites where we do not own content and rely in part on our customers to control such activity. If we fail to detect or prevent fraudulent or other malicious activity, the affected advertisers may experience or perceive a reduced return on their investment and our reputation may be harmed. High levels of fraudulent or malicious activity could lead to dissatisfaction with our solutions, refusals to pay, refund or future credit demands or withdrawal of future business.
We are dependent upon our relationships with Amazon, eBay and PayPal and one or more of these relationships can be terminated at will.
Product sales represented
78%
of our total revenues for 2016 and 83%, of our total revenues in the 2015. We sell our products through various distribution portals, which include Amazon and eBay, and through direct sales. During 2016, Amazon accounted for
65%,
eBay accounted for
10%
and direct sales accounted for
25%
of our total revenue from product sales. During 2015, Amazon accounted for 88%, eBay accounted for 6%, and direct sales accounted for 6% of our total revenue from product sales. A substantial amount of payments for our products sold are processed through PayPal and Stripe and Amazon handles certain fulfillment of product orders for us. Our agreements with any of these companies may be terminated at will. Due to high concentration and reliance on these portals, and the dependence on PayPal and Stripe, the loss of a working relationship with any of these entities could adversely affect our results of operations in future periods. Given the dominance of these entities in their respective sectors, in the event our relationship with one or more of these entities was terminated, there are no assurances we would be able to locate a suitable successor company.
Our product sales revenues
have historically been
dependent upon our relationships with two vendors. There are no assurances we will be able to continue to rely on those relationships in future periods.
During 2016, we
purchased a substantial amount of the products we sell through our websites from two vendors: Citizens Watch Company of America, Inc., and Bulova Corporation. Citizens Watch Company of America, Inc. accounted for
38%
and Bulova Corporation accounted for
17%
of total products purchased in 2016. These two vendors accounted for 34% and 26%, respectively, of total products purchased in 2015. While we seek to continue to expand our product lines by adding companies to our list of vendors, and continue to expand our product lines and vendor relationships
including through the acquisition of Black Helmet Apparel in December 2016 as described elsewhere in this prospectus,
due to our high reliance on these two vendors, the loss of one of these vendors could adversely affect our operations. We do not have any long term contracts with either vendor and these relationships can be terminated at will. There are no assurances our efforts to diversify our vendor base will be successful.
We are presently dependent on our relationship with Google AdSense to generate revenues from advertising sales.
We offer display advertising on our websites either through direct advertisements or through numerous third party providers, including Google AdSense. Approximately
21%
of our total revenue in 2016 from services came from Google AdSense
as compared to
approximately 36%
in
2015. From time-to-time Google may implement policy changes that could impact our ability to display ads. We expect that once developed and launched, all of our advertising revenue will come from the Bright Mountain Media Ad
Network. Until such time, however, if our revenues from Google AdSense continue to increase in future periods, such potential policy changes could cause volatility in our advertising revenue and earnings and the loss of the access to Google AdSense could have an adverse effect on our business.
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The acquisition of new businesses is costly and these acquisitions may not enhance our financial condition.
A significant element of our growth strategy is to acquire companies which complement our business. The process to undertake a potential acquisition can be time-consuming and costly. We
have and continue to
expect to expend significant resources to undertake business, financial and legal due diligence on our potential acquisition targets and there is no guarantee that we will acquire the company after completing due diligence. The process of identifying and consummating an acquisition could result in the use of substantial amounts of cash and exposure to undisclosed or potential liabilities of acquired companies. In some instances, we may be required to provide historic audited financial statements for up to two years for acquisition targets in compliance with the rules and regulations of the Securities and Exchange Commission, or “SEC”. The necessity to provide these audited financial statements will increase the costs to us of consummating an acquisition or, if it is determined that the target company cannot obtain the requisite audited financials, we may be unable to pursue an acquisition which might otherwise be accretive to our business. In addition, even if we are successful in acquiring additional companies, there are no assurances that the operations of these businesses will enhance our future financial condition. To the extent that a business we acquire does not meet the performance criteria used to establish a purchase price, some or all of the goodwill related to that acquisition could be charged against our future earnings, if any.
Online security breaches could harm our business.
User confidence in our websites depends on maintaining strong security features. While we have not experienced any security breaches to date, experienced programmers or “hackers” could penetrate sectors of our systems. Because a hacker who is able to penetrate network security could misappropriate proprietary information or cause interruptions in our services, we may have to expend significant capital and resources to protect against or to alleviate problems caused by hackers. Additionally, we may not have a timely remedy against a hacker who is able to penetrate our network security. Such security breaches could materially affect our operations, damage our reputation and expose us to risk of loss or litigation. In addition, the transmission of computer viruses resulting from hackers or otherwise could expose us to significant liability. Our insurance policies may not be adequate to reimburse us for losses caused by security breaches. We also face risks associated with security breaches affecting third parties with whom we have relationships.
We must promote the Bright Mountain brand to attract and retain users, advertisers and strategic partners.
The success of the Bright Mountain brand depends largely on our ability to provide high quality content which is of interest to our users. If our users do not perceive our existing content to be of high quality, or if we introduce new content or enter into new business ventures that are not favorably perceived by users, we may not be successful in promoting and maintaining the Bright Mountain brand. Any change in the focus of our operations creates a risk of diluting our brand, confusing users and decreasing the value of our website traffic base to advertisers. If we are unable to maintain or grow the Bright Mountain brand, our business would be severely harmed.
We may expend significant resources to protect our content or to defend claims of infringement by third parties, and if we are not successful we may lose rights to use significant material or be required to pay significant fees.
Our success and ability to compete are dependent on our proprietary content. We rely exclusively on copyright law to protect our content. While we actively take steps to protect our proprietary rights, these steps may not be adequate to prevent the infringement or misappropriation of our content, which could severely harm our business. In addition to content written by our employees, we also acquire content from various freelance providers and other third-party content providers. While we attempt to ensure that such content may be freely used by us, other parties may assert claims of infringement against us relating to such content. We may need to obtain licenses from others to refine, develop, market and deliver new content or services. We may not be able to obtain any such licenses on commercially reasonable terms or at all or rights granted pursuant to any licenses may not be valid and enforceable.
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Failure to protect our intellectual property rights or claims by others that we infringe their intellectual property rights could substantially harm our business.
Our website domain names are crucial to our business. However, as with phone numbers, we do not have and cannot acquire any property rights in an internet address. The regulation of domain names in the United States and in other countries is also subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or obtain comparable domain names, which could harm our business. We also rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated. Others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our intellectual property rights. Therefore, in certain jurisdictions, we may be unable to protect our technology and designs adequately against unauthorized third party use, which could adversely affect our ability to compete.
Developing and implementing new and updated applications, features and services for our websites may be more difficult than expected, may take longer and cost more than expected and may not result in sufficient increases in revenue to justify the costs.
Attracting and retaining users of our websites requires us to continue to provide quality, targeted content and to continue to develop new and updated applications, features and services for our websites. If we are unable to do so on a timely basis or if we are unable to implement new applications, features and services without disruption to our existing ones, our ability to continue to expand our website traffic will be in jeopardy. The costs of development of these enhancements may negatively impact our ability to achieve profitability. There can be no assurance that the revenue opportunities from expanded website content, or updated technologies, applications, features or services will justify the amounts ultimately spent by us.
Our technology development efforts may not be successful in improving the functionality of our network, which could result in reduced traffic on our websites.
If our websites do not work as intended, or if we are unable to upgrade the functionality of our websites as needed to keep up with the rapid evolution of technology for content delivery, our websites may not operate properly, which could harm our business. Additionally, software product design, development and enhancement involve creativity, expense and the use of new development tools and learning processes. Delays in software development processes are common, as are project failures, and either factor could harm our business.
We are dependent upon
independent writers
to provide content for our warisboring.com website
.
In connection with our acquisition of the warisboring.com website and associated content in January 2016, we entered into a Website Management Services Agreement with the seller under which he was engaged to manage the website for us on a full-time basis. Under the terms of this agreement he is also responsible for providing continuing access to the same content group which provided content to the website before we acquired it. We are dependent upon this group of contributors to provide proprietary content for this website. We do not have any agreements with these individual content providers and there are no restrictions on these independent contractors which prohibit them from providing content to competing websites. If we should lose the services of one or more of these content providers for this website our ability to provide proprietary content on this website will be in jeopardy until such time as we are able to recruit and engage suitable replacement content providers.
Our ability to deliver our content depends upon the quality, availability, policies and prices of certain third-party service providers.
We rely on third parties to provide website hosting services. In certain instances, we rely on a single service provider for some of these services. In the event the provider were to terminate our relationship or stop providing these services, our ability to operate our websites could be impaired. Our ability to address or mitigate these risks may be limited. The failure of all or part of our website hosting services could result in a loss of access to our websites which would harm our results of operations.
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We may be held liable for content, blogs or third party links on our website or content distributed to third parties.
As a publisher and distributor of content over the internet, including blogs which appear on our websites and links to third-party websites that may be accessible through our websites, or content that includes links or references to a third-party’s website, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature, content or ownership of the material that is published on or distributed from our websites. These types of claims have been brought, sometimes successfully, against online services, websites and print publications in the past. Other claims may be based on errors or false or misleading information provided on linked websites, including information deemed to constitute professional advice such as legal, medical, financial or investment advice. Other claims may be based on links to sexually explicit websites. Although we carry general liability insurance, our insurance may not be adequate to indemnify us for all liabilities imposed. Any liability that is not covered by our insurance or is in excess of our insurance coverage could severely harm our financial condition and business. Implementing measures to reduce our exposure to these forms of liability may require us to spend substantial resources and limit the attractiveness of our websites to users.
Our business strategy to expand our operations will subject us to even greater competitive disadvantages than we currently face and we will be competing with companies with much greater resources than we have.
The market for digital online advertising solutions is competitive and dynamic. Most of our competitors will have substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources. There are no assurances we will ever be able to effectively compete in this market.
Our management may be unable to effectively integrate our acquisitions and to manage our growth and we may be unable to fully realize any anticipated benefits of these acquisitions.
We are subject to various risks associated with our growth strategy, including the risk that we will be unable to identify and recruit suitable acquisition candidates in the future or to integrate and manage the acquired companies. Acquired companies’ histories, the geographical location, business models and business cultures will be different from ours in many respects. Successful integration of these acquisitions is subject to a number of challenges, including:
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the diversion of management time and resources and the potential disruption of our ongoing business;
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difficulties in maintaining uniform standards, controls, procedures and policies;
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unexpected costs and time associated with upgrading both the internal accounting systems as well as educating each of their staff as to the proper methods of collecting and recording financial data;
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potential unknown liabilities associated with acquired businesses;
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the difficulty of retaining key alliances on attractive terms with partners and suppliers; and
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the difficulty of retaining and recruiting key personnel and maintaining employee morale.
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There can be no assurance that our efforts to integrate the operations of any acquired assets or companies will be successful, that we can manage our growth or that the anticipated benefits of these proposed acquisitions will be fully realized.
We depend on the services of our Chief Executive Officer and our Vice President - Digital and the loss of either of their services could harm our ability to operate our business in future periods
Our success largely depends on the efforts, reputation and abilities of W. Kip Speyer, our Chief Executive Officer, and Todd F. Speyer, our Vice President - Digital. While we are a party to an employment agreement with Mr. Kip Speyer and do not expect to lose his services in the foreseeable future, the loss of the services of Mr. Kip Speyer could materially harm our business and operations in future periods. We are not a party to an employment agreement with Mr. Todd Speyer, his son. While we do not expect to lose the services of Mr. Todd Speyer in the foreseeable future, if he should choose to leave our company our business and operations could be harmed until such time as we were able to engage a suitable replacement for him.
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We are dependent upon consultants to provide key operational support for our Black Helmet Apparel business
.
In connection with our acquisition of the assets of the Black Helmet Apparel business, we entered into consulting agreements with the two principals to provide operational services for those assets. If we should lose the services of one or both of these individuals our ability to effectively operate and grow that portion of our business will be in jeopardy until such time as we are able to recruit and engage suitable replacements.
We are dependent upon employees to provide key operational support for the Daily Engage Media.
In connection with the acquisition of Daily Engage Media, we will enter into employment agreements with the two principals. If we should lose the services of one or both of these individuals our ability to effectively operate and grow that portion of our business will be in jeopardy until such time as we are able to recruit and engage suitable replacements.
We must hire, integrate and/or retain qualified personnel to support our expected business expansion.
Our success also depends on our ability to attract, train and retain qualified personnel. In addition, because our users must perceive the content of our websites as having been created by credible and notable sources, our success also depends on the name recognition and reputation of our editorial staff. Competition for qualified personnel is intense and we may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we fail to attract and retain qualified personnel, our business will suffer.
We deliver advertisements to users from third-party ad networks which exposes our users to content and functionality over which we do not have ultimate control.
We display pay-per-click, banner, cost per acquisition "CPM",
direct,
and other forms of advertisements to users that come from third-party ad networks. We do not control the content and functionality of such third-party advertisements and, while we provide guidelines as to what types of advertisements are acceptable, there can be no assurance that such advertisements will not contain content or functionality that is harmful to users. Our inability to monitor and control what types of advertisements get displayed to users could have a material adverse effect on our business, financial condition and results of operations.
Our services may be interrupted if we experience problems with our network infrastructure
.
The performance of our network infrastructure is critical to our business and reputation. Because our services are delivered solely through the
i
nternet, our network infrastructure could be disrupted by a number of factors, including, but not limited to:
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unexpected increases in usage of our services;
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computer viruses and other security issues;
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interruption or other loss of connectivity provided by third-party internet service providers;
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natural disasters or other catastrophic events; and
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server failures or other hardware problems.
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If our services were to be interrupted, it could cause loss of users, customers and business partners, which could have a material adverse
effect.
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Our systems may fail due to natural disasters, telecommunications failures and other events, any of which would limit user traffic
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Our websites are hosted by third party providers. Any disruption of in the computing platform at these third party providers could result in a service outage. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, supplier failure to meet commitments, and similar events could damage these systems and cause interruptions in the hosting of our websites. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting our website and could cause advertisers to terminate any agreements with us. In addition, we could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable. If any of these circumstances occurred, our business could be harmed. Our insurance policies may not adequately compensate us for losses that may occur due to any failures of or interruptions in our systems. We do not presently have a formal disaster recovery plan.
Our websites must accommodate high volumes of traffic and deliver frequently updated information. While we have not experienced any systems failures to date, it is possible that we may experience systems failures in the future and that such failures could harm our business. In addition, our users depend on internet service providers, online service providers and other website operators for access to our websites. Many of these providers and operators have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Any of these system failures could harm our business.
Privacy concerns could impair our business.
We have a policy against using personally identifiable information obtained from users of our websites without the user’s permission. In the past, the Federal Trade Commission has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy. If we use personal information without permission or in violation of our policy, we may face potential liability for invasion of privacy for compiling and providing information to our corporate customers and electronic commerce merchants. In addition, legislative or regulatory requirements may heighten these concerns if businesses must notify internet users that the data may be used by marketing entities to direct product promotion and advertising to the user. Other countries and political entities, such as the European Union, have adopted such legislation or regulatory requirements. The United States may adopt similar legislation or regulatory requirements in the future. If consumer privacy concerns are not adequately addressed, our business, financial condition and results of operations could be materially harmed.
We are subject to a number of regulatory risks
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Any failure to comply with the various regulations could adversely impact our business in future business.
We are subject to a number of domestic and, to the extent our operations are conducted outside the U.S., foreign laws and regulations that affect companies conducting business on the internet and through other electronic means, many of which are still evolving and could be interpreted in ways that could harm our business. U.S. and foreign regulations and laws potentially affecting our business are evolving frequently. We currently have not developed our internal compliance program nor do we have policies in place to monitor compliance. Instead, we rely on the policies of our publishing partners. If we are unable to identify all regulations to which our business is subject and implement effective means of compliance, we could be subject to enforcement actions, lawsuits and penalties, including but not limited to fines and other monetary liability or injunction that could prevent us from operating our business or certain aspects of our business. In addition, compliance with the regulations to which we are subject now or in the future may require changes to our products or services, restrict or impose additional costs upon the conduct of our business or cause users to abandon material aspects of our services. Any such action could have a material adverse effect on our business, results of operations and financial condition.
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Risks Related to this Offering and Ownership of our Securities
We do not know whether an active, liquid and orderly trading market will develop for our offered securities or what the market price of our offered securities will be and as a result it may be difficult for you to sell your shares of our common stock and warrants.
Prior to this offering our common stock was quoted on the OTCQB Tier of the OTC Markets and it was thinly traded. In addition, prior to this offering there has been no market for the warrants. An active trading market in our common stock or the warrants may never develop or be sustained following this offering. The public offering price for our common stock and warrants was determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of our common stock or the warrants after this offering. The market value of our common stock or the warrants may decrease from the public offering price. As a result of these and other factors, you may be unable to resell your shares of our common stock or warrants at or above the public offering price. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares or warrants. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into collaborations or acquire companies or products by using our shares of common stock as consideration. The market price of our offered securities may be volatile, and you could lose all or part of your investment.
The trading price of the shares of our common stock and warrants following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:
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the success of competitive products;
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actual or anticipated changes in our growth rate relative to our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
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regulatory or legal developments in the United States and other countries;
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the recruitment or departure of key personnel;
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the level of expenses;
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actual or anticipated changes in estimates s to financial results, development timelines or recommendations by securities analysts;
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variations in our financial results or those of companies that are perceived to be similar to us;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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inconsistent trading volume levels of our shares;
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announcement or expectation of additional financing efforts;
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sales of our common stock by us, our insiders or our other shareholders;
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market conditions in the technology sectors; and
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general economic, industry and market conditions.
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In addition, the stock market in general, and digital media companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of these risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on the market price of the shares of our common stock and warrants.
14
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of the shares of our common stock and warrants may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. To the extent that any claims or suits are brought against us and successfully concluded, we could be materially adversely affected, jeopardizing our ability to operate successfully. Furthermore, our human and capital resources of could be adversely affected by the need to defend any such actions, even if we are ultimately successful in our defense.
If you purchase shares of common stock and warrants in this offering, you will incur immediate and substantial dilution in the book value of the shares of our common stock.
The proposed public offering price of the shares of our common stock is substantially higher than the net tangible book value per share of our common stock. Investors purchasing shares of common stock and warrants in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing shares of common stock and warrants in this offering will incur immediate dilution of $_______ per share, based on an assumed public offering price of $_____ per share. Further, investors purchasing shares of common stock and warrants in this offering will contribute approximately ____% of the total amount invested by shareholders since our inception, but will own, as a result of such investment, only approximately ___% of the shares of common stock outstanding immediately following this offering. As a result of the dilution to investors purchasing shares of common stock and warrants in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. Further, because we may need to raise additional capital to fund our anticipated level of operations, we may in the future sell substantial amounts of common stock or securities convertible into or exchangeable for common stock. These future issuances of equity or equity-linked securities, together with the exercise of outstanding options and any additional shares issued in connection with acquisitions, if any, may result in further dilution to investors.
We are an “emerging growth company” and we are able to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which could result in our shares of common stock or warrants being less attractive to investors.
In 2013, we elected to become an “emerging growth company,” as defined in the JOBS Act, and we as such we are able to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our shares of common stock or warrants less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our shares of common stock or warrants and the market price of such securities may be more volatile.
Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
15
We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate any material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles, or “GAAP”. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2016.
In making this assessment, management used the criteria set forth by the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our management has concluded that as of December 31,
2016,
our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles as a result of material weaknesses. We identified material weaknesses, which included:
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·
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our company currently has only
two employees
who
were
responsible for handling the cash and making deposits, posting cash receipts, writing and mailing checks, and posting cash disbursements. Our
CFO
reviews bank statements and reconciliations on a monthly basis as a mitigating control until such time as funds are available to us to create a position to segregate duties consistent with control objectives, and
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·
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we do not currently have monitoring controls in place to ensure correct analysis and application of GAAP.
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While we have implemented a plan to remediate these weaknesses, we cannot assure you that we will be able to remediate these weaknesses, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. Our failure to remediate the material weaknesses identified above or the identification of additional material weaknesses in the future, could adversely affect our ability to report financial information, including our filing of quarterly or annual reports with the SEC on a timely and accurate basis. Moreover, our failure to remediate the material weaknesses identified above or the identification of additional material weaknesses could prohibit us from producing timely and accurate financial statements, which may adversely affect our the market price of shares of our common stock or warrants and we may be unable to maintain compliance with NASDAQ listing requirements.
Because we do not anticipate paying any cash dividends on our
common
stock in the foreseeable future, capital appreciation, if any, will be your sole source of potential gain.
We have never declared or paid cash dividends on our
common
stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our shares of common stock and warrants will be your sole source of gain for the foreseeable future.
16
Sales of a substantial number of shares of our common stock in the public market, or the perception such sales may occur, could cause the market price of shares of our common stock or warrants to fall.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market of such sales or that the holders of a large number of shares intend to sell shares, could reduce the market price of our shares of our common stock or warrants. After this offering, we will have outstanding ____________ shares of common stock assuming a public offering price of $____ per share. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates, as well as an additional ________ shares of our common stock which are available for resale under Rule 144 of the Securities Act of 1933, as amended, or the “Securities Act”. On the date of this prospectus our executive officers and directors entered into lock-up agreements pursuant to which they agreed not to sell any of our shares for a period of six months from the effective date of this offering, and a non-executive principal shareholder has entered into a lock-up agreement pursuant to which he has agreed not to sell any of our shares for a period of 90 days from the effective date of this offering. As representative of the underwriters, Joseph Gunnar & Co., LLC may, in its sole discretion, allow early releases under the referenced lock-up restrictions.
We have also entered into lock up agreements with the principals of Black Helmet and intend to enter into lock up agreements with the principals of Daily Engage Media to which the representative of the underwriters is not a party for terms which extend one year from the closing of these transactions.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business and cause the market price of our shares of common stock or warrants to decline. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. If we do not invest the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause the price of our shares of common stock or warrants to decline.
Some provisions of our charter documents and Florida law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders and may prevent attempts by our shareholders to replace or remove our current management.
Provisions in our amended and restated articles of incorporation and amended and restated bylaws, as well as provisions of Florida law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our shareholders, or remove our current management. These include provisions that:
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·
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permit our board of directors to issue up to 20,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
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·
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provide that all vacancies on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
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·
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provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide advance notice in writing, and also satisfy requirements as to the form and content of a shareholder’s notice;
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·
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not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election; and
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·
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provide that special meetings of our shareholders may be called only by the board of directors or by the holders of at least 40% of our securities entitled to notice of and to vote at such meetings.
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These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, who are responsible for appointing the members of our management. Section 607.0902 of the Florida Business Corporation Act provides provisions which may discourage, delay or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our shareholders. As permitted under Florida law, we have elected not to be governed by this statute. Any provision of our amended and restated articles of incorporation, amended and restated bylaws or Florida law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares of common stock or warrants, and could also affect the price that some investors are willing to pay for our shares of common stock or warrants.
17
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the trading price of our common stock or warrants and trading volume could decline.
The trading market for our shares of our common stock and warrants will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our shares of common stock or warrants. If no securities or industry analysts commence coverage of our company, the trading price for our shares of our common stock and warrants would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our shares of common stock or warrants would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the trading price of our shares of common stock or warrants and trading volume to decline.
The warrants are a risky investment. You may be unable to exercise your warrants for a profit.
The warrants will have an exercise period of five years from the closing of this offering. If the price of our shares of common stock does not increase to an amount sufficiently above the exercise price of the warrants during the exercise period of the warrants, you may be unable to recover any of your investment in the warrants. There can be no assurance that any of the factors that could impact the trading price of our common stock will result in the trading price increasing to an amount that will exceed the exercise price or the price required for you to achieve a positive return on your investment in the warrants.
Holders of the warrants will have no rights as common shareholders until they acquire our common stock.
Until you acquire shares of our common stock upon exercise of the warrants, you will have no rights with respect to our common stock issuable upon exercise of the warrants, including the right to vote. Upon exercise of your warrants, you will be entitled to exercise the rights of a common shareholder only as to matters for which the record date occurs after the exercise date.
Our company has a concentration of stock ownership and control, which may have the effect of delaying, preventing, or deterring a change of control
Our common stock ownership is highly concentrated. Mr. W. Kip Speyer, our Chief Executive Officer and Chairman of the Board, together with members of our board of directors and a principal shareholder, beneficially own approximately
56%
of our total outstanding shares of common stock before the offering. Assuming the issuance of _________ shares of our common stock in this offering, based on an assumed offering price of $_______ per share after the offering Mr. Speyer will continue to control ___% of our outstanding shares of common stock. As a result of the concentrated ownership of the stock, Mr. Speyer may be able to control all matters requiring shareholder approval, including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company. It could also deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and it may affect the market price of our common stock.
The conversion of our outstanding 10% Series A convertible preferred stock and/or payment of stock dividends on these shares will be dilutive to our common shareholders.
At
March 31, 2017,
we had 100,000 shares of our 10% Series A convertible preferred stock outstanding. These shares are convertible into shares of our common stock on a one for one basis at the option of the holder at any time until December 30, 2017, at which time they are automatically converted into common stock if not previously converted. The conversion of these shares of preferred stock will result in the issuance of an additional 100,000 shares of our common stock. In addition, the designations, rights and preferences of the 10% Series A convertible preferred stock provide that a 10% annual dividend is payable in shares of our common stock at a rate of one share of common stock for each 10 shares of preferred stock outstanding. These dividends are payable in January of each year. The issuance of shares of our common stock upon the conversion of the 10% Series A convertible preferred stock and/or as payment of dividends on the shares will be dilutive to our existing shareholders and could adversely impact the market price of our common stock, should a market be developed of which there is no assurance.
18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a digital media holding company for online assets primarily targeted to the military and public safety sectors. We own websites, which are customized to provide our niche users, including active duty, reserve and retired military, law enforcement, and fire fighters with information and news that may be of interest to them. We generate revenues from two segments, product sales and services. Services consist of advertising revenue and subscriptions. Within our product sales segment, we generate product sales revenue through e-commerce distributors portals such as Amazon and eBay, and direct sales though proprietary websites and a retail location. The following graph provides historical quarterly total revenue in the respective periods presented:
Quarterly Total Revenue
($ in thousands)
![[BMTM_S1006.GIF]](http://content.edgar-online.com/edgar_conv_img/2017/04/12/0001553350-17-000391_BMTM_S1006.GIF)
Key 2016 highlights include:
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·
|
total revenue of $1,933,785, a revenue increase of 14% as compared to 2015;
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·
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services revenue growth of 53% for 2016 as compared to 2015;
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|
·
|
product sales revenue increased 6.4% in 2016 from 2015; and
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·
|
acquired two new web properties as well as the assets of the Black Helmet Apparel business.
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28
Many of these increases are being powered by website traffic increases of
39%
for the
fourth quarter
of 2016 compared to the
fourth quarter
of 2015 as a result of organic growth and acquisitions. The following graph provides information on the
quarterly
traffic to our proprietary websites over the respective quarterly periods presented:
Quarterly Website Traffic (Visits)
![[BMTM_S1008.GIF]](http://content.edgar-online.com/edgar_conv_img/2017/04/12/0001553350-17-000391_BMTM_S1008.GIF)
2016 was a transitional year for our company as we invested in the infrastructure required to create more content, website traffic and expand our ability to sell our advertising inventory. Historically, a majority of our revenues have come from product sales. As a result of the consistent increase in both the overall site traffic as well as unique visitors to our websites, we believe our company has reached sufficient critical mass to begin the multi-year transition to a media company that generates most of its revenue from the sales of advertising on its websites. We believe that this natural evolution of our model will permit us to concentrate our efforts on growing our highest margin opportunities through the leverage of our website portfolios and growing internet audience. To begin implementing the next segment of our business model, during the fourth quarter of 2015 we began a rebranding of our company which included a name change to “Bright Mountain Media, Inc.”
Since inception we have chosen to be a provider of quality website content to our niche market through our content staff of writers and others which, in our opinion, has been the principle reason for the growth in our website traffic. Subject to availability of additional capital, we expect to begin adding more content staff including writers, graphic designers, videographers and social media personnel, as well as former military and public safety individuals to create additional content for our websites. We believe these steps will help drive additional traffic to our websites which in turn will allow us to better leverage the highly targeted website traffic on our web properties and increase advertising revenues.
A key component of our growth also remains our acquisition strategy. We remained committed to expanding our portfolio of web properties in 2016 and beyond with additional acquisitions that fit strategically into our business objectives. In 2016, we acquired
www.warisboring.com
and
www.sargeslist.com
. and in December 2016 we acquired the assets of the Black Helmet Apparel business. Following this transaction we have begun to leverage the unique designs and marketing aspects of Black Helmet Apparel to enhance and expand our online assets primarily targeted to the military and public safety sectors. In March 2017 we entered into the agreement to purchase the membership interests of Daily Engage Media which is described elsewhere, the closing of which will occur immediately following the closing of this offering.
Our ability to continue our acquisition strategy, however, is dependent on our ability to raise additional working capital, both to fund the costs of the transactions as well as the integration and expansion of the acquired companies and web properties. While we continue to increase our revenues, we reported a net loss of $2,667,051 for 2016. During 2016 our average monthly negative cash flow was approximately $150,000. As we continue to grow our business we expect that our monthly cash operating overhead will continue to increase as we add personnel, although at a lesser rate and we are not able at this time to quantify the amount of this expected increase.
29
Without giving effect to this offering, we do not anticipate that we will generate sufficient revenue to fund our operations for the next 12 months. As a result, we will need to raise additional working capital, including through this offering, to fund our ongoing operations as well as to provide additional funds for the further evolution of our business including the expenses of this offering.
In 2016 we raised $800,000 through the sale of our securities and $1,475,000 through the sale of debt, including $925,000 through the sale of convertible notes to our chief executive officer.
Without giving effect to this offering, we presently estimate we will need to raise at least $2,000,000 to satisfy our working capital needs for the next 12 months. Without giving effect to this offering, we do not have any firm commitments for this necessary capital and there are no assurances we will be successful in raising the capital upon terms and conditions, which are acceptable to us, if at all. If we are unable to raise the necessary additional working capital, absent a significant increase in our revenues, of which there is no assurance, we will be unable to continue to grow our company and may be forced to reduce certain operating expenses in an effort to conserve our working capital.
Going Concern
For 2016, we reported a net loss of $2,667,051, net cash used in operating activities of $1,860,515 and we had an accumulated deficit of $8,824,806 at December 31, 2016. The report of our independent registered public accounting firm on our audited consolidated financial statements at December 31, 2016 and 2015 and for the years then ended contains an explanatory paragraph regarding substantial doubt of our ability to continue as a going concern based upon our net losses, cash used in operations and accumulated deficit. These factors, among others, raise substantial doubt about our ability to continue as a going concern. There are no assurances we will be successful in our efforts to generate revenues or report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.
Results of operations
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2016
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2015
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% Change
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Product sales
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$
|
1,499,010
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|
|
$
|
1,408,481
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6.4
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%
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|
Revenues from services
|
|
|
434,775
|
|
|
|
283,598
|
|
|
|
53.3
|
%
|
|
Total revenues
|
|
|
1,933,785
|
|
|
|
1,692,079
|
|
|
|
14.3
|
%
|
|
Cost of sales – products
|
|
|
1,133,872
|
|
|
|
1,148,338
|
|
|
|
(0.01
|
)%
|
|
Cost of sales - products as a percentage of product sales
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75.6%
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|
81.5%
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(5.9
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)%
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|
Gross profit
|
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799,913
|
|
|
|
543,741
|
|
|
|
47.1
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%
|
|
Selling, general and administrative expenses
|
|
|
3,093,295
|
|
|
|
2,214,238
|
|
|
|
39.7
|
%
|
|
(Loss) from operations
|
|
$
|
(2,293,382
|
)
|
|
$
|
(1,670,497
|
)
|
|
|
37.3
|
%
|
Revenue
The increase in product sales primarily reflects increased sales from on-line marketing of our products through third parties. In addition, while we acquired the assets which constituted the Black Helmet Apparel business in mid-December 2016, we reported minimal revenues from those products sales in 2016 as a result of the seasonal nature of its historic operations. This sharp increase in service revenues reflects the increase in visitor traffic to our previously existing websites as well as traffic from additional websites acquired in 2016 and 2015.
In addition to our corporate website, we currently own 26 websites, and we also partner with third parties on five additional websites under revenue sharing arrangements. We intend to continue our concentration on increasing our website traffic through organic growth as well as acquisitions focused on our targeted market segment.
Cost of Sales
Cost of sales as a percentage of product sales declined in 2016 compared to the prior year. This decline was due in large part to larger discounts being offered on many of our watch products in 2015 that were not offered in 2016. These discounts were intended to liquidate slower moving items for a measured period, which was successful. Following the recent acquisition of the assets of Black Helmet Apparel, we expect our margins on product sales will increase beginning in the first quarter of 2017 as this line of business historically reported pre-acquisition margins of 40%. We do not incur any cost of sales related to our service revenues.
30
Selling, general and administrative expenses (SG&A)
A significant portion of the increase in selling, general and administrative expenses between years was attributable to non-cash expenses which were attributable to websites acquired and impairment losses associated with previously acquired websites of an aggregate of $347,907 for 2016 as compared to $252,436 for 2015. In addition, stock options compensation expense totaled $147,472 in 2016 compared to $59,327 in 2015. This increase in option compensation expense is expected to increase as we continue to attract qualified employees while minimizing, as much as possible, cash demands related to increased staffing. During 2016 we increased staffing to support targeted growth with salaries and employee medical expenses increasing 27% in 2016 compared to 2015. Legal fees increased 50% in 2016 over the prior year which includes 21% paid in stock in 2016. Rent expense increased 46% between periods reflecting expansion of our corporate offices in the third quarter 2016.
Selling, general and administrative expenses are expected to continue to increase in 2017 and beyond as we incur additional accounting and legal expenses related to acquisitions and to integrate and expand the operations of the Black Helmet Apparel business and Daily Engage Media into our company, expand our administrative support functions, execute our planned growth strategy of increasing website visits organically and launch the Bright Mountain Media Ad Network. We also expect to incur additional SG&A expenses as a result of the uplisting of our common stock to the Nasdaq Capital Market.
Total other income (expense)
Total other income (expense) primarily reflects interest expense associated with our borrowings under convertible notes. The significant increases in interest expense in 2016 reflects the conversion of $603,600 of principal and accrued interest owned under those notes into shares of our common stock during the third quarter of 2016 which required us to recognize the related unamortized debt discount as interest.
Non-GAAP financial measures
We introduced adjusted EBITDA, a non-GAAP financial measure, beginning with the fourth quarter of 2014. We report adjusted EBITDA as a supplemental measure to GAAP. This measure is one of the primary metrics by which we evaluate the performance of our business, on which our internal budgets are based. We believe that investors have access to, and we are obligated to provide, the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We endeavor to compensate for the limitations of the non-GAAP measure presented by providing the comparable GAAP measure with equal or greater prominence and description of the reconciling items, including quantifying such items to derive the non-GAAP measure. We encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measure.
Our adjusted EBITDA is defined as operating income/loss excluding:
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·
|
non-cash stock option compensation expense;
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·
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depreciation;
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·
|
acquisition-related items consisting of amortization expense and impairment expense;
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·
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interest; and
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·
|
amortization on debt discount.
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We believe this measure is useful for analysts and investors as this measure allows a more meaningful year-to-year comparison of our performance. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole. The above items are excluded from adjusted EBITDA measure because these items are non-cash in nature, and we believe that by excluding these items, adjusted EBITDA corresponds more closely to the cash operating income/loss generated from our business. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses.
31
The following is an unaudited reconciliation of net (loss) to adjusted EBITDA for the periods presented:
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|
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|
For the Year Ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Net Loss
|
|
$
|
(2,667,051
|
)
|
|
$
|
(1,673,094
|
)
|
|
plus:
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
147,472
|
|
|
|
59,327
|
|
|
Depreciation expense
|
|
|
13,955
|
|
|
|
14,248
|
|
|
Amortization expense
|
|
|
252,134
|
|
|
|
181,905
|
|
|
Amortization on debt discount
|
|
|
321,056
|
|
|
|
260
|
|
|
Impairment expense
|
|
|
95,773
|
|
|
|
70,531
|
|
|
Interest expense
|
|
|
52,682
|
|
|
|
2,627
|
|
|
Adjusted EBITDA:
|
|
$
|
(1,783,979
|
)
|
|
$
|
(1,344,196
|
)
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Liquidity and capital resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. As of December 31, 2016 we had $162,795 in cash and cash equivalents and working capital of $355,344, as compared to cash and cash equivalents of $416,187 in cash and cash equivalents and working capital of $1,246,265 at December 31, 2015. Our principal sources of operating capital have been equity and debt financings from related parties. In 2016 we raised $800,000 through the sale of our securities and $1,475,000 through the sale of debt, including $975,000 through the sale of convertible notes to our chief executive officer. During April 2017 our chief executive officer lent us an additional $150,000 under five year convertible notes. In August 2016 the holders of $600,000 principal amount of our 12% convertible promissory notes, including the $500,000 principal amount of notes purchased by our chief executive officer prior to the conversion date, converted those notes into shares of our common stock, thereby satisfying those obligations and eliminating future interest payments. In August 2016 the holders of substantially all outstanding shares of our preferred stock converted those securities into shares of our common stock. Following these conversions, which left 100,000 shares of our 10% Series A convertible preferred stock remaining outstanding, we have substantially reduced all future dividend payments on our preferred stock.
During 2016 we utilized the proceeds we raised from these debt and equity financings to acquire one new web property, to close the acquisition of the assets of the Black Helmet Apparel business and to provide funds to it for working capital, as well as to fund our other operations.
In July 2016 we entered into a consulting agreement with Hallmark Investments, Inc., a broker-dealer and member of FINRA. Under the terms of this agreement, as amended in September 2016, we engaged Hallmark Investments, Inc. to provide various consulting services to us including identifying and evaluating strategic alternatives or acquisitions, and introducing us to private equity, institutional investors and broker-dealers to assist us in raising funds for strategic alternative or acquisitions. We agreed to pay Hallmark Investments, Inc. a cash fee of 2% of the funds raised, and to issue it shares of our common stock equal to 2% of the funds raised.
Cash flows
Net cash flows used in operating activities was $1,860,515 in 2016 as compared to net cash flows used in operating activities of $1,591,611 for 2015. In 2016 we used cash primarily to fund our net loss of $2,667,051. In 2015 we used cash primarily to fund our net loss of $1,673,094, and for an increase in our inventory of $2,289,284.
Net cash flows used in investing activities in 2016 was $669,114 and was related primarily to our purchase of websites as compared to net cash flows used in investing activities of $196,979 for 2015 due to the purchase of fixed assets and the acquisition of websites.
Net cash flows provided by financing activities was $2,276,237 in 2016 as compared to $1,614,541 for 2015. In both periods, cash was provided from the sale of our securities, net of repayments of debt obligations.
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Critical accounting policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 1 to our audited consolidated financial statements appearing elsewhere in this prospectus.
Recent accounting pronouncements
The recent accounting standards that have been issued or proposed by the Financial Accounting Standards Board, or "FASB," or other standards-setting bodies as described in Note 1 to our audited consolidated financial statements appearing elsewhere in this prospectus that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
Off balance sheet arrangements
As of the date of this prospectus, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
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OUR BUSINESS
Overview
We are a digital media holding company for online assets primarily targeted to the military and public safety sectors. We are dedicated to providing “those that keep us safe” places to go online where they can do everything from staying current on news and events affecting them, look for jobs,
share
information,
communicate
with the public, and purchase products.
In addition to our corporate website, we
own
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websites which are customized to provide our niche users, including active, reserve and retired military, law enforcement, first responders and other public safety employees with information and news that we believe may be of interest to them. We have placed a particular emphasis on providing quality content on our websites to drive traffic increases. Our websites feature timely, proprietary and aggregated content covering current events and a variety of additional subjects targeted to the specific demographics of the individual website. Our business strategy requires us to continue to provide this quality content to our niche markets and to grow our business, operations and revenues both organically and through acquisitions.
Presently, we generate revenue from two segments: product sales and services. Services include advertising revenue and subscriptions. While more than
78%
of our revenues are generated from product sales
in 2016,
we intend to monetize our website traffic by attracting local, national and international advertisers, begin selling subscriptions to our websites and establishing the Bright Mountain Ad
Network.
Currently, in addition to our corporate website, www.brightmountainmedia.com, we own the following website properties which we have acquired or developed since 2013:
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Advertisetothemilitary.com
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Militaryhousingrentals.com
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BlackHelmetApparel.com
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Militarystarter.com
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Bootcamp4me.com
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Popularmilitary.com
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Bootcamp4me.org
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Sargeslist.com
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Brightwatches.com
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Teacheraffairs.com
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Coastguardnews.com
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Thebright.com
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Fdcareers.com
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Thebrightmail.com
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Fireaffairs.com
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Usmclife.com
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Firefightingnews.com
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Wardocumentaryfilms.com
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Gopoliceblotter.com
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Warisboring.com
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JQPublicblog.com
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Welcomehomeblog.com
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Leoaffairs.com
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Thebravestonline.com
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Leofundme.com
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Thebrightnetwork.com
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We also partner with third
parties
on
five
additional websites, havokjournal.com,
Article107News.com,
lawofficer.com, jointhemilitary.org and yuuut.com, under revenue sharing arrangements.
In December 2016 we acquired assets constituting the Black Helmet Apparel business. In March 2017, as described below, we entered into a definitive agreement to purchase Daily Engage Media, an ad network. The closing of this pending acquisition is contingent upon the closing of this offering.
Over the past
four
years we have experienced rapid visitor growth, both organically and through acquisitions. With
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website properties in addition to our corporate website, annual visits to our websites have increased from approximately 840,000 in 2013 to more than
57,000,000 visits for 2016.
While we
expect to
continue to
make strategic acquisitions in future periods,
we believe that our visitor traffic has achieved sufficient critical mass to permit us to aggressively implement our strategy to monetize our traffic by:
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launching the Bright Mountain Media Ad
Network, a programmatic advertising network similar to Google Ad Sense or the
AOL1 platform
to our niche demographics;
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expanding internally or through outsourcing a sales force or call center to market direct ads to our websites and the launching of the Bright Mountain Media Ad
Network;
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begin selling subscriptions to selective websites;
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pursue local, national and international advertisers whose targets are our niche users; and
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seek ancillary sources of revenues through new products and services such as lead sales and employment advertisements.
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Accordingly, we believe the
five
primary elements to increasing our revenues are:
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closing the pending acquisition of Daily Engage Media;
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launching the Bright Mountain Media Ad
Network to our niche demographics
based upon technology to be included in the Daily Engage Media acquisition;
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starting the sales and marketing initiatives and outreach to sell
our ad inventory directly to advertisers
and recruit websites in our niche demographic to join the Bright Mountain Media Ad
Network;
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leveraging our recently acquired Black Helmet brand and
integrating and exposing our e-commerce efforts to our website traffic;
and
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supporting the expected growth of Black Helmet and Daily Engage Media by utilizing a portion of the proceeds from this offering to finance inventory increases and accounts receivables.
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We intend to create value for advertisers with a streamlined, simple advertising model that leverages our data, content and technology to connect advertisers with their target audience. To implement our strategy, we intend use the proceeds from this offering to:
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engage additional sales associates to sell our advertising and to begin marketing the Bright Mountain Media Ad Network to similar websites in the military, public safety and first responder niche;
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add more content staff, including writers, graphic designers, videographers and social media personnel;
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expand and improve our content by hiring, among others, former military and public safety individuals;
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add IT, administration, sales support and advertising operation personnel;
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acquire additional websites and improve existing websites;
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seek advertising network acquisitions; and
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provide additional products and services for our users in an effort to increase our e-commerce sales.
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We currently use social media, such as YouTube, Twitter and Facebook, as additional distribution methods of our content. As the behavior of
i
nternet consumers continues to change, distribution of our content via traditional methods such as our websites may become less effective, and new distribution strategies may need to be accelerated. Consumers are increasingly using social networking sites, such as Facebook and Twitter, to communicate and to acquire and disseminate information. As consumers migrate more towards social networks, we expect to continue to build social elements into our content in order to make them available on social networks. We also expect to
continue to
expand our content to include video and audio.
The market and our demographics
Our niche market for the military and public safety sectors consists of a targeted U.S. demographic of in excess of 40 million users including their spouses.
Adding
their parents and other direct family members could increase the U.S. targeted market to approximately 100 million users. We also believe there are another estimated 100 million military and public safety personnel and their families outside the U.S. The largest segments of the market are military veterans and retired firefighters and law enforcement. The following chart provides insight into our targeted demographics in the United States:
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![[BMTM_S1010.GIF]](http://content.edgar-online.com/edgar_conv_img/2017/04/12/0001553350-17-000391_BMTM_S1010.GIF)
Sources: (1) U.S. Bureau of Labor Statistics; (2) FBI; (3) National Fire Protection Association; (4) U.S. Department of Defense 2017 Budget; (5) U.S. Department of Defense 2014, Demographics Profile of the Military Community; (6) U.S. Department of Veterans Affairs Population Tables; and (7) National Survey of Veterans.
As a homogeneous group, our user profile should be attractive to local, national and international companies whose advertising budgets are shifting from print media, radio and television to the internet. We believe that the market for the military and public safety providers is fragmented, and that we have an opportunity to become a leading player in the market through growth, consolidation and the creation of the Bright Mountain Media Ad Network which will be specifically targeted to our niche demographics.
As a result of the consistent increase in both the overall site traffic as well as unique visitors to our websites, we believe our company has reached sufficient critical mass to transition to a digital media company that generates most of its revenue from the sales of advertising on its websites. Together with revenues from our to-be-established Bright Mountain Media Ad Network, we believe that this natural evolution of our model will permit us to concentrate our efforts on growing our highest profit opportunities through the leverage of our website portfolios and the growing internet audience. This is reinforced with our belief that digital marketing and advertising channels will experience budget increases as traditional print and other channels are likely to see budget reductions.
We do anticipate, however, a time lag between the increase in expenses and the increase in advertising revenues as we implement our business strategy.
Current business and revenue streams
We have several revenue streams generated directly from our websites. The revenue streams consist principally of product sales and advertising revenue, which is generated primarily through the display of paid listings as well as display advertisements appearing on our websites and subscriptions. We generate advertising revenue either directly from companies who pay us a fee for advertising space, or by users
viewing or
“clicking” on website advertisements utilizing several ad network partners such as Google AdSense. We generate subscription revenues by the sale of access to career postings on one of our websites. The term of the subscriptions range from one month to 12 months and range in price from $8.95 to $77.00. Revenues are recognized, on a net basis, over the term of the subscription period. We generate product revenues by the sale of watches, apparel
and accessories
through our websites
BlackHelmet.com,
BrightWatches.com and Gopoliceblotter.com as well as through e-commerce distributor portals such as Amazon and eBay. Additionally, we expanded our product sales segment by adding a retail location in Delray Beach,
Florida
in the fourth quarter of 2014. During the third quarter of 2016 we
expanded
our existing retail space at this location to provide additional retail and inventory space. We believe that having a retail presence has allowed us to expand our product lines.
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BrightWatches.com,
BlackHelmet.com
and Gopoliceblotter.com are web-based “stores” where shoppers can purchase a variety of products including watches, apparel
and accessories.
We maintain an inventory of watches and clocks. Customers that purchase products from Brightwatches.com pay us directly in a fully enabled payment and checkout process that permits payments for purchases using credit cards through the internet-based payment processing service PayPal. Our watches and clocks are also available for purchase through eBay and Amazon. Fulfillment of our orders of watches and clocks are either handled directly by Amazon when purchases are made through it or by us for purchases made through eBay or BrightWatches.com. Customers that purchase products from
either BlackHelmet.com or
Gopoliceblotter.com pay us directly in a fully enabled payment and checkout process that permits payments for purchases using credit cards through the internet-based payment processing services.
Certain of our
apparel products are also available on Amazon. Fulfillment of orders of apparel is either handled directly by Amazon when purchases are made through it, shipped directly by a third party who produces the apparel for us or shipped by us.
Other recent developments
Warisboring.com
In January 2016 we closed the acquisition of the www.warisboring.com website and all content and rights associated therewith pursuant to the terms and conditions of the Website Asset Purchase Agreement dated December 4, 2015 with War Is Boring, Ltd. Co. and its principal David Axe. The aggregate purchase price of the assets was $250,000, of which $100,000 was paid at closing and the balance of $150,000 will be paid monthly in an amount equal to 30% of the net revenues from the website, when collected, with the total amount of the earn out to be paid by January 4, 2019. We also entered into a Website Management Services Agreement with Mr. Axe pursuant to which we engaged him to act as website manager for the www.warisboring.com website utilizing the War Is Boring, Ltd. content group. Under the terms of this agreement we agreed to pay Mr. Axe a monthly fee of $5,000 and pay the associated fees of the content group. The initial term of the agreement is for three years and may be renewed for an additional one year period upon the mutual consent of the parties. We may terminate the agreement upon 30 days’ notice in the event Mr. Axe should engage in willful misconduct as defined in the agreement.
Black Helmet Apparel
As described later in this section under "History," in December 2016 we acquired the assets of the Black Helmet Apparel business. Launched in June 2008, revenues of the seller attributed to the Black Helmet Apparel business for period from January 1, 2016 through December 15, 2016 (date of acquisition) and the year ended December 31, 2015 (unaudited) were $1,130,638 and $1,238,270, respectively. Following this transaction we have begun to leverage the unique designs and marketing aspects of Black Helmet Apparel to enhance and expand our online assets primarily targeted to the military and public safety sectors and have increased the inventory of Black Helmet Apparel to facilitate increased sales and take advantage of bulk purchasing discounts in an effort to increase margins on these products.
The Black Helmet clothing and accessories feature designs that are hand drawn, unique and relay the fearless side of firefighting, including:
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T-shirts
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jackets
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sweatshirts
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drinkware
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wallets
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knives
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hats
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jewelry, including bracelets, earrings and pendants
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decals and patches
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phone accessories
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sunglasses
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backpacks
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The designs used on the Black Helmet products are proprietary to us. Mr. James Love, a firefighter, is the principal graphic artist responsible for these unique designs, which are initially hand drawn by him prior to being converted to digital art. Following our acquisition of the Black Helmet assets, which included all of the intellectual property rights associated with these designs, we engaged Mr. Love to provide certain consulting and advisory services to us including product designs.
Since acquiring this business, we are preparing to launch new t-shirt designs and new accessory products, including a knife design, a backpack, a hybrid workout and casual shorts, sunglasses, ties, dress shirts, badge wallets and belts. New hat designs are also in various stages of development. We also expect to utilize these assets to expand the brand into the police and military demographics with new products targeted to our core demographics.
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Seasonally, the business follows a similar pattern to other domestic retailers, with approximately 40% of the sales occurring in November through mid-December for holiday gifts. Additionally, special emphasis and sales volume occurs surrounding St. Patrick’s Day and September 11. Jackets and snow hats are offered for winter and shorts and sunglasses for summer. With proceeds from this offering, we intend to allocate additional funds for Black Helmet inventory.
The Black Helmet products are sold primarily through the website at www.blackhelmetapparrel.com. We purchase products from a variety of local and international sources, and product sales are fulfilled from the Orlando, Florida warehouse.
Pending acquisition of Daily Engage Media and launch of the Bright Mountain Media Ad Network
In March 2017 we entered into a definitive agreement to purchase all of the membership interests of Daily Engage Media from unrelated third parties for $4.9 million consisting of cash and shares of our common stock. We are dependent upon the proceeds from this offering to close this pending transaction. In connection with the proposed acquisition of Daily Engage Media, we will also enter into three year employment agreements with Messrs. Rezitis and Pagoulatos, two of the members, which provide for annual base compensation of $75,000 plus the ability to earn bonuses. The employment agreements are expected to contain customary confidentiality, non-intervention and assignment clauses.
Launched in 2015, Daily Engage Media is an ad network that connects advertisers with approximately 200 digital publications worldwide. Daily Engage Media's audited revenues for 2016 were $1,647,596. Following the closing of the transaction, we expect to complete the development of the ad exchange platform Daily Engage Media has under development and utilize that technology for the basis of launching our Bright Mountain Media Ad Network. We also expect to utilize a portion of the proceeds from this offering to fund Daily Engage's receivables.
Daily Engage Media has a total of 13 employees and contractors located at its executive offices in New Jersey and in India and Canada. Since inception Daily Engage Media has grown its business through aggressive sales efforts and branding, including:
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establishing favorable contract terms with many key advertising demand parties;
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supply relationships with approximately 200 digital publishers and a pipeline of others;
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proprietary software to collect and report results for publisher clients;
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ability and software to quickly and efficiently detect fraudulent traffic; and
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highly scalable sales and ad operations functions.
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After the closing of the acquisition, we expect to launch the Bright Mountain Media Ad Network platform based upon the technology currently available and being developed by Daily Engage Media. This new platform is expected to have a significant impact on our revenues and its capabilities will include:
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server integration with several ad exchanges, making for extremely quick ad deployments;
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leading targeting technology, allowing advertisers to pinpoint their marketing efforts to reach the military-public safety demographic across mobile, tablet, and desktop;
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capable of handling any ad format, including video, display, and native ads; and
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ad serving and self-service features for publishers and advertisers.
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Our Bright Mountain Media Ad Exchange will be a trading desk for publishers and advertisers where they will be able to login and choose from various features to maximize their earning potential. Publishers will be able to select a variety of ad units for their video, mobile, display and native advertisements and also have the ability to create their own unique ad formats. Advertisers will be able to choose where their ads will be seen using our filters or by connection directly with the publisher through our platform.
The Bright Mountain Media Ad Exchange will be a custom built platform, which will be user friendly for both the publisher and the advertiser. It will have technology that will allow ads to be served at the highest speed in the industry and the ability to precisely geo target the area the ads will be shown. Other key capabilities will include:
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server integration with the advertisers, making for extremely quick ad deployments;
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leading targeting technology, allowing advertisers to pinpoint their marketing efforts to reach the military-public safety demographic across mobile, tablet and desktop;
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capable of handling any ad format, including video, display and native ads; and
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ad serving and self-service features for publishers.
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We believe that the acquisition of Daily Engage Media and the development of the ad exchange will provide the following benefits:
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it will immediately increase our ability to monetize the core military-public safety business of 26 websites (publishers) with approximately 5 million visitors;
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allow us to immediately begin selling advertising to the more than approximately 10,000 other publishers (websites) in our military-public safety demographic;
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disrupt the digital market for military-public safety audiences and advertisers by being the first vertically integrated publisher/ad network in our demographic; and
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place us into the position as the only fully integrated digital business that serves the publisher, ad network, ad exchange and e-commerce needs of the military-public safety demographic.
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Our strategy
As we transition to a digital media company, we continue to focus our efforts in the target markets of military, law enforcement, and first responders – groups known by many advertisers and brands as ‘our country’s heroes.’ Our business strategy is to provide quality content that focuses on all of these audience segments which we believe allows us to reach a deeper and broader niche demographic than our competitors.
Our objective is to maintain and improve our position as a leading digital media company in our niche market, by, among other things:
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hiring and contracting talented content creators;
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expanding our website portfolio within our niche market organically and through acquisitions;
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achieving a dominant market share of our ‘heroes’ audience segments in order to be a single source for advertisers and brands to connect with them; and
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expanding our sales force and marketing efforts.
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A key element to our strategy is the establishment of the Bright Mountain Media Ad
Network, a programmatic
and directly sold
advertising network. We believe this will allow us to substantially increase the size of our audience within our niche demographic that can be sold to advertisers and brands. Programmatic advertising networks are designed to help marketers and their agencies connect with consumers through digital media at moments when that connection is most likely to be influential and most likely to achieve the advertiser’s objectives. Programmatic buying is the automated purchase of digital advertising inventory through a combination of machine-based transactions, data and algorithms. Real time bidding, or “RTB,” a subset of programmatic buying, is the real-time purchase and sale of advertising inventory on an impression-by-impression basis on ad exchanges. Programmatic buying and RTB are emerging and growing trends in the buying and selling of digital advertising inventory. The recognition by advertisers that an increased use of programmatic buying and RTB systems may constitute an effective way to achieve their campaign goals and cost savings, and the recognition by digital media property owners that they may achieve greater returns from an increased use of programmatic buying and RTB systems.
The key components of the Bright Mountain Media Ad Network are expected to include:
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the sale of all digital advertising inventory on Bright Mountain Media owned websites directly to brands and advertisers, as well as on ad exchanges which are online marketplaces where digital advertising spaces are bought and sold;
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the sale of digital advertising inventory from similar web properties not owned by us directly to brands, advertisers and ad exchanges for which we will receive a commission;
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software that will facilitate the sale of ad inventory as well as software that will deliver the paid-for advertising to all websites within the Bright Mountain Media Ad Network;
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the ability to leverage our combined audience size in the Bright Mountain Media Ad Network to command higher paying advertising across our network of web properties;
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the eventual expansion to represent websites beyond our initial niche scope to include broader demographic segments; and
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expansion of "our heroes" demographic to include all men aged 18 to 50.
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We believe that the combination of our owned websites’ ad inventory with an ever-growing ad inventory from websites which we represent will uniquely position our company as the largest single source for brands and advertisers to reach these desired ‘hero’ audiences.
The Bright Mountain Media Ad Network is expected to market all the Bright Mountain Media owned advertising inventory together with similar websites in our demographic. We believe this strategy will create scale to attract interest from potential brands and advertisers, advertising networks and advertising exchanges. Simply put, the programmatic nature of this network will allow for:
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first
, selling the advertising inventory in real time at the highest possible price;
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second
, the program will interact with all the publishers in the Bright Mountain Media Ad Network reporting impressions, ad fill rates, CPMs, click through rates, and estimated revenue; and
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third
, we plan to incorporate into this software a platform where advertisers can directly
make
purchases on the Bright Mountain Media Ad
Network.
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We will also continue to seek strategic acquisitions that are related to our core mission and niche demographic which, to date, have been instrumental to our growth strategy. We believe that all of the programs and efforts to develop organic website traffic, and bring users and consumers to our websites, will continue to be enhanced through the addition of strategic acquisitions of other internet properties. We are committed to adding to our website portfolio in
2017
and beyond with additional internet properties that will fit strategically into our business objectives, so that we keep scaling up our website portfolio and increase our internet reach and traffic. While we will use a portion of the proceeds from this offering for acquisitions, we hope to use our stock as currency, in whole or in part, for acquisitions,
including our purchase of Daily Engage Media.
As we increase and expand our website portfolio and technology base, we believe that
we
will realize cost and operating efficiencies by consolidating sales, technical and administrative support, as well as shared content and overhead costs.
Acquisition strategy
Our acquisition strategy is a reflection of our primary goals and is a basic tool to help accelerate the achievements of our core objectives which are:
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growth of visitor traffic in our core demographics;
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growth of our service revenue; and
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leveraging our visitor traffic to further the growth of our e-commerce segment.
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Once we acquire a website property, we improve the look and feel of the website to increase its appeal to our audience and add additional content targeted to the specific demographics of the acquired website property. In many instances we retain the services of the prior operator of the acquired website property for a transition period following the transaction to ensure a seamless integration into the Bright Mountain family of websites. It has been our experience that the improvements we make to acquired website properties have significantly increased historic website traffic to these sites.
We expect to continue our acquisition strategy of website properties following the completion of this offering. This strategy will continue to be:
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only make acquisitions that fill strategic objectives;
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concentrate our acquisition strategy on attractively valued targets;
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make prudent use of our common stock as a currency;
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improve and redesign content of acquired websites;
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use acquisitions to accelerate scaling up to achieve core objectives;
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as acquisitions become larger, look to add managers; and
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as we become a larger company we expect acquisitions to become more significant and strategic.
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Key relationships
We purchase a substantial amount of the products we sell through our websites from two vendors: Citizens Watch Company of America, Inc., and Bulova Corporation. During 2016, purchases from Citizens accounted for
38%
and purchases from Bulova accounted for
17%
of the total products purchased. These two vendors accounted for 34% and 26%, respectively, of total products purchased in 2015.
We sell many of our products through various e-commerce distribution portals, which include Amazon and eBay. During 2016, these two distributor portals accounted for
65%
and
10%,
respectively of our total revenue. During 2015, these two portals accounted for 88% and 6%, respectively, of our total sales. A substantial amount of payments for our products sold are processed through PayPal and Stripe.
We offer display advertising on our websites either through direct advertisements or through numerous third party providers, including Google AdSense. Google AdSense is a free service, which displays text or image ads that correspond to the keywords of the content of the page on which the ad is shown. Each time a user of a host website clicks on an AdSense advertisement, Google provides a flat fee to the operators of that website on behalf of the applicable advertiser. Approximately
21%
of our total revenue in 2016 from services came from Google AdSense
as compared to
approximately 36% in
2015.
Technology
Our top technical priority is the fast and reliable delivery of pages to our users. Our systems are designed to handle traffic and network growth. We rely on multiple tiers of redundancy/failover and third-party content delivery network to achieve our goal of 24 hours, seven-days-a-week Website uptime. Regular automated backups protect the integrity of our data. Our servers are continuously monitored by numerous third-party and open-source monitoring and alerting tools.
Competition
The internet and industries that operate through it are intensely competitive. We compete with other companies that have significantly greater financial, technical, marketing, and distribution resources. Our competitors include Yahoo
!
, AOL and
its subsidiary
Huffington Post
. Both AOL and Huffington Post were
recently acquired by Verizon Communications as it looks for growth in the digital, mobile and video marketplace,
and its previously announced pending acquisition of Yahoo! remains pending as of the date of this prospectus.
We believe that we can effectively compete in the marketplace for the following reasons:
|
|
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|
·
|
we have limited ourselves to certain niche, but significant and identifiable, markets;
|
|
|
·
|
we have customized our websites to the interests of our users and provide excellent content and news;
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·
|
our CEO, W. Kip Speyer, has had extensive entrepreneurial and management experience, including experience with public companies;
|
|
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·
|
we have a highly focused group of
44
people, which include writers, programmers, researchers, site managers and editors, and
22
direct full-time and three part-time employees; and
|
|
|
·
|
we are able to manage future growth without a substantial increase in our infrastructure.
|
Most of our competitors have significantly greater financial, technical, marketing and distribution resources as well as greater experience in the industry than we have. There are no assurances we will ever be able to effectively compete in our marketplace. Our websites may not be competitive with other technologies and/or our websites may be displaced by newer technology. If this happens, our sales and revenues will likely decline. In addition, our current and potential competitors may establish cooperative relationships with larger companies, to gain access to greater development or marketing resources. Competition may result in price reductions, reduced gross margins and loss of market share.
41
Intellectual property
We currently rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We own the following service marks and trademarks, which are registered with the United States Patent and Trademark Office:
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Mark
|
|
Federal registration number
|
|
Expiration
(1)
|
|
Description of Mark Usage
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|
“BRIGHT WATCHES.COM” Design and Service Mark
|
|
4,763,256
|
|
June 30, 2025
|
|
Design and service mark for online retail store services featuring watches and clocks.
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“THE BRIGHT NETWORK” Design and Service Mark
|
|
4,726,578
|
|
April 28, 2025
|
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Design and service mark for electronic mailing services.
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“BRIGHT WATCHES” Trade and Service Mark
|
|
4,686,168
|
|
February 10, 2025
|
|
Service mark for online retail services featuring watches and clocks.
|
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“WOLFHUNTER” Character Mark
|
|
4,517,881
|
|
April 22, 2024
|
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Standard Character mark.
|
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“WOLFHUNTER” Design Mark
|
|
4,517,697
|
|
April 22, 2024
|
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Design mark
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“THEBRIGHT.COM” Logo Trade Mark and Service Mark
|
|
4,497,074
|
|
March 18, 2024
|
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Design mark for downloadable bulletins concerning financial research. For providing news in the field of finance, providing research services in the field of finance and investment. For providing current event news and information via a global computer network.
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“THEBRIGHT.COM” Trade Mark and Service Mark
|
|
4,524,450
|
|
May 6, 2024
|
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Word mark for providing on-line information in the field of employment, providing on-line job listings, promoting the charitable services of others. For providing on-line news in the field of finance, providing research services in the field of finance and investment. For providing current event news and information via a global computer network.
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Logo Trade Mark and Service Mark
|
|
4,421,423
|
|
October 22, 2023
|
|
Design mark for retail store services featuring a wide variety of consumer goods; computerized on-line services featuring a wide variety of consumer goods; providing on-line information in the field of employment, providing on-line job listings; promoting the goods of others by means of providing on-line coupons; promoting the charitable services of others, namely, providing individuals with information about various charities for the purpose of making donations to charities. For providing on-line news and research services in the field of finance, providing current event news and information via a global computer network.
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“BE CAREFUL IT'S YOUR MONEY” Trade Mark
|
|
4,199,431
|
|
August 28, 2022
|
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Word mark for bulletin concerning financial research.
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“FIVE PEAKS” Service Mark
|
|
4,129,833
|
|
April 17, 2022
|
|
Word mark for providing research services in the field of finance and investment.
|
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|
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|
“FIVE PEAKS” Service Mark
|
|
4,218,990
|
|
October 2, 2022
|
|
Design mark for providing research services in the field of finance and investment.
|
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“BRIGHT MOUNTAIN” Service Mark
|
|
4,081,251
|
|
January 3, 2022
|
|
Word mark for providing online classified advertisements in the field of finance; providing online advertisement of the goods and services of others.
|
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|
|
“BRIGHT MOUNTAIN” Service Mark
|
|
4,218,978
|
|
October 2, 2022
|
|
Design mark for providing online classified advertisements in the field of finance; providing online advertisement of the goods and services of others.
|
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|
"BLACK HELMET" Trademark
|
|
4,028,799
|
|
September 20, 2021
|
|
Word mark for various Black Helmet merchandise
|
———————
(1)
trademarks and service marks are renewable for additional 10-year periods.
42
In addition to www.brightmountainmedia.com and www.thebright.com, we own multiple domain names that we may or may not operate in the future. However, as with phone numbers, we do not have and cannot acquire any property rights in an internet address. The regulation of domain names in the United States and in other countries is also subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or obtain comparable domain names, which could harm our business.
Employees
At
March 31,
2017
we had
22
full-time and three part-time employees. We also utilize the services of
22
independent contractors who provide content
, operational
and related website services. There are no collective bargaining agreements covering any of our employees.
Government regulation
Aspects of the digital marketing and advertising industry and how our business operates are highly regulated. We are subject to a number of domestic and, to the extent our operations are conducted outside the U.S., foreign laws and regulations that affect companies conducting business on the internet and through other electronic means, many of which are still evolving and could be interpreted in ways that could harm our business. In particular, we are subject to rules of the Federal Trade Commission, or “FTC,” the Federal Communications Commission, or “FCC,” and potentially other federal agencies and state laws related to our advertising content and methods, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or “CAN-SPAM Act,” which establishes certain requirements for commercial electronic mail messages and specifies penalties for the transmission of commercial electronic mail messages that follow a recipient’s opt-out request or are intended to deceive the recipient as to source or content, and federal and state regulations covering the treatment of member data that we collect from endorsers.
U.S. and foreign regulations and laws potentially affecting our business are evolving frequently. We currently have not developed our internal compliance program nor do we have policies in place to monitor compliance. Instead, we rely on the policies of our publishing partners. If we are unable to identify all regulations to which our business is subject and implement effective means of compliance, we could be subject to enforcement actions, lawsuits and penalties, including but not limited to fines and other monetary liability or injunction that could prevent us from operating our business or certain aspects of our business. In addition, compliance with the regulations to which we are subject now or in the future may require changes to our products or services, restrict or impose additional costs upon the conduct of our business or cause users to abandon material aspects of our services. Any such action could have a material adverse effect on our business, results of operations and financial condition.
The FTC adopted “Guides Concerning the Use of Endorsements and Testimonials in Advertising” on October 5, 2009. These guides recommend that advertisers and publishers clearly disclose in third-party endorsements made online, such as in social media, if compensation was received in exchange for said endorsements. Because some of our marketing campaigns entail the engagement of consumers to refer other consumers in their social networks to view adds or take action, and both we and the consumer may earn cash and other incentives, any failure on our part to comply with these guides may be damaging to our business. We currently do not take any steps to monitor compliance with these guides. In the event of a violation, the FTC could potentially identify a violation of the guides, which could subject us to a financial penalty or loss of endorsers or advertisers.
In the area of information security and data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.
We are also subject to federal, state, and foreign laws regarding privacy and protection of user data. Any failure by us to comply with these privacy-related laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business. In addition, the interpretation of data protection laws, and their application to the internet is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from state to state, country to country, or region to region, and in a manner that is not consistent with our current data protection practices. Complying with these varying requirements could cause us to incur additional costs and change our business practices. Further, any failure by us to adequately protect our members’ privacy and data could result in a loss of member confidence in our services and ultimately in a loss of members and customers, which could adversely affect our business.
43
Legal proceedings
From time-to-time, we may be involved in litigation or be subject to claims arising out of our operations or content appearing on our websites in the normal course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on our company because of defense and settlement costs, diversion of management resources and other factors.
Our offices
We lease our corporate offices at 6400 Congress Avenue, Suite 2050, Boca Raton, Florida 33487 under a long-term non-cancellable lease agreement, which contains renewal options. The lease, which was entered into on August 25, 2014 was amended on July 30, 2015 to increase the original approximate 2,014 square feet to approximately 4,450 square feet. The term of the lease was extended and will terminate on March 14, 2019 at a current base rent of $8,978 per month for the first 12 months with a 3% escalation each year. An additional security deposit of $2,500 was required. Rent is all-inclusive and includes electricity, heat, air-conditioning, and water. The original rent commencement date is October 11, 2014 and will expire on March 14, 2019.
We lease retail space for our product sales division at 4900 Linton Boulevard, Bay 17A, Delray Beach, Florida 33445 under a long-term, non-cancellable lease agreement, which contains renewal options. The lease, which was entered into on August 25, 2014, is for approximately 2,150 square feet for a term of 36 months in Delray Beach, Florida at a base rent of approximately $2,329 per month for the first 12 months with a 3% escalation each year. A security deposit of $3,865, first month's prepaid rent of $3,865, and last month's prepaid rent of $4,015 was paid upon lease execution. The lease is a triple net lease. Common area maintenance is approximately $1,317 per month for the first 12 months with annual escalations not to exceed 4%. The rent commencement date is October 1, 2014 and was initially set to expire on September 30, 2017. In January 2017, this lease was modified and extended concurrent with the expansion of our retail space in the same location.
In January 2017, we entered into an additional lease and modified and extended our existing lease for our retail site. The new lease agreement provides for an additional 2,720 square feet adjacent to our existing Delray Beach, Florida location commencing February 1, 2017, expiring January 31, 2022. This lease provides for an initial monthly base rental of $1,757, representing a one-half reduction in rental payments for the first year as an accommodation. Minimum base rental for year two is $3,513 per month, escalating 3% per year thereafter. We also provided a $10,000 security deposit and prepaid $96,400 in future rents on the facility through the funding of certain leasehold improvements. Simultaneously, we modified our existing lease on the initial space, extending this lease to coincide with the new space, expiring January 31, 2022, at an initial base rental of $2,471 per month, escalating 3% per year thereafter.
On December 16, 2016, with an effective date of December 15, 2016 under the terms of the Asset Purchase Agreement, we acquired the assets constituting the Black Helmet Apparel business including various website properties and content, social media content, inventory and other intellectual property rights. We also acquired the right to assume the lease of their warehouse facility consisting of approximately 2,667 square feet. The lease was renewed for a three year term in April 2016 with an initial base rental rate of $1,641 per month, escalating at approximately 3% per year thereafter.
History
We were organized as a Florida corporation in 2010 under the name Speyer Investment Advisors, Inc. In 2012 we changed our name to Speyer Investment Research, Inc. In 2014, as we began building our brand we changed our name to Bright Mountain Holdings, Inc. and in 2015 we changed our name to Bright Mountain Acquisition Corporation and then to Bright Mountain Media, Inc. as we began implementing our strategy to transform into a digital media company.
On December 16, 2016, with an effective date of December 15, 2016 and pursuant to the terms of the Asset Purchase Agreement by and among Bright Mountain Media, Inc., its subsidiary Bright Mountain, LLC, Sostre Enterprises, Inc., Pedro Sostre III and James Love, we acquired the assets constituting the Black Helmet Apparel business from Sostre Enterprises, Inc., including various website properties and content, social media content, inventory and other intellectual property rights. The consideration for the acquisition consisted of $250,000 in cash, 200,000 shares of our common stock valued at $170,000, the assumption of $35,582 in liabilities, net of deferred revenue, and the forgiveness of working capital advances we had previously made to the seller totaling $200,000. The asset purchase agreement contains customary non-compete and indemnification provisions. At closing, the recipients of the shares entered into one year lockup/leakout agreements with us.
In connection with the acquisition, and to ensure the continuity of the operations, effective December 15, 2016 we also entered into three year Services Agreements with each of Messrs. Sostre and Love which provide for annual base compensation of $75,000 plus the ability to earn bonuses based upon the satisfaction of certain revenue and gross margin targets. The Services Agreements contain customary confidentiality, non-intervention and invention assignment clauses.
44
INDEX TO FINANCIAL STATEMENTS
|
|
|
Report of independent registered public accounting firm
|
F-2
|
|
Consolidated balance sheets at December 31,
2016 and 2015
|
F-3
|
|
Consolidated statements of operations for the years ended December 31,
2016 and 2015
|
F-4
|
|
Consolidated statement of changes in shareholders' equity for the years ended December 31,
2016 and 2015
|
F-5
|
|
Consolidated statements of cash flow for the years ended December 31,
2016 and 2015
|
F-7
|
|
Notes to consolidated financial statements December 31,
2016 and 2015
|
F-9
|
|
|
|
Sostre Enterprises, Inc.
December 31, 2014
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-35
|
|
Financial Statements:
|
|
|
Balance Sheet
|
F-36
|
|
Statement of Operations
|
F-37
|
|
Statement of Shareholder’ Deficit
|
F-38
|
|
Statement of Cash Flows
|
F-39
|
|
Notes to the Financial Statements
|
F-40
|
Sostre Enterprises, Inc.
December 31, 2015
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-45
|
|
Financial Statements:
|
|
|
Balance Sheet
|
F-46
|
|
Statement of Operations
|
F-47
|
|
Statement of Shareholder’ Deficit
|
F-48
|
|
Statement of Cash Flows
|
F-49
|
|
Notes to the Financial Statements
|
F-50
|
Sostre Enterprises, Inc.
September 30, 2016
(unaudited)
|
|
|
Financial Statements:
|
|
|
Unaudited Condensed Balance Sheets
|
F-55
|
|
Unaudited Condensed Statements of Operations
|
F-56
|
|
Unaudited Condensed Statements of Cash Flows
|
F-57
|
|
Notes to the Unaudited Condensed Financial Statements
|
F-58
|
Daily Engage Media Group, LLC
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception) to December 31, 2015
|
|
|
Independent Registered Auditors' Report
|
F-63
|
|
Financial Statements:
|
|
|
Balance Sheets
|
F-64
|
|
Statements of Operations
|
F-65
|
|
Statement of Changes in Member’s Equity
|
F-66
|
|
Statements of Cash Flows
|
F-67
|
|
Notes to the Financial Statements
|
F-68
|
|
|
|
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
|
|
|
FOR THE PERIOD ENDING DECEMBER 31, 2016
|
F-75
|
F-1
![[BMTM_S1011.JPG]](http://content.edgar-online.com/edgar_conv_img/2017/04/12/0001553350-17-000391_BMTM_S1011.JPG)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Director of:
Bright Mountain Media, Inc.
We have audited the accompanying consolidated balance sheets of Bright Mountain Media, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015 and the related
consolidated statements of operations, changes in shareholders’ equity, and cash flows for the years ended December 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly in all material respects, the financial position of Bright Mountain Media, Inc. and Subsidiaries as of December 31, 2016 and 2015 and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a net loss of $2,667,051 and used cash in operations of $1,860,515 and an accumulated deficit of $8,824,806 at December 31, 2016. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
LIGGETT & WEBB, P.A.
Certified Public Accountants
Boynton Beach, Florida
March 31, 2017
F-2
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
162,795
|
|
|
$
|
416,187
|
|
|
Accounts Receivable
|
|
|
157,013
|
|
|
|
42,449
|
|
|
Prepaid Expenses and Other Current Assets
|
|
|
132,950
|
|
|
|
109,927
|
|
|
Inventories
|
|
|
1,127,072
|
|
|
|
1,053,890
|
|
|
Total Current Assets
|
|
|
1,579,830
|
|
|
|
1,622,453
|
|
|
Fixed Assets, net
|
|
|
99,001
|
|
|
|
51,305
|
|
|
Website Acquisition Assets, net
|
|
|
967,114
|
|
|
|
630,286
|
|
|
Tradenames
|
|
|
150,000
|
|
|
|
—
|
|
|
Other Assets
|
|
|
184,400
|
|
|
|
15,547
|
|
|
Total Assets
|
|
$
|
2,980,345
|
|
|
$
|
2,319,591
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
654,140
|
|
|
$
|
323,782
|
|
|
Accrued Interest
|
|
|
11,111
|
|
|
|
—
|
|
|
Accrued Interest to Related Party
|
|
|
5,592
|
|
|
|
—
|
|
|
Premium Finance Loan Payable
|
|
|
53,643
|
|
|
|
52,406
|
|
|
Note Payable
|
|
|
500,000
|
|
|
|
—
|
|
|
Total Current Liabilities
|
|
|
1,224,486
|
|
|
|
376,188
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Debt to Related Parties, net
|
|
|
185,905
|
|
|
|
122,260
|
|
|
Total Liabilities
|
|
|
1,410,391
|
|
|
|
498,448
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01, 20,000,000 shares authorized, 100,000 and 5,200,000 issued and outstanding respectively:
|
|
|
|
|
|
|
|
|
|
Series A, 2,000,000 shares designated, 100,000 and 1,900,000 shares issued and outstanding
|
|
|
1,000
|
|
|
|
19,000
|
|
|
Series B, 1,000,000 shares designated, 0 and 1,000,000 shares issued and outstanding
|
|
|
—
|
|
|
|
10,000
|
|
|
Series C, 2,000,000 shares designated, 0 and 1,800,000 shares issued and outstanding
|
|
|
—
|
|
|
|
18,000
|
|
|
Series D, 2,000,000 shares designated, 0 and 500,000 shares issued and outstanding
|
|
|
—
|
|
|
|
5,000
|
|
|
Common stock, par value $.01, 324,000,000 shares authorized, 44,901,531 issued and outstanding, and 35,885,059 issued and outstanding, respectively
|
|
|
449,016
|
|
|
|
358,850
|
|
|
Additional paid-in-capital
|
|
|
9,944,744
|
|
|
|
7,568,048
|
|
|
Accumulated Deficit
|
|
|
(8,824,806
|
)
|
|
|
(6,157,755
|
)
|
|
Total shareholders’ equity
|
|
|
1,569,954
|
|
|
|
1,821,143
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
2,980,345
|
|
|
$
|
2,319,591
|
|
See accompanying notes to consolidated financial statements
F-3
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Product Sales
|
|
$
|
1,499,010
|
|
|
$
|
1,408,481
|
|
|
Revenues from Services
|
|
|
434,775
|
|
|
|
283,598
|
|
|
Total Revenue
|
|
|
1,933,785
|
|
|
|
1,692,079
|
|
|
Cost of sales
|
|
|
1,133,872
|
|
|
|
1,148,338
|
|
|
Gross profit
|
|
|
799,913
|
|
|
|
543,741
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,093,295
|
|
|
|
2,214,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,293,382
|
)
|
|
|
(1,670,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
69
|
|
|
|
30
|
|
|
Interest expense
|
|
|
(11,111
|
)
|
|
|
(2,627
|
)
|
|
Interest expense – related party
|
|
|
(362,627
|
)
|
|
|
-
|
|
|
Total other income (expense), net
|
|
|
(373,669
|
)
|
|
|
(2,597
|
)
|
|
Net Loss
|
|
|
(2,667,051
|
)
|
|
|
(1,673,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
Series A, Series B, Series C and Series D preferred
|
|
|
280,682
|
|
|
|
338,684
|
|
|
Total preferred stock dividends
|
|
|
280,682
|
|
|
|
338,684
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(2,947,733
|
)
|
|
$
|
(2,011,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted
|
|
|
39,867,371
|
|
|
|
34,587,695
|
|
See accompanying notes to consolidated financial statements
F-4
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2014
|
|
|
4,400,000
|
|
|
$
|
44,000
|
|
|
|
33,123,234
|
|
|
$
|
334,832
|
|
|
$
|
5,741,109
|
|
|
$
|
(2,501
|
)
|
|
$
|
(4,484,661
|
)
|
|
$
|
1,632,779
|
|
|
Common stock issued for cash (.2778/share) pursuant to exercised stock option grant
|
|
|
|
|
|
|
|
|
|
|
54,000
|
|
|
|
540
|
|
|
|
14,461
|
|
|
|
|
|
|
|
|
|
|
|
15,001
|
|
|
Common stock issued for cash ($.50/share) pursuant to exercised stock option grant
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
100
|
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
Common Stock issued for services ($.60/share)
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
70
|
|
|
|
4,130
|
|
|
|
|
|
|
|
|
|
|
|
4,200
|
|
|
Common stock issued for services ($.65/share)
|
|
|
|
|
|
|
|
|
|
|
57,000
|
|
|
|
570
|
|
|
|
36,480
|
|
|
|
|
|
|
|
|
|
|
|
37,050
|
|
|
Common stock issued for services ($.69/share)
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
70
|
|
|
|
4,760
|
|
|
|
|
|
|
|
|
|
|
|
4,830
|
|
|
Common stock issued for services ($.75/share)
|
|
|
|
|
|
|
|
|
|
|
7,400
|
|
|
|
74
|
|
|
|
5,476
|
|
|
|
|
|
|
|
|
|
|
|
5,550
|
|
|
Retired Treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,600
|
)
|
|
|
1,099
|
|
|
|
2,501
|
|
|
|
|
|
|
|
—
|
|
|
Sale of common stock for cash ($.50/share) pursuant to Subscription Agreement
|
|
|
|
|
|
|
|
|
|
|
1,980,000
|
|
|
|
19,800
|
|
|
|
970,200
|
|
|
|
|
|
|
|
|
|
|
|
990,000
|
|
|
Sale of 10% Series A Preferred Stock for cash ($.50/share) pursuant to Subscription Agreement
|
|
|
300,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
147,000
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
Sale of 10% Series D Preferred Stock for cash ($.50/share) pursuant to Subscription Agreement
|
|
|
500,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
245,000
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
|
Common stock issued for 10% dividend payment pursuant to 10% Series A Preferred Stock designations
|
|
|
|
|
|
|
|
|
|
|
160,000
|
|
|
|
1,600
|
|
|
|
(1,600
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Common stock issued for 10% dividend payment pursuant to 10% Series B Preferred Stock designations
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
1,000
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Common stock issued for 10% dividend payment pursuant to 10% Series C Preferred Stock designations
|
|
|
|
|
|
|
|
|
|
|
29,425
|
|
|
|
294
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Stock option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,327
|
|
|
|
|
|
|
|
|
|
|
|
59,327
|
|
|
Common Stock issued for acquisitions ($.75. share)
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
3,500
|
|
|
|
259,000
|
|
|
|
|
|
|
|
|
|
|
|
262,500
|
|
|
Beneficial Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,000
|
|
|
|
|
|
|
|
|
|
|
|
78,000
|
|
|
Net loss for the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,673,094
|
)
|
|
|
(1,673,094
|
)
|
|
Balance - December 31, 2015
|
|
|
5,200,000
|
|
|
$
|
52,000
|
|
|
|
35,885,059
|
|
|
$
|
358,850
|
|
|
$
|
7,568,048
|
|
|
$
|
—
|
|
|
$
|
(6,157,755
|
)
|
|
$
|
1,821,143
|
|
See accompanying notes to consolidated financial statements
F-5
BRIGHT MOUNTAIN MEDIA, INC., AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance – December 31, 2015
|
|
|
5,200,000
|
|
|
$
|
52,000
|
|
|
|
35,885,059
|
|
|
$
|
358,850
|
|
|
$
|
7,568,048
|
|
|
$
|
(6,157,755
|
)
|
|
$
|
1,821,143
|
|
|
Common stock issued for services ($0.695/share)
|
|
|
|
|
|
|
|
|
|
|
71,000
|
|
|
|
710
|
|
|
|
48,460
|
|
|
|
|
|
|
|
49,170
|
|
|
Common stock issued for services ($0.750/share)
|
|
|
|
|
|
|
|
|
|
|
3,600
|
|
|
|
36
|
|
|
|
2,664
|
|
|
|
|
|
|
|
2,700
|
|
|
Common stock issued for services ($0.850/share)
|
|
|
|
|
|
|
|
|
|
|
25,200
|
|
|
|
252
|
|
|
|
21,168
|
|
|
|
|
|
|
|
21,420
|
|
|
Sale of common stock for cash ($0.50/share) pursuant to subscription agreement
|
|
|
|
|
|
|
|
|
|
|
1,600,000
|
|
|
|
16,000
|
|
|
|
784,000
|
|
|
|
|
|
|
|
800,000
|
|
|
Common stock issued on conversion of $600,000 in related party notes payable and $3,600 related interest
|
|
|
|
|
|
|
|
|
|
|
1,207,200
|
|
|
|
12,072
|
|
|
|
591,528
|
|
|
|
|
|
|
|
603,600
|
|
|
Common stock issued on conversion of Series A preferred stock
|
|
|
(1,800,000
|
)
|
|
|
(18,000
|
)
|
|
|
1,800,000
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Common stock issued on conversion of Series B preferred stock
|
|
|
(1,000,000
|
)
|
|
|
(10,000
|
)
|
|
|
1,000,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Common stock issued on conversion of Series C preferred stock
|
|
|
(1,800,000
|
)
|
|
|
(18,000
|
)
|
|
|
1,800,000
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Common stock issued on conversion of Series D preferred stock
|
|
|
(500,000
|
)
|
|
|
(5,000
|
)
|
|
|
500,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Common stock issued for 10% dividend payment pursuant to Series A preferred stock subscription agreements
|
|
|
|
|
|
|
|
|
|
|
290,374
|
|
|
|
2,904
|
|
|
|
(2,904
|
)
|
|
|
|
|
|
|
—
|
|
|
Common stock issued for 10% dividend payment pursuant to Series B preferred stock subscription agreements
|
|
|
|
|
|
|
|
|
|
|
160,375
|
|
|
|
1,604
|
|
|
|
(1,604
|
)
|
|
|
|
|
|
|
—
|
|
|
Common stock issued for 10% dividend payment pursuant to Series C preferred stock subscription agreements
|
|
|
|
|
|
|
|
|
|
|
288,673
|
|
|
|
2,887
|
|
|
|
(2,887
|
)
|
|
|
|
|
|
|
—
|
|
|
Common stock issued for 10% dividend payment pursuant to Series D preferred stock subscription agreements
|
|
|
|
|
|
|
|
|
|
|
70,050
|
|
|
|
701
|
|
|
|
(701
|
)
|
|
|
|
|
|
|
—
|
|
|
Stock option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,472
|
|
|
|
|
|
|
|
147,472
|
|
|
Beneficial conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
621,500
|
|
|
|
|
|
|
|
621,500
|
|
|
Common stock issued for asset acquisition
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
2,000
|
|
|
|
168,000
|
|
|
|
|
|
|
|
170,000
|
|
|
Net loss for the year ended December 31 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,667,051
|
)
|
|
|
(2,667,051
|
)
|
|
Balance – December 31, 2016
|
|
|
100,000
|
|
|
$
|
1,000
|
|
|
|
44,901,531
|
|
|
$
|
449,016
|
|
|
$
|
9,944,744
|
|
|
$
|
(8,824,806
|
)
|
|
$
|
1,569,954
|
|
See accompanying notes to consolidated financial statements
F-6
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,667,051
|
)
|
|
$
|
(1,673,094
|
)
|
|
Adjustments to reconcile net loss to net cash used in operations:
|
|
|
|
|
|
|
|
|
|
Bad Debt Expense
|
|
|
15,000
|
|
|
|
798
|
|
|
Depreciation
|
|
|
13,955
|
|
|
|
14,248
|
|
|
Amortization of Debt Discount
|
|
|
321,056
|
|
|
|
260
|
|
|
Amortization
|
|
|
252,134
|
|
|
|
181,905
|
|
|
Stock option compensation expense
|
|
|
147,472
|
|
|
|
59,327
|
|
|
Impairment of Website Assets
|
|
|
95,773
|
|
|
|
70,531
|
|
|
Common stock issued for services
|
|
|
73,290
|
|
|
|
51,630
|
|
|
Product refund reserve
|
|
|
14,580
|
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
(144,144
|
)
|
|
|
(39,137
|
)
|
|
Inventory
|
|
|
(15,182
|
)
|
|
|
(277,442
|
)
|
|
Prepaid expenses and other current assets
|
|
|
(73,440
|
)
|
|
|
(23,629
|
)
|
|
Other assets
|
|
|
(118,436
|
)
|
|
|
(2,967
|
)
|
|
Accounts payable
|
|
|
224,478
|
|
|
|
45,959
|
|
|
Net cash used in operating activities
|
|
|
(1,860,515
|
)
|
|
|
(1,591,611
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(61,651
|
)
|
|
|
(27,479
|
)
|
|
Purchase of websites
|
|
|
(607,463
|
)
|
|
|
(169,500
|
)
|
|
Net cash used in investing activities
|
|
|
(669,114
|
)
|
|
|
(196,979
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
800,000
|
|
|
|
1,010,001
|
|
|
Sale of Preferred stock
|
|
|
—
|
|
|
|
400,000
|
|
|
Proceeds from premium finance loan, net of repayment
|
|
|
1,237
|
|
|
|
4,540
|
|
|
Issuance of note payable
|
|
|
500,000
|
|
|
|
—
|
|
|
Long term Debt – Loan from related parties
|
|
|
975,000
|
|
|
|
200,000
|
|
|
Net cash provided by financing activities
|
|
|
2,276,237
|
|
|
|
1,614,541
|
|
|
Net decrease in cash
|
|
|
(253,392
|
)
|
|
|
(174,049
|
)
|
|
Cash at beginning of period
|
|
|
416,187
|
|
|
|
590,236
|
|
|
Cash at end of period
|
|
$
|
162,795
|
|
|
$
|
416,187
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
30,725
|
|
|
$
|
2,367
|
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and financing activities
|
|
|
|
|
|
|
|
|
|
Premium finance loan payable recorded as prepaid
|
|
$
|
84,825
|
|
|
$
|
87,212
|
|
See accompanying notes to consolidated financial statements
F-7
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
During 2016, the Company recorded a beneficial conversion debt discount to additional paid-in-capital of $621,500.
During January 2016, in connection with the purchase of the Warisboring website, the Company issued a note payable to the seller for $150,000, recognizing a discount on the note of $32,732.
During 2016, the Company issued 200,000 shares of common stock with a fair value of $170,000 for an asset acquisition which included $58,000 in inventory and assumed liabilities of $40,000.
During 2016, the Company issued 809,472 shares of its common stock as dividends to the holders of its Series A, Series B, Series C, and Series D Stock only.
During 2016, the Company issued 5,100,000 shares of its common stock to the holders of its Series A Stock, Series B Stock, Series C Stock, and Series D Stock for conversion of 5,100,000 shares of its preferred stock Series A, Series B, Series C, and Series D.
During 2016, the Company issued 1,207,200 shares of its common stock upon the conversion of $600,000 principal amount and $3,600 of interest due under convertible notes.
During 2015, the Company retired 360,000 shares of common stock with a cost of $2,501.
During 2015, the Company issued 289,425 shares of common stock due Series A, Series B, and Series C Stockholders with a fair market value of $217,069.
See accompanying notes to consolidated financial statements
F-8
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Bright Mountain Media, Inc., formerly known as Bright Mountain Acquisition Corporation, is a Florida corporation formed on May 20, 2010. Its wholly owned subsidiaries, Bright Mountain LLC, and The Bright Insurance Agency, LLC, were formed as Florida limited liability companies in May 2011. Its wholly owned subsidiary, Bright Watches, LLC was formed as Florida limited liability company in December 2015. When used herein, the terms "BMTM," the "Company," "we," "us," "our" or "Bright Mountain" refers to Bright Mountain Media, Inc. and its subsidiaries.
The Company is a media holding company of online assets. We sell various products through our proprietary websites and retail location, and through third party e-commerce distributor portals. Our websites provide content designed to attract and retain targeted Internet audiences. We generate revenues from two segments, product sales and services. Services consists of advertising revenue and subscription revenue. Our advertising revenue is generated primarily through the display of paid listings as well as display advertisements appearing on our websites.
On December 16, 2016, with an effective date of December 15, 2016, under the terms of an Asset Purchase Agreement, the Company acquired the assets, constituting the Black Helmet Apparel business (“Black Helmet”), from Sostre Enterprises, Inc. Assets acquired included various website properties and content, social media content, inventory and other intellectual property rights. The Black Helmet line of apparel features clothing and accessories focused on firefighters.
Consideration for the acquisition of Black Helmet consisted of $250,000 in cash, 200,000 shares of common stock valued at $170,000, the forgiveness of working capital advances of $200,000 and assumption of $40,000 in liabilities.
The Company obtained approximately 21% of its 2016 revenues from services Google AdSense, a third-party provider. Paid listings are priced on a price per click basis and when a user submits a search query and then clicks on a Google AdSense paid listing displayed in response to the query, Google bills the advertiser that purchased the paid listing directly and shares a portion of the fee charged to the advertiser with the Company. The Company's remaining 79% of revenues from services was from other third-party providers, direct advertising, and subscriptions.
Bright Mountain plans to grow its business through organic growth and acquisitions. The Bright Mountain strategy is to concentrate its marketing and development primarily to military and public safety audiences and associated demographic.
Our websites contain a number of sections with demographically oriented information including originally written news content, blogs, forums, career information, and video.
Principles of Consolidation
The consolidated financial statements include the accounts of BMTM and its wholly owned subsidiaries, Bright Mountain LLC, The Bright Insurance Agency, LLC and Bright Watches, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue on our products in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-10
, "Revenue Recognition in Financial
Statements"
. Under these guidelines, revenue is recognized on sales transactions when all of the following exist: persuasive evidence of an arrangement did exist, delivery of product has occurred, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. The Company has several revenue streams generated directly from its website and specific revenue recognition criteria for each revenue stream is as follows:
·
Sale of merchandise directly to consumers: The Company's product sales are recognized either FOB shipping point or FOB destination, dependent on the customer. Revenues are therefore recognized at point of ownership transfer;
·
Advertising revenue is received directly form companies who pay the Company a monthly fee for advertising space;
F-9
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1
–
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
·
Advertising revenues are generated by users "clicking" on website advertisements utilizing several ad network partners: Revenues are recognized, on a net basis, upon receipt of payment by the ad network partner since the revenue is not determinable until it is received; and
·
Subscription revenues are generated by the sale of access to career postings or period subscription on one of our websites. The term of the subscriptions range from one month to twelve months. Revenues are recognized, on a net basis, over the term of the subscription period. All sales are final per the subscription Terms of Use.
The Company follows the guidance of ASC 605-50-25, "
Revenue Recognition, Customer Payments
". Accordingly, any incentives received from vendors are recognized as a reduction of the cost of products included in inventories. Promotional products or samples given to customers or potential customers are recognized as a cost of goods sold. Cash incentives provided to our customers are recognized as a reduction of the related sale price, and, therefore, are a reduction in sales.
Use of Estimates
Our consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States ("GAAP"). These accounting principles require management 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 our consolidated financial statements as well as reported amounts of revenue and expenses during the periods presented. Our consolidated 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. Significant estimates included in the accompanying consolidated financial statements include revenue recognition, the fair value of acquired assets for purchase price allocation in business combinations, valuation of inventory, valuation of intangible assets, estimates of amortization period for intangible assets, estimates of depreciation period for fixed assets, valuation of equity based transactions, and the valuation allowance on deferred tax assets.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments and Fair Value Measurements
The Company measures its financial assets and liabilities in accordance with GAAP. For certain of our financial instruments, including cash, accounts payable, accrued expenses, and the short-term portion of long-term debt, the carrying amounts approximate fair value due to their short maturities.
We adopted accounting guidance for financial and non-financial assets and liabilities (ASC 820). The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2:
Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
F-10
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Level 3:
Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which are generally net 30 or net 60 days. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
Inventories
Inventories are stated at the lower of cost or market using the first in, first out (FIFO) method. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Cost of Sales
Components of costs of sales include product costs, shipping costs to customers and any inventory adjustments.
Shipping and Handling Costs
The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs for shipments to customers as cost of revenues.
Sales Return Reserve Policy
Our return policy generally allows our end users to return purchased products for refund or in exchange for new products. We estimate a reserve for sales returns and record that reserve amount as a reduction of sales and as a sales return reserve liability. Sales to consumers on our web site generally may be returned within a reasonable period of time.
Product Warranty Reserve Policy
The Company is a retail distributor of products and warranties are the responsibility of the manufacturer. Therefore, the Company does not record a reserve for product warranty.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets of seven years for office furniture and equipment, and five years for computer equipment. Leasehold improvements are amortized over the lesser of the lease term or the useful life of the improvements. Expenditures for maintenance and repairs along with fixed assets below our capitalization threshold of $500 are expensed as incurred.
Website Development Costs
The Company accounts for its website development costs in accordance with ASC 350-50,
"Website Development Costs"
. These costs, if any, are included in intangible assets in the accompanying consolidated financial statements or expensed immediately if the Company cannot support recovery of these costs from positive future cash flows.
F-11
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASC 350-50 requires the expensing of all costs of the preliminary project stage and the training and application maintenance stage and the capitalization of all internal or external direct costs incurred during the application and infrastructure development stage. Upgrades or enhancements that add functionality are capitalized while other costs during the operating stage are expensed as incurred. The Company amortizes the capitalized website development costs over an estimated life of five years.
As of December 31, 2016 and 2015, all website development costs have been expensed.
Amortization and Impairment of Long-Lived Assets
Amortization and impairment of long-lived assets are non-cash expenses relating primarily to website acquisitions. The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10,
"Accounting for the Impairment or
Disposal of Long-Lived Assets"
. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Website acquisition costs are amortized over five years. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. While it is likely that we will have significant amortization expense as we continue to acquire websites, we believe that intangible assets represent costs incurred by the acquired website to build value prior to acquisition and the related amortization and impairment charges of assets, if applicable, are not ongoing costs of doing business. Non-cash impairment expense is included in selling, general and administrative expenses on the accompanying statement of operations. For the year ended December 31, 2016 and the year ended December 31, 2015, non-cash impairment expense was $95,773 and $70,531 respectively. For the year ended December 31, 2016 and the year ended December 31, 2015, non-cash amortization expense was $252,134 and $181,905 respectively.
Stock-Based Compensation
The Company accounts for stock-based instruments issued to employees for services in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The value of the portion of an employee award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The Company accounts for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC Topic 505-50,
"Equity-Based
Payments to Non-Employees".
The Company estimates the fair value of stock options by using the Black-Scholes option-pricing model. Non-cash stock-based stock option compensation is expensed over the requisite service period and are included in selling, general and administrative expenses on the accompanying statement of operations. For the year ended December 31, 2016 and the year ended December 31, 2015, non-cash stock-based stock option compensation expense was $147,472 and $59,327, respectively.
Advertising, Marketing and Promotion Costs
Advertising, marketing and promotion expenses are expensed as incurred and are included in selling, general and administrative expenses on the accompanying consolidated statement of operations. For the years ended December 31, 2016 and 2015, advertising, marketing and promotion expense was $35,387 and $29,563, respectively.
Income Taxes
We use the asset and liability method to account for income taxes. Under this method, deferred income taxes are determined based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements which will result in taxable or deductible amounts in future years and are measured using the currently enacted tax rates and laws. A valuation allowance is provided to reduce net deferred tax assets to the amount that, based on available evidence, is more likely than not to be realized.
F-12
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company follows the provisions of ASC 740-10,
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements
in the period during which, based on all available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The
portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as
a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would
be payable to the taxing authorities upon examination.
As of December 31, 2016, tax years 2016, 2015, and 2014 remain open for Internal Revenue Service ("IRS") audit. The Company has received no notice of audit or any notifications from the IRS for any of the open tax years.
Concentrations
The Company purchases a substantial amount of its products from two vendors; Citizens Watch Company of America, Inc., and Bulova Corporation. During 2016, these two vendors accounted for 38% and 17%, respectively of total products purchased as compared to 34% and 26% in 2015. Although we continue to add additional product vendors, and expand our product lines and vendor relationships, due to the high concentration and reliance on these two vendors, the loss of one of these two vendors could adversely affect the Company's operations.
The Company generates revenues from two segments: product sales and services. We sell many products through various distribution portals, which include Amazon and eBay. During 2016, these two portals accounted for 65% and 10%, respectively of our total product sales as compared to 88% and 6% in 2015. Due to high concentration and reliance on these portals, the loss of a working relationship with either of these two portals could adversely affect the Company's operations.
A substantial amount of payments for our products sold are processed through PayPal. A disruption in PayPal payment processing could have an adverse effect on the Company's operations and cash flow.
Credit Risk
The Company minimizes the concentration of credit risk associated with its cash by maintaining its cash with high quality federally insured financial institutions. However, cash balances in excess of the FDIC insured limit of $250,000 are at risk. At December 31, 2016 and December 31, 2015, respectively, the Company had cash balances above the FDIC insured limit of approximately $0 and $166,187 respectively. The Company performs ongoing evaluations of its trade accounts receivable customers and generally does not require collateral.
Concentration of Funding
During the years ended December 31, 2016 and 2015 a large portion of the Company's funding was provided through the issuance of 12% convertible notes and the sale of shares of the Company's common stock and preferred stock to a related party officer and director, as well as to a principal shareholder.
Basic and Diluted Net Earnings (Loss) Per Common Share
In accordance with ASC 260-10
, "Earnings Per Share",
basic net earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. As of December 31, 2016 and 2015 there were 2,281,000 and 1,701,000 common stock equivalent shares outstanding as stock options, respectively; 100,000 and 5,200,000 common stock equivalents from the conversion of preferred stock, respectively; and 1,150,000 and 400,000 common stock equivalents from the conversion of notes payable, respectively. Equivalent shares were not utilized as the effect is anti-dilutive.
F-13
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment Information
In accordance with the provisions of ASC 280-10,
"Disclosures about Segments of an Enterprise and Related Information",
the Company is required to report financial and descriptive information about its reportable operating segments. The Company has two identifiable operating segments based on the activities of the Company in accordance with the ASC 28-10. The Company's two segments are product sales and services as of December 31, 2016 and 2015. The product sales segment sells merchandise directly to customers thorough e-commerce distributor portals such as Amazon and eBay and through our proprietary websites and retail location. The services segment is focused on producing advertising revenue generated by users "clicking" on website advertisements utilizing several ad network partners and direct advertisers and subscription revenue generated by the sale of access to career postings on one of our websites.
Recent Accounting Pronouncements
In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “
Revenue from Contracts with Customers
.”
The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605 "Revenue Recognition," and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35 "
Revenue Recognition – Construction-Type and Production-Type Contracts
." The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU No. 2014-09.
We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In June 2014, the FASB issued ASU 2014-12, "
Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period
." This ASU provides more explicit guidance for treating share-based payment awards that require a specific performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The adoption of this guidance had no effect on the consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “
Presentation of Financial Statements - Going Concern
,” which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application was permitted. The adoption of ASU 2014-15 did not have a material effect on the consolidated financial statements.
F-14
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2015, FASB issued ASU No. 2015-11
, “Inventory (Topic 330): Simplifying the Measurement of Inventory
” more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method
.
For public business entities, this ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments in this ASU should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.
We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In February 2016, the FASB issued ASU 2016-02 “
Leases
,” which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We do not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
In April 2016, the FASB issued ASU 2016–10
“Revenue from Contract with Customers
(Topic 606):
Identifying Performance Obligations and Licensing.”
The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In April 2016, the FASB issued ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments”
ASU 2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company sustained a net loss of $2,667,051 and used cash in operating activities of $1,860,515 for the year ended December 31, 2016. The Company had an accumulated deficit of $8,824,806 at December 31, 2016. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving investment capital and loans from related parties to sustain its current level of operations.
Management plans to continue raising additional capital through private placements and is exploring additional avenues for future fund-raising through both public and private sources.
F-15
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 – GOING CONCERN (CONTINUED)
The consolidated financial statements do not include any adjustments relating 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 3 – ACQUISITIONS
On January 2, 2015, the Company entered into a Website Asset Purchase Agreement with an unrelated third party. As consideration for the purchase, the Company paid $50,000 in cash and issued 250,000 shares of its common stock with a fair value of $187,500. In conjunction with the Website Asset Purchase Agreement, the Company also entered into a Website Management Agreement. Under the terms of the Website Management Agreement, which expires on December 31, 2017, the Company agreed to pay $30,000 per year for full-time services in managing the website. The acquisition was accounted following ASC 805
“Business
Combinations.”
The operations of the website prior to the Company’s acquisition were immaterial; therefore, pro forma information was not presented. There were no costs of acquisition incurred as a result of this purchase.
On February 17, 2015, the Company entered into a Website Asset Purchase Agreement with an unrelated third party for an aggregate purchase price of $102,000. The purchase price consisted of a cash payment of $27,000, payable at a rate of $1,500 per month beginning on the closing date, and 100,000 shares of the Company’s common stock with a fair value of $75,000. The asset acquisition was accounted for as a purchase of assets in accordance with Rule 11-01 (d) of Regulation S-X and ASC 805-10-55-4. There were no costs of acquisition incurred as a result of the asset purchase.
On April 14, 2015, the Company entered into a Website Asset Purchase Agreement with an unrelated third party for a purchase price of $50,000 in cash. The acquisition was accounted for following ASC
805 "Business Combinations."
The operations of the website prior to the Company's acquisition were immaterial; therefore, pro forma information was not presented. There were no costs of acquisition incurred as a result of this purchase.
On June 1, 2015, the Company entered into a Website Asset Purchase Agreement with an unrelated third party for a purchase price of $50,000 in cash. The asset acquisition was accounted for as a purchase of assets in accordance with Rule 11-01 (d) of Regulation S-X and ASC 805-10-55-4. There were no costs of acquisition incurred as a result of the asset purchase.
On January 2, 2016, the Company closed the acquisition of warisboring.com pursuant to the terms and conditions of the Website Asset Purchase Agreement dated December 4, 2015 for an aggregate purchase price of $250,000. The purchase price consisted of a cash payment of $100,000 at the January 4, 2016 closing and the balance of $150,000, payable monthly in an amount equal to 30% of the net revenues from the website, when collected, with the total amount of the earn out to be paid by January 4, 2019. The Company recorded the future monthly payments totaling $150,000 at a present value of $117,268, net of discount of $32,732. The present value was calculated at a discount rate of 12% (which is the Company’s most recent borrowing rate) using the estimated future revenues from the website to estimate the payment dates. The estimated future revenues from the website were based on the average historical monthly revenues from the website prior to the Company’s acquisition. During 2016, the Company amortized $10,911 of this discount. The acquisition was accounted following ASC 805 “
Business Combinations
.” Under the purchase method of accounting, the transaction was valued for accounting purposes at $217,268, which was the fair value of warisboring.com. The Company has initially determined there was only two amortizable intangible assets. The acquisition date estimated fair value of the consideration transferred consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Customer and related relationships
|
|
$
|
39,578
|
|
|
Website
|
|
|
177,690
|
|
|
Total
|
|
$
|
217,268
|
|
The above estimated fair value of the intangible assets are based on a preliminary purchase price allocation prepared by management. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we may record adjustments to the asset acquired, with the corresponding offset to website. After the preliminary purchase price allocation period, we record adjustments to assets acquired subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.
F-16
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 3 – ACQUISITIONS (CONTINUED)
On February 2, 2016, the Company entered into a Website Asset Purchase Agreement with unrelated third parties for a purchase price of $15,000 in cash. The acquisition was accounted for following ASC
805 "Business Combinations."
The operations of the website prior to the Company's acquisition were immaterial; therefore, pro forma information was not presented. There were no costs of acquisition incurred as a result of this purchase.
On December 16, 2016, with an effective date of December 15, 2016 under the terms of the Asset Purchase Agreement, we acquired the assets constituting the Black Helmet apparel business from Sostre Enterprises, Inc., including various website properties and content, social media content, inventory and other intellectual property rights. The consideration for the acquisition consisted of $250,000 in cash, 200,000 shares of our common stock valued at $170,000, the assumption of $40,000 in liabilities and the forgiveness of working capital advances we had previously made to the seller totaling $200,000.
A summary of assets acquired is as follows:
|
|
|
|
|
|
Inventory
|
|
$
|
58,000
|
|
|
Intangibles – website
|
|
|
80,000
|
|
|
Intangibles – trade name
|
|
|
150,000
|
|
|
Intangibles – customer relationships
|
|
|
252,000
|
|
|
Intangibles – non compete agreements
|
|
|
120,000
|
|
|
Total assets acquired
|
|
$
|
660,000
|
|
Pro forma results
The following table sets forth the unaudited pro forma results of the Company as if the acquisition of the Warisboring.com website and the assets constituting the Black Helmet apparel business had taken place on the first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the assets been acquired as of the first day of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Total revenue
|
|
$
|
3,064,423
|
|
|
$
|
3,189,217
|
|
|
Total expenses
|
|
|
6,048,465
|
|
|
|
5,194,111
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(3,264,724
|
)
|
|
$
|
(2,343,578
|
)
|
|
Basic and diluted net loss per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
At December 31, 2016 and December 31, 2015, website acquisition assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Website Acquisition Assets
|
|
$
|
1,739,179
|
|
|
$
|
1,054,444
|
|
|
Less: Accumulated Amortization
|
|
|
(581,045
|
)
|
|
|
(328,911
|
)
|
|
Less: Impairment Loss
|
|
|
(191,020
|
)
|
|
|
(95,247
|
)
|
|
Website Acquisition Assets, net
|
|
$
|
967,114
|
|
|
$
|
630,286
|
|
Non-cash amortization expense for the years ending December 31, 2016 and 2015 was $252,134 and $181,905 respectively.
Non-cash impairment expense for the years ending December 31, 2016 and 2015 was $95,773 and $70,531 respectively.
In connection with the acquisition of the Black Helmet apparel business, the Company recognized $150,000 attributable to tradenames acquired.
F-17
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 4 – INVENTORIES
At December 31, 2016 and December 31, 2015 inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Product Inventory: Clocks and Watches
|
|
$
|
982,283
|
|
|
$
|
1,017,220
|
|
|
Product Inventory: Other Inventory
|
|
|
144,789
|
|
|
|
36,670
|
|
|
Total Inventory Balance
|
|
$
|
1,127,072
|
|
|
$
|
1,053,890
|
|
NOTE 5 – PREPAID COSTS AND EXPENSES
At December 31, 2016 and December 31, 2015, prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Other Current Assets
|
|
$
|
—
|
|
|
$
|
14,500
|
|
|
Prepaid Rent
|
|
|
46,523
|
|
|
|
—
|
|
|
Prepaid Insurance
|
|
|
84,825
|
|
|
|
87,212
|
|
|
Prepaid Inventory
|
|
|
1,602
|
|
|
|
8,215
|
|
|
Prepaid Expenses and Other Current Assets
|
|
$
|
132,950
|
|
|
$
|
109,927
|
|
NOTE 6 – PROPERTY AND EQUIPMENT
At December 31, 2016 and December 31, 2015, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Depreciable Life
|
|
|
|
|
2016
|
|
|
2015
|
|
|
(Years)
|
|
|
Furniture and Fixtures
|
|
$
|
70,108
|
|
|
$
|
49,088
|
|
|
7
|
|
|
Computer Equipment
|
|
|
56,142
|
|
|
|
50,522
|
|
|
5
|
|
|
Leasehold Improvements
|
|
|
35,011
|
|
|
|
—
|
|
|
10
|
|
|
Total Fixed Assets
|
|
|
161,261
|
|
|
|
99,610
|
|
|
|
|
|
|
Less: Accumulated Depreciation
|
|
|
(62,260
|
)
|
|
|
(48,305
|
)
|
|
|
|
|
|
Total Fixed Assets, net
|
|
$
|
99,001
|
|
|
$
|
51,305
|
|
|
|
|
|
Non-cash depreciation expense for the years ending December 31, 2016 and 2015 was $13,955 and $14,248 respectively.
NOTE 7 – SEGMENT INFORMATION
The Company has two identifiable segments as of December 31, 2016; products and services. The products segment sells merchandise directly to customers thorough e-commerce distributor portals such as Amazon and eBay and through our proprietary websites and retail location. The services segment is focused on producing advertising revenue generated by users "clicking" on website advertisements utilizing several ad network partners and direct advertisers and subscription revenue generated by the sale of access to career postings on one of our websites.
The following information represents segment activity for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2016
|
|
|
|
|
Products
|
|
|
Services
|
|
|
Total
|
|
|
Revenues
|
|
$
|
1,499,010
|
|
|
$
|
434,775
|
|
|
$
|
1,933,785
|
|
|
Website Amortization
|
|
$
|
—
|
|
|
$
|
252,134
|
|
|
$
|
252,134
|
|
|
Depreciation
|
|
$
|
10,817
|
|
|
$
|
3,138
|
|
|
$
|
13,955
|
|
|
Impairment
|
|
$
|
—
|
|
|
$
|
95,773
|
|
|
$
|
95,773
|
|
|
Loss from operations
|
|
$
|
(1,526,442
|
)
|
|
$
|
(766,940
|
)
|
|
$
|
(2,293,382
|
)
|
|
Segment Assets
|
|
$
|
1,648,690
|
|
|
$
|
1,331,655
|
|
|
$
|
2,980,345
|
|
F-18
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 7 – SEGMENT INFORMATION (CONTINUED)
The following information represents segment activity for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2015
|
|
|
|
|
Products
|
|
|
Services
|
|
|
Total
|
|
|
Revenues
|
|
$
|
1,408,481
|
|
|
$
|
283,598
|
|
|
$
|
1,692,079
|
|
|
Website Amortization
|
|
$
|
—
|
|
|
$
|
181,905
|
|
|
$
|
181,905
|
|
|
Depreciation
|
|
$
|
11,860
|
|
|
$
|
2,388
|
|
|
$
|
14,248
|
|
|
Impairment
|
|
$
|
—
|
|
|
$
|
70,531
|
|
|
$
|
70,531
|
|
|
Loss from operations
|
|
$
|
(1,181,233
|
)
|
|
$
|
(491,861
|
)
|
|
$
|
(1,673,094
|
)
|
|
Segment Assets
|
|
$
|
1,582,563
|
|
|
$
|
737,028
|
|
|
$
|
2,319,591
|
|
NOTE 8 – LONG TERM DEBT TO RELATED PARTIES
Beneficial Conversion Feature
On February 9, 2016, the Company issued a $100,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on February 9, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $39,000 with the unamortized balance being charged to interest expense upon conversion.
On May 19, 2016, the Company issued a $100,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on May 19, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $50,000 with the unamortized balance being charged to interest expense upon conversion.
On June 10, 2016, the Company issued a $50,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on June 10, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $25,000 with the unamortized balance being charged to interest expense upon conversion.
F-19
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 8 – LONG TERM DEBT TO RELATED PARTIES (CONTINUED)
On June 25, 2016, the Company issued a $50,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on June 25, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $35,000 with the unamortized balance being charged to interest expense upon conversion.
On July 7, 2016, the Company issued a $50,000 12% convertible promissory note that had conversion prices that create a beneficial conversion. This note matured on July 7, 2021. This note was convertible at the option of the holder into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion features is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest over the five-year life of the note using the effective interest method. In August 2016, the note was converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016 the Company recognized a debt discount of $35,000 with the unamortized balance being charged to interest expense upon conversion.
On July 25, 2016, the Company issued a $50,000 12% convertible promissory note that had conversion prices that create a beneficial conversion. This note matured on July 25, 2021. This note was convertible at the option of the holder into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion features is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest over the five-year life of the note using the effective interest method. In August 2016, the note was converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016 the Company recognized a debt discount of $35,000 with the unamortized balance being charged to interest expense upon conversion.
In August 2015, the Company issued 1,207,200 shares of common stock upon the conversion at $0.50 per share of $600,000 in convertible notes payable and $3,600 of accrued interest.
Following the conversion of outstanding notes in August 2016, the Company issued a series of 12% convertible promissory notes that have conversion prices that create a beneficial conversion. This note mature five years from issuance and are convertible at the option of the holder into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion features is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest over the five-year life of the note using the effective interest method.
F-20
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 8 – LONG TERM DEBT TO RELATED PARTIES (CONTINUED)
A summary of these note issuances is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Maturity Date
|
|
|
Principal
|
|
|
Discount Recognized
|
|
|
Amortization Expense 2016
|
|
|
Carry Amount at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/26/16
|
|
|
9/26/21
|
|
|
$
|
100,000
|
|
|
$
|
70,000
|
|
|
$
|
3,692
|
|
|
$
|
33,692
|
|
10/14/16
|
|
|
10/14/21
|
|
|
|
100,000
|
|
|
|
70,000
|
|
|
|
3,024
|
|
|
|
33,024
|
|
10/31/16
|
|
|
10/31/21
|
|
|
|
100,000
|
|
|
|
70,000
|
|
|
|
2,372
|
|
|
|
32,372
|
|
11/03/16
|
|
|
11/03/21
|
|
|
|
50,000
|
|
|
|
35,000
|
|
|
|
1,120
|
|
|
|
16,120
|
|
11/11/16
|
|
|
11/11/21
|
|
|
|
100,000
|
|
|
|
70,000
|
|
|
|
1,934
|
|
|
|
31,934
|
|
11/21/16
|
|
|
11/21/21
|
|
|
|
50,000
|
|
|
|
35,000
|
|
|
|
775
|
|
|
|
15,775
|
|
12/15/16
|
|
|
12/15/21
|
|
|
|
75,000
|
|
|
|
52,500
|
|
|
|
488
|
|
|
|
22,988
|
|
|
|
|
|
|
|
|
|
$
|
575,000
|
|
|
$
|
402,500
|
|
|
$
|
13,405
|
|
|
$
|
185,905
|
On December 22 and 29, 2015, the Company issued $100,000 and $100,000, respectively, of 12% convertible notes that had conversion prices that create a beneficial conversion. The notes matured December 22 and 29, 2020, respectively. These notes were convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The Company recognized $39,000 and $39,000 of debt discount, respectively. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. As of December 31, 2015 the carrying amount was $122,260. During the year ended December 31, 2016 the Company amortized a total of $77,740 upon conversion in August 2016, and $260 in 2015, respectively.
NOTE 9 – NOTE PAYABLE
On November 30, 2016, the Company entered into a promissory note agreement with an unaffiliated party in the principal amount of $500,000. The note is unsecured, carries an interest rate of 25% per annum payable in arrears at maturity. The note matures November 30, 2017 and may be prepaid at any time without notice or prepayment penalty. In the event of default of any loan provision, the lender can declare all or any portion of the unpaid principal and interest immediately due and payable.
Maturities of Long-Term Obligations for Five Years and Beyond
The minimum annual principal payments of long-term debt to related parties and notes payable at December 31, 2016 were:
|
|
|
|
|
|
2017
|
|
$
|
500,000
|
|
|
2018
|
|
|
—
|
|
|
2019
|
|
|
—
|
|
|
2020 and thereafter
|
|
|
575,000
|
|
|
Total minimum principal payments
|
|
$
|
1,075,000
|
|
NOTE 10 –PREMIUM FINANCE LOANS PAYABLE
Premium Finance Loan Payable
The Company generally finances its annual insurance premiums through the use of short-term notes, payable in 10 equal monthly installments. Coverages financed include Directors and Officers and Errors and Omissions with premiums financed in 2016 of $60,943 and $24,747, respectively.
Total Premium Finance Loan Payable balance for all of the Company's policies was $53,643 at December 31, 2016 and $52,406 at December 31, 2015.
F-21
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its corporate offices at 6400 Congress Avenue, Suite 2050, Boca Raton, Florida 33487 under a long-term non-cancellable lease agreement, which contains renewal options. The lease, which was entered into on August 25, 2014 was amended on July 30, 2015 to increase the original approximate 2,014 square feet to approximately 4,450 square feet. The term of the lease was extended and will terminate on March 14, 2019 at a current base rent of for a term of approximately $8,978 per month for the first twelve months with a 3% escalation each year. An additional security deposit of $2,500 was required. Rent is all-inclusive and includes electricity, heat, air-conditioning, and water. The original rent commencement date is October 11, 2014 and will expire on March 14, 2019.
The Company leases retail space for its product sales division at 4900 Linton Boulevard, Bay 17A, Delray Beach, FL 33445 under a long-term, non-cancellable lease agreement, which contains renewal options. The lease, which was entered into on August 25, 2014, is for approximately 2,150 square feet for a term of 36 months in Delray Beach, Florida at a base rent of approximately $2,329 per month for the first twelve months with a 3% escalation each year. A security deposit of $3,865, first month's prepaid rent of $3,865, and last month's prepaid rent of $4,015 was paid upon lease execution. The lease is a triple net lease. Common area maintenance is approximately $1,317 per month for the first twelve months with annual escalations not to exceed 4%. The rent commencement date is October 1, 2014 and was initially set to expire on September 30, 2017. In January 2017, this lease was modified and extended concurrent with the expansion of our retail space in the same location.
In January 2017, the Company entered into an additional lease and modified and extended our existing lease for our retail site. The new lease agreement provides for an additional 2,720 square feet adjacent to our existing Delray Beach FL location commencing February 1, 2017, expiring January 31, 2022. This lease provides for an initial monthly base rental of $1,757, representing a one-half reduction in rental payments for the first year as an accommodation. Minimum base rental for year two is $3,513 per month, escalating 3% per year thereafter. The Company also provided a $10,000 security deposit and prepaid $96,940 in future rents on the facility through the funding of certain leasehold improvements. Simultaneously, the Company modified our existing lease on the initial space, extending this lease to coincide with the new space, expiring January 31, 2022, at an initial base rental of $2,471 per month, escalating 3% per year thereafter.
On December 16, 2016, with an effective date of December 15, 2016 under the terms of the Asset Purchase Agreement, we acquired the assets constituting the Black Helmet apparel business including various website properties and content, social media content, inventory and other intellectual property rights. (See Note 3) We also acquired the right to assume the lease of their warehouse facility consisting of approximately 2,667 square feet. The lease was renewed for a three year term in April 2016 with an initial base rental rate of $1,641 per month, escalating at approximately 3% per year thereafter.
Future minimum lease commitments due for facilities under non-cancellable operating leases at December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
2017
|
|
$
|
190,372
|
|
|
2018
|
|
|
211,726
|
|
|
2019
|
|
|
101,157
|
|
|
2020 and thereafter
|
|
|
165,659
|
|
|
Total minimum lease payments
|
|
$
|
668,914
|
|
Rent expense for the years ended December 31, 2016 and 2015 was $177,150 and $120,162 respectively.
F-22
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal
From time-to-time, we may be involved in litigation or be subject to claims arising out of our operations or content appearing on our websites in the normal course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on our company because of defense and settlement costs, diversion of management resources and other factors.
Other Commitments
The Company entered into various contracts or agreements in the normal course of business, which may contain commitments. During the years ended December 31, 2016 and 2015, the Company entered into agreements with third party vendors to supply website content and data, website software development, advertising, public relations, and legal services. All of these commitments contain provisions whereby either party may terminate the agreement with specified notice, normally 30 days, and with no further obligation on the part of either party.
During the years ended December 31, 2016 and 2015, the Company entered into agreements with third parties related to websites acquired during the respective periods as further discussed in Note 3. In connection with the two acquisitions made in 2016, the Company entered into a management agreement associated with the WarIsBoring website at $5,000 per month through November 18, 2018, and two service agreements in connection the Black Helmet Apparel acquisition at $6,250 per month, each, through December 15, 2019, plus the ability to earn bonuses ranging from $50,000 for the year ending December 31, 2017 to $100,000 for the year ending December 31, 2019 each based upon the satisfaction of certain revenue and gross margin targets. Future contingent milestone payments under the acquisitions made in 2015 totaled approximately $40,000 and $40,000 for 2016 and 2015, respectively.
Total payments for the years ended December 31, 2016 and 2015 was $120,250 and $164,550 respectively.
Contractual commitments remaining under various acquisition related agreements total: $245,000 in 2017; $205,000 in 2018; $144,000 in 2019 and $0 for 2020 and 2021, respectively.
The Company entered into an Executive Employment Agreement with our Chief Executive Officer, with an effective date of June 1, 2014. Under the terms of this agreement, the Company will compensate the Chief Executive Officer with a base salary of $75,000 annually, and he is entitled to receive discretionary bonuses as may be awarded by the Company's board of directors from time to time. The initial term of the agreement is three years, and the Company may extend it for an additional one-year period upon written notice at least 180 days prior to the expiration of the term.
The Chief Executive Officer's base annual salary was increased to $77,500 in January, 2015, $96,000 in July 2015, and to $125,000 effective October 1, 2015 upon recommendation of the Compensation Committee of the board of directors. In May 2016 the Chief Executive Officer orally agreed to a reduction in his base salary to $95,000 per annum.
The agreement will terminate upon the Chief Executive Officer's death or disability. In the event of a termination upon his death, the Company is obligated to pay his beneficiary or estate an amount equal to one year base salary plus any earned bonus at the time of his death. In the event the agreement is terminated as a result of his disability, as defined in the agreement, he is entitled to continue to receive his base salary for a period of one year. The Company is also entitled to terminate the agreement either with or without case, and the Chief Executive Officer is entitled to voluntarily terminate the agreement upon one year's notice to the Company. In the event of a termination by the Company for cause, as defined in the agreement, or voluntarily by the Chief Executive Officer, the Company is obligated to pay him the base salary through the date of termination. In the event the Company terminates the agreement without cause, the Company is obligated to give him one years' notice of the Company's intent to terminate and, at the end of the one year period, pay an amount equal to two times his annual base salary together with any bonuses which may have been earned as of the date of termination. A constructive termination of the agreement will also occur if the Company materially breaches any term of the agreement or if a successor company to Bright Mountain Acquisition Corporation fails to assume the Company's obligations under the employment agreement. In that event, the Chief Executive Officer will be entitled to the same compensation as if the Company terminated the agreement without cause.
F-23
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
The employment agreement contains customary non-compete and confidentiality provisions. The Company also agreed to indemnify the Chief Executive Officer pursuant to the provisions of the Company's Amended and Restated Articles of Incorporation and Amended and Restated By-laws.
NOTE 12 – STOCK COMPENSATION
The Company accounts for stock option compensation issued to employees for services in accordance with ASC Topic 718,
“Compensation – Stock Compensation”.
ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The value of the portion of an employee award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The Company accounts for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC Topic 505-50,
Equity-Based Payments to Non-Employees.
The Company estimates the fair value of stock options by using the Black-Scholes option-pricing model.
Stock options issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option, whichever is more reliably measurable in accordance with FASB ASC 505,
Equity,
and FASB ASC 718
,
including related amendments and interpretations. The related expense is recognized over the period the services are provided.
On April 20, 2011, the Company's board of directors and majority stockholder adopted the 2011 Stock Option Plan (the "2011 Plan"), to be effective on January 3, 2011. The purpose of the 2011 Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development and financial success. Under the 2011 Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long-term incentive awards. The Company has reserved for issuance an aggregate of 900,000 shares of common stock under the 2011 Plan. The maximum aggregate number of shares of Company stock that shall be subject to Grants made under the Plan to any individual during any calendar year shall be 180,000 shares. The Company's board of directors will administer the 2011 Plan until such time as such authority has been delegated to a committee of the board of directors. The material terms of each option granted pursuant to the 2011 Plan by the Company shall contain the following terms: (i) that the purchase price of each share purchasable under an incentive option shall be determined by the Committee at the time of grant, (ii) the term of each option shall be fixed by the Committee, but no option shall be exercisable more than 10 years after the date such option is granted and (iii) in the absence of any option vesting periods designated by the Committee at the time of grant, options shall vest and become exercisable in terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument. As of December 31, 2016, 27,000 shares were remaining under the 2011 Plan for future issuance.
On April 1, 2013, the Company's board of directors and majority stockholder adopted the 2013 Stock Option Plan (the "2013 Plan"), to be effective on April 1, 2013. The purpose of the 2013 Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development and financial success. Under the 2013 Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long-term incentive awards. The Company has reserved for issuance an aggregate of 900,000 shares of common stock under the 2013 Plan. The maximum aggregate number of shares of Company stock that shall be subject to grants made under the 2013 Plan to any individual during any calendar year shall be 180,000 shares. The Company's board of directors will administer the 2013 Plan until such time as such authority has been delegated to a committee of the board of directors. The material terms of each option granted pursuant to the 2013 Plan by the Company shall contain the following terms: (i) that the purchase price of each share purchasable under an incentive option shall be determined by the Committee at the time of grant, (ii) the term of each option shall be fixed by the Committee, but no option shall be exercisable more than 10 years after the date such option is granted and (iii) in the absence of any option vesting periods designated by the Committee at the time of grant, options shall vest and become exercisable in terms and conditions, consistent with the 2013 Plan, as may be determined by the Committee and specified in the grant instrument. As of December 31, 2016, 132,000 shares were remaining under the 2013 Plan for future issuance.
F-24
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 12 – STOCK COMPENSATION (CONTINUED)
On May 22, 2015, the Company's board of directors and majority stockholder adopted the 2015 Stock Option Plan (the "2015 Plan"), to be effective on May 22, 2015. The purpose of the 2015 Plan is to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development and financial success. Under the 2015 Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long-term incentive awards. The Company has reserved for issuance an aggregate of 1,000,000 shares of common stock under the 2015 Plan. The maximum aggregate number of shares of Company stock that shall be subject to grants made under the 2015 Plan to any individual during any calendar year shall be 100,000 shares. The Company's board of directors will administer the 2015 Plan until such time as such authority has been delegated to a committee of the board of directors. The material terms of each option granted pursuant to the 2015 Plan by the Company shall contain the following terms: (i) that the purchase price of each share purchasable under an incentive option shall be determined by the Committee at the time of grant, (ii) the term of each option shall be fixed by the Committee, but no option shall be exercisable more than 10 years after the date such option is granted and (iii) in the absence of any option vesting periods designated by the Committee at the time of grant, options shall vest and become exercisable in terms and conditions, consistent with the 2015 Plan, as may be determined by the Committee and specified in the grant instrument. As of December 31, 2016, 385,000 shares were remaining under the 2015 Plan for future issuance.
On March 23, 2015 the Company granted 40,000 ten-year stock options, which have an exercise price of $0.75 per share and cliff vest annually over four years starting in March 2016 to a director. The aggregate fair value of these options was computed at $17,224 or $0.4306 per option.
On October 27, 2015 the Company granted 60,000 ten-year stock options, which have an exercise price of $0.65 per share and cliff vest annually over four years starting October 2016 to a director. The aggregate fair value of these options was computed at $22,392 or $0.3732 per option.
On October 27, 2015 the Company granted 100,000 ten-year stock options, which have an exercise price of $0.65 per share and cliff vest annually over four years starting October 2016 to an executive officer and director. The aggregate fair value of these options was computed at $37,318 or $0.3732 per option.
On March 22, 2016 the Company granted 100,000 ten-year stock options, which have an exercise price of $0.695 per share to an executive officer and director. The aggregate fair value of these options was computed at $39,901 or $0.3990 per option.
On March 22, 2016 the Company granted 46,000 ten-year stock options, which have an exercise price of $0.695 per share to a director. The aggregate fair value of these options was computed at $18,354 or $0.3990 per option.
On July 12, 2016, the Company granted 360,000 ten-year stock options, to five employees including one officer, which have an exercise price of $0.85 per share. The aggregate fair value of these options was $179,640 or $0.499 per option.
On August 16, 2016, the Company granted 60,000 ten-year stock options to a director of the Company. The options granted have an exercise price of $0.85 per share. The aggregate fair value of these options was $29,940 or $0.499 per share.
On December 16, 2016, the Company granted 14,000 ten year stock options to four directors for board participation. The options granted have an exercise price of $0.85 per share. The aggregate fair value of these options was $6,202 or $0.443 per share.
The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of our stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates.
F-25
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 12 – STOCK COMPENSATION (CONTINUED)
The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors, which is subject to ASC Topic 718 requirements. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period for each award. The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted during the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
Assumptions:
|
2016
|
|
2015
|
|
Expected term (years)
|
6.25
|
|
|
6.8
|
|
|
Expected volatility
|
63
|
%
|
|
63
|
%
|
|
Risk-free interest rate
|
0.01% - 2.07
|
%
|
|
0.01% - 2.07
|
%
|
|
Dividend yield
|
0
|
%
|
|
0
|
%
|
|
Expected forfeiture rate
|
0
|
%
|
|
0
|
%
|
The expected life is computed using the simplified method, which is the average of the vesting term and the contractual term. The expected volatility is based on an average of similar public companies historical volatility, as the Company's common stock is quoted in the over the counter market on the OTCQB Tier of the OTC Markets, Inc. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected term of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.
The Company recorded $147,472 and $59,327 of stock option expense for the year ended December 31, 2016 and December 31, 2015 respectively. The non-cash stock option expense for years ended December 31, 2016 and 2015 have been recognized as a component of general and administrative expenses in the accompanying consolidated financial statements.
As of December 31, 2016 there were total unrecognized compensation costs related to non-vested share-based compensation arrangements of $228,167 to be recognized through December 2020.
The grant date weighted average for fair values of options granted in 2016 is $ 0.41 per option.
A summary of the Company's stock option activity during the years ended December 31, 2016 and 2015 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Balance Outstanding, December 31, 2014
|
|
|
1,565,000
|
|
|
$
|
0.30
|
|
|
|
7.5
|
|
|
|
349,983
|
|
|
Granted
|
|
|
200,000
|
|
|
|
0.67
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(64,000
|
)
|
|
|
0.50
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
-
|
|
|
|
0.50
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance Outstanding, December 31, 2015
|
|
|
1,701,000
|
|
|
|
0.34
|
|
|
|
6.8
|
|
|
|
337,984
|
|
|
Granted
|
|
|
580,000
|
|
|
|
0.81
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
-
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance Outstanding, December 31, 2016
|
|
|
2,281,000
|
|
|
$
|
0.47
|
|
|
|
6.8
|
|
|
$
|
795,185
|
|
|
Exercisable at December 31, 2016
|
|
|
1,476,000
|
|
|
$
|
0.31
|
|
|
|
5.6
|
|
|
$
|
865,635
|
|
F-26
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 12 – STOCK COMPENSATION (CONTINUED)
Summarized information with respect to options outstanding under the two option plans at December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range or
Exercise Price
|
|
Number
Outstanding
|
|
Remaining
Average
Contractual
Life (In Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
0.14 - 0.24
|
|
720,000
|
|
1.3
|
|
$
|
0.14
|
|
720,000
|
|
$
|
0.14
|
|
0.25 - 0.49
|
|
351,000
|
|
.9
|
|
$
|
0.28
|
|
306,000
|
|
$
|
0.286
|
|
0.50 - 0.85
|
|
1,210,000
|
|
4.7
|
|
$
|
0.70
|
|
450,000
|
|
$
|
0.61
|
|
|
|
2,281,000
|
|
6.9
|
|
$
|
0.47
|
|
1,476,000
|
|
$
|
0.31
|
Summarized information with respect to options outstanding under the three option plans at December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range or
Exercise Price
|
|
Number
Outstanding
|
|
Remaining
Average
Contractual
Life (In Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
0.14 - 0.24
|
|
720,000
|
|
2.1
|
|
$
|
0.06
|
|
720,000
|
|
$
|
0.09
|
|
0.25 - 0.49
|
|
351,000
|
|
1.5
|
|
$
|
0.05
|
|
207,000
|
|
$
|
0.05
|
|
0.50 - 0.78
|
|
630,000
|
|
3.2
|
|
$
|
0.23
|
|
187,500
|
|
$
|
0.09
|
|
|
|
1,701,000
|
|
6.8
|
|
$
|
0.34
|
|
1,114,500
|
|
$
|
0.23
|
NOTE 13 – PREFERRED STOCK
The Company authorized 20,000,000 shares of preferred stock with a par value of $0.01.
At a meeting of the board of directors, held on November 1, 2013, the directors approved the designation of 2,000,000 shares of the Preferred Stock as 10% Series A Convertible Preferred Stock (“Series A Stock”) and authorized the issuance of the Series A Stock. Holders of the Series A Stock are entitled to the payment of a 10% dividend payable on preferred shares outstanding in shares of the Corporation’s common stock at a rate of one share of Common Stock for each ten shares of Series A Stock. Dividends shall be payable annually the tenth business day of January. Each holder of Series A Stock may convert all or part of the Series A Stock into shares of common stock on a share for share basis, subject to proportional adjustment in the event of stock splits, dividends or similar corporate events. Series A Stock shall rank superior to all other classes of stock upon liquidation. Each share of Series A Stock automatically converts to common shares five years from the date of issuance or upon a change in control. On the tenth business day of January 2016 there were 181,699 shares of common stock dividends owed and payable to the Series A Stockholders of record as dividends on the Series A Stock. On January 10, 2016, the Company issued 181,699 shares of common stock due Series A Stockholders. On August 18, 2016, Series A Stockholders converted 1,800,000 Series A preferred shares into 1,800,000 common shares, leaving 100,000 Series A Stock outstanding. In addition, in 2016 the Company issued 108,675 common shares representing accrued dividends with a fair value of $92,373 through the date of conversion. As of December 31, 2016, there were 10,000 shares of common stock dividends accrued but not earned until the tenth business day of January 2017 to the Series A Stockholders as dividends on the Series A Stock.
At a meeting of the board of directors, held on December 23, 2013, the directors approved the designation of 1,000,000 shares of the Preferred Stock as 10% Series B Convertible Preferred Stock (“Series B Stock”) and authorized the issuance of the Series B Stock. Holders of the Series B Stock were entitled to the payment of a 10% dividend payable on preferred shares outstanding in shares of the Corporation’s common stock at a rate of one share of common stock for each ten shares of Series B Stock. Dividends were payable annually the tenth business day of January. Each holder of Series B Stock was entitled to convert all or part of the Series B Stock into shares of common stock on a share for share basis. On the tenth business day of January 2016 there were 100,000 shares of common stock owed and payable to the Series B Stockholders as dividends on the Series B Stock. On January 10, 2016, the Company issued 100,000 shares of common stock due Series B Stockholder. On August 18, 2016, the Series B Stockholders converted all 1,000,000 shares into 1,000,000 common shares. In addition, in 2016 the Company issued 60,375 common shares representing accrued dividends with a fair value of $51,319 through the date of conversion.
F-27
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 13 – PREFERRED STOCK (CONTINUED)
At a meeting of the board of directors, held on September 22, 2014, the directors approved the designation of 2,000,000 shares of the Preferred Stock as 10% Series C Convertible Preferred Stock (“Series C Stock”) and authorized the issuance of the Series C Stock. Holders of the Series C Stock were entitled to the payment of a 10% dividend payable on preferred shares outstanding in shares of the Corporation’s common stock at a rate of one share of common stock for each ten shares of Series C Stock. Dividends were payable annually the tenth business day of January. Each holder of Series C Stock was entitled to convert all or part of the Series C Stock into shares of common stock on a share for share basis. On the tenth business day of January 2016 there were 180,000 shares of common stock owed and payable to the Series C Stockholders as dividends on the Series C Stock. On January 10, 2016, the Company issued 180,000 shares of common stock due Series C Stockholder. On August 18, 2016, the Series C Stockholders converted all 1,800,000 shares into 1,800,000 common shares. In addition, in 2016 the Company issued 108,675 common shares representing accrued dividends with a fair value of $92,373 through the date of conversion.
At a meeting of the board of directors, held on March 20, 2015, the directors approved the designation of 2,000,000 shares of the Preferred Stock as 10% Series D Convertible Preferred Stock (“Series D Stock”) and authorized the issuance of the Series D Stock. Holders of the Series D Stock were entitled to the payment of a 10% dividend payable on preferred shares outstanding in shares of the Corporation’s common stock at a rate of one share of common stock for each ten shares of Series D Stock. Dividends shall were payable annually the tenth business day of January. Each holder of Series D Stock was entitled to convert all or part of the Series D Stock into shares of common stock on a share for share basis. Series D Stock shall rank superior to all common stock upon liquidation. Each share of Series D Stock shall automatically convert to common shares five years from the date of issuance or upon a change in control. On the tenth business day of January 2016 there were 39,863 shares of common stock owed and payable to the Series D Stockholders as dividends on the Series D Stock. On January 10, 2016, the Company issued 39,863 shares of common stock due Series D Stockholder. On August 18, 2016, the Series D preferred shareholders converted all 500,000 shares into 500,000 common shares. In addition, the Company issued 30,187 common shares representing accrued dividends with a fair value of $25,659 through the date of conversion.
The Company has no present intent to issue any additional shares of any series of the previously designated preferred stock.
NOTE 14 – COMMON STOCK
The Company has authorized 324,000,000 shares of common stock with a par value of $0.01.
During the year ended December 31, 2015, the Company issued 54,000 shares of its common stock in connection with the exercise of a stock option granted to a related party Director and received $15,001 based on the exercise price of $0.2778 per common share.
During the year ended December 31, 2015 the Company issued 10,000 shares of its common stock in connection with the exercise of a stock option granted to a related party Director and received $5,000 based on the exercise price of $0.50 per share.
During the year ended December 31, 2015, the Company raised additional capital through issuance of common stock pursuant to a private placement whereby $990,000 in capital was raised through the issuance of 1,980,000 shares of common stock at $0.50 per share.
During the year ended December 31, 2016 the Company raised $800,000 through the sale of 1,600,000 shares of common stock at $0.50 per share.
|
|
|
B)
|
Stock issued for services
|
On January 19, 2015, the Company entered into an agreement with an employee, wherein the employee elected to receive 400 shares of the Company common stock at a fair value of $0.75 per share, or $300, in lieu of a bonus.
On May 1, 2015, the Company entered into an agreement with an employee, wherein the employee elected to receive 2,000 shares of the Company common stock at a fair value of $0.65 per share, or $1,300, in lieu of a bonus.
F-28
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 14 – COMMON STOCK (CONTINUED)
On May 22, 2015, the Company issued to a law firm 50,000 shares of its common stock at $0.65 per share, or $32,500, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On May 28, 2015, the Company issued to a consultant 5,000 shares of its common stock at $0.65 per share, or $3,250, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On October 15, 2015, the Company issued to a consultant 7,000 shares of its common stock at $0.60 per share, or $4,200, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On November 15, 2015, the Company issued to a consultant 7,000 shares of its common stock at $0.75 per share, or $5,250, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On December 15, 2015, the Company issued to a consultant 7,000 shares of its common stock at $0.69 per share, or $4,830, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On January 15, 2016, the Company issued to a consultant 7,000 shares of its common stock at $0.695 per share, or $4,865, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On February 15, 2016, the Company issued to a consultant 7,000 shares of its common stock at $0.695 per share, or $4,865, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On March 22, 2016, the Company issued to a law firm 50,000 shares of its common stock at $0.695 per share, or $34,750, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On April 15, 2016, the Company issued to a consultant 7,000 shares of its common stock at $0.695 per share, or $4,690, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
On May 16, 2016, the Company issued to a consultant 3,600 shares of its common stock at $0.75 per share, or $2,700, for services rendered. The Company valued these common shares based on the fair value at the date of grant.
From June 20, 2016 through December 16, 2016 the Company issued in seven equal amounts of 3,600 shares, 25,200 shares to a consultant at $0.85 per share valued at $21,420 or $3,060 per issuance, for services rendered. The Company valued these common shares based on a fair value on the date of grant.
|
|
|
C)
|
Retirement of Treasury Shares
|
On December 21, 2015 the Company’s board of directors approved to retire 360,000 treasury shares with a cost of $2,501.
|
|
|
D)
|
Stock issued for acquisitions
|
During the year ended December 31, 2015, the Company issued 350,000 shares of its common stock for the acquisition of two websites. The Company valued these common shares at $262,500 or $0.75 per share, based on the fair value on the date of the acquisitions/
On December 15, 2016, the Company issued 200,000 shares of its common stock in connection the acquisition of the Black Helmet Apparel operations from a private company. (See Note 3) The common shares were valued at $170,000 or $0.85 per share, based on the fair value on the date of issuance.
F-29
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 14 – COMMON STOCK (CONTINUED)
|
|
|
E)
|
Stock issued for dividends
|
During the year ended December 31, 2016, the Company issued 809,472 shares of its common stock as dividends to the holders of its Series A, Series B, Series C, and Series D Stock. Included in these issuances were 501,562 common shares issued in January as annual dividends due under the provision of the Series A, B, C and D Stock and 307,910 common shares issued as dividend accrued through August 18, 2016, upon conversion. Holders of the Series A, Series B, Series C, and Series D Stock are entitled to the payment of a 10% dividend payable in shares of the Company’s common stock at a rate of one share of common stock for each ten shares of Series A, Series B, Series C, or Series D Stock payable on the tenth business day of January for the previous year.
During the year ended December 31, 2015, the Company issued 289,425 shares of its common stock as dividends to the holders of its Series A Stock, Series B Stock, and Series C Stock only. Holders of the Series A, Series B, Series B and Series D Stock are entitled to the payment of a 10% dividend payable in shares of the Company's common stock at a rate of one share of common stock for each ten shares of Series A, Series B, Series C, or Series D Stock. Dividends shall be payable annually the tenth business day of January.
F)
Stock issued for conversion of preferred stock
In August 2016, the Company issued 5,100,000 shares of its common stock to the holders of its Series A Stock, Series B Stock, Series C Stock and Series D Stock upon the conversion of 5,100,000 shares of its Series A Stock, Series B Stock, Series C Stock and Series D Stock.
G)
Stock issued for conversion of convertible notes payable and accrued interest
In August 2016 the Company issued 1,207,200 shares of common stock upon the conversion, at $0.50 per share, of $600,000 in convertible notes payable with related accrued interest of $3,600 through the date of conversion.
NOTE 15 – RELATED PARTIES
During the year ended December 31, 2016, a related party, director and founder purchased 1,600,000 shares of the Company’s common stock for $800,000.
On February 9, 2016, the Company issued a $100,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on February 9, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $39,000 with the unamortized balance being charged to interest expense upon conversion.
On May 19, 2016, the Company issued a $100,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on May 19, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $50,000 with the unamortized balance being charged to interest expense upon conversion.
F-30
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 15 – RELATED PARTIES (CONTINUED)
On June 10, 2016, the Company issued a $50,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on June 10, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $25,000 with the unamortized balance being charged to interest expense upon conversion.
On June 25, 2016, the Company issued a $50,000 12% convertible note that had conversion prices that create a beneficial conversion. This note matured on June 25, 2021. This note was convertible at the option of the holders into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method. In August 2016, the notes were converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016, the Company recognized a debt discount of $35,000 with the unamortized balance being charged to interest expense upon conversion.
On July 7, 2016, the Company issued a $50,000 12% convertible promissory note that had conversion prices that create a beneficial conversion. This note matured on July 7, 2021. This note was convertible at the option of the holder into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion features is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest over the five-year life of the note using the effective interest method. In August 2016, the note was converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016 the Company recognized a debt discount of $35,000 with the unamortized balance being charged to interest expense upon conversion.
On July 25, 2016, the Company issued a $50,000 12% convertible promissory note that had conversion prices that create a beneficial conversion. This note matured on July 25, 2021. This note was convertible at the option of the holder into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion features is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest over the five-year life of the note using the effective interest method. In August 2016, the note was converted into common shares at a conversion price of $0.50 per share. Upon conversion, the unamortized debt discount was charged to interest expense. During the year ended December 31, 2016 the Company recognized a debt discount of $35,000 with the unamortized balance being charged to interest expense upon conversion.
Following the conversion of outstanding notes in August 2016, the Company issued a series of 12% convertible promissory notes that have conversion prices that create a beneficial conversion. This note mature five years from issuance and are convertible at the option of the holder into shares of common stock at any time prior to maturity at a conversion price of $0.50 per share. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion features is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest over the five-year life of the note using the effective interest method.
F-31
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 15 – RELATED PARTIES (CONTINUED)
A summary of these note issuances is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Maturity Date
|
|
|
Principal
|
|
|
Discount Recognized
|
|
|
Amortization Expense 2016
|
|
|
Carry Amount at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/26/16
|
|
|
9/26/21
|
|
|
$
|
100,000
|
|
|
$
|
70,000
|
|
|
$
|
3,692
|
|
|
$
|
33,692
|
|
10/14/16
|
|
|
10/14/21
|
|
|
|
100,000
|
|
|
|
70,000
|
|
|
|
3,024
|
|
|
|
33,024
|
|
10/31/16
|
|
|
10/31/21
|
|
|
|
100,000
|
|
|
|
70,000
|
|
|
|
2,372
|
|
|
|
32,372
|
|
11/03/16
|
|
|
11/03/21
|
|
|
|
50,000
|
|
|
|
35,000
|
|
|
|
1,120
|
|
|
|
16,120
|
|
11/11/16
|
|
|
11/11/21
|
|
|
|
100,000
|
|
|
|
70,000
|
|
|
|
1,934
|
|
|
|
31,934
|
|
11/21/16
|
|
|
11/21/21
|
|
|
|
50,000
|
|
|
|
35,000
|
|
|
|
775
|
|
|
|
15,775
|
|
12/15/16
|
|
|
12/15/21
|
|
|
|
75,000
|
|
|
|
52,500
|
|
|
|
488
|
|
|
|
22,988
|
|
|
|
|
|
|
|
|
|
$
|
575,000
|
|
|
$
|
402,500
|
|
|
$
|
13,405
|
|
|
$
|
185,905
|
During the year ended December 31, 2015 a related party, director and founder purchased 1,140,000 shares of the Company’s common shares for $570,000.
During the year ended December 31, 2015, a related party founder purchased 200,000 shares of the Company’s Series A Stock for $100,000.
During the year ended December 31, 2015, a related party purchased 100,000 shares of the Company’s Series A Stock for $50,000.
During the year ended December 31, 2015, a related party purchased 500,000 shares of the Company’s Series D Stock for $250,000.
During the year ended December 31, 2015 related party Directors purchased 440,000 shares of the Company’s common shares for $220,000.
During the year ended December 31, 2015 a related party Director purchased 54,000 shares of the Company’s common shares for $15,001 in connection with the exercise of a stock option granted based on the exercise price of $0.2778 per common share.
During the year ended December 31, 2015 a related party Director purchased 10,000 shares of the Company’s common shares for $5,000 in connection with the exercise of a stock option granted based on the exercise price of $0.50 per common share.
During the year ended December 31, 2015 the Company issued a convertible note that has a conversion price that creates a beneficial conversion to a related party director and founder. The note issued was for an amount of $100,000 with a maturity date of December 22, 2020 and bears an interest rate of 12% paid monthly in cash on the first day of each month, commencing on January 1, 2016. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature was recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the note using the effective interest method. During 2015, the Company recognized a discount of $39,000 and amortized $38,805 upon conversion in August 2016 and $195 in 2015, respectively, related to this convertible note. During 2016 and 2015, the Company recognized interest expense of $8,500 and $300 related to this convertible note, respectively.
F-32
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 15 – RELATED PARTIES (CONTINUED)
During the year ended December 31, 2015 the Company issued a convertible note that has a conversion price that creates a beneficial conversion to a related party. The note issued was for an amount of $100,000 with a maturity date of December 28, 2020 and bears an interest rate of 12% paid monthly in cash on the first day of each month, commencing on January 1, 2016. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature was recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the note using the effective interest method. During 2015, the Company recognized a discount of $39,000 and amortized $38,935 upon conversion in August 2016 and $65 in 2015 related to this convertible note. During 2015, the Company recognized interest expense of $8,500 and $100 related to this convertible note, respectively.
NOTE 16 – INCOME TAXES
For the years ended December 31, 2016 and 2015 there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.
As of December 31, 2016, the Company has net operating loss carry forwards of approximately $7,219,000. The carryforwards expire in years 2033 through 2036. The Company's net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in Section 382 of the Internal Revenue Code.
The Company's tax expense differs from the "expected" tax expense for Federal income tax purposes, computed by applying the United States Federal tax rate of 34% to loss before taxes, as follows:
The tax effects of the temporary differences between reportable financial statement income (loss) and taxable income (loss) are recognized as deferred tax assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Tax expense (benefit) at the statutory rate
|
|
$
|
(906,797
|
)
|
|
$
|
(568,852
|
)
|
|
State income taxes, net of federal income tax benefit
|
|
|
(96,813
|
)
|
|
|
(60,733
|
)
|
|
Non-deductible expenses
|
|
|
229,241
|
|
|
|
2,135
|
|
|
Change in valuation allowance
|
|
|
774,369
|
|
|
|
627,450
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
The tax effect of significant components of the Company's deferred tax assets and liabilities at December 31, 2016 and 2015, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
2,716,420
|
|
|
$
|
2,042,006
|
|
|
Book to tax difference – intangible assets
|
|
|
146,733
|
|
|
|
27,348
|
|
|
Stock option expense
|
|
|
90,801
|
|
|
|
373,456
|
|
|
Total gross deferred tax assets
|
|
|
2,953,954
|
|
|
|
2,442,810
|
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(2,953,954
|
)
|
|
|
(2,442,810
|
)
|
|
Total net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
F-33
BRIGHT MOUNTAIN MEDIA, INC. AND SUBSIDIARIES
(formerly known as Bright Mountain Acquisition Corporation and subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 16 – INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Because of the historical earnings history of the Company, the net deferred tax assets for 2016 and 2015 were fully offset by a 100% valuation allowance. The change in the valuation allowance was an increase of $774,369 and $627,450 for the years December 31, 2016 and 2015, respectively.
NOTE 17 – SUBSEQUENT EVENTS
On January 10, 2017, the Company issued 10,000 common shares as an annual dividend on the Company’s 100,000 Series A preferred shares outstanding.
On January 16, 2017, the Company issued 3,600 shares of our common stock valued at $3,060 to a consultant for services rendered.
On January 19, 2017, February 6, 2017, February 24, 2017 and March 7, 2017 the Company issued 12% convertible notes in the amount of $100,000, $100,000, $50,000 and $100,000, respectively, to the Company’s related party founder. The notes have a conversion price that creates a beneficial conversion. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the five-year life of the notes using the effective interest method.
On March 3, 2017 the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with Daily Engage Media Group LLC, a New Jersey limited liability company ("Daily Engage Media") and its members (“Members”). Launched in 2015, Daily Engage Media is an ad network that connects advertisers with approximately 200 digital publications worldwide. Under the terms of the Purchase Agreement, upon closing of a pending financing, we will purchase all of the membership interests in Daily Engage Media from the Members for $4.9 million which will be paid $1.95 million in cash and $2.95 million in shares of our common stock to be valued at the public offering price. The closing of the acquisition is subject to a number of conditions precedent, including, but not limited to, the closing of our pending public offering.
F-34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Director of
Sostre Enterprises, Inc.
We have audited the accompanying balance sheet of Sostre Enterprises, Inc. (the “Company”) as of December 31, 2014 and the related statement of operations, changes in shareholders’ deficit, and cash flows for the year ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Sostre Enterprises, Inc. as of December 31, 2014 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company has a net loss of $41,492 and used cash in operations of $8,060 and an accumulated deficit of $114,415 at December 31, 2014. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
LIGGETT & WEBB, P.A.
Certified Public Accountants
Boynton Beach, Florida
February 28, 2017
F-35
Sostre Enterprises, Inc.
Balance Sheet
December 31, 2014
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Currents Assets
|
|
|
|
|
Cash
|
|
$
|
24,613
|
|
|
Cash - restricted
|
|
|
10,004
|
|
|
Accounts receivable, net
|
|
|
5,235
|
|
|
Inventories, net
|
|
|
63,232
|
|
|
Total Current Assets
|
|
|
103,084
|
|
|
Fixed Assets, net
|
|
|
1,007
|
|
|
Total Assets
|
|
$
|
104,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts Payable
|
|
$
|
72,360
|
|
|
Accrued Expenses
|
|
|
16,513
|
|
|
Deferred Revenue
|
|
|
22,750
|
|
|
Loans Payable
|
|
|
43,038
|
|
|
Notes Payable
|
|
|
63,844
|
|
|
Total Current Liabilities
|
|
|
218,505
|
|
|
Total Liabilities
|
|
|
218,505
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Deficit
|
|
|
|
|
|
Common stock, par value $0, 25,000 shares authorized, 25,000
|
|
|
|
|
|
shares issued and outstanding at December 31, 2014
|
|
|
1
|
|
|
Accumulated Deficit
|
|
|
(114,415
|
)
|
|
Total Shareholders' Deficit
|
|
|
(114,414
|
)
|
|
Total Liabilities and Shareholders' Deficit
|
|
$
|
104,091
|
|
See accompanying notes to financial statements
F-36
Sostre Enterprises, Inc.
Statement of Operations
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Revenues from product sales
|
|
$
|
1,479,007
|
|
|
Revenues from services
|
|
|
124,152
|
|
|
Total revenues
|
|
|
1,603,159
|
|
|
Cost of sales
|
|
|
773,077
|
|
|
Gross profit
|
|
|
830,082
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
Advertising and promotion
|
|
|
265,518
|
|
|
Salaries and wages
|
|
|
289,816
|
|
|
Selling, general and administrative expenses
|
|
|
281,383
|
|
|
Total operating expenses
|
|
|
836,717
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,635
|
)
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
Interest expense
|
|
|
(34,857
|
)
|
|
Total other income (expense)
|
|
|
(34,857
|
)
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(41,492
|
)
|
|
Income taxes
|
|
|
----
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(41,492
|
)
|
See accompanying notes to financial statements
F-37
Sostre Enterprises, Inc.
Statement of Changes in Shareholders' Deficit
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2013
|
|
|
25,000
|
|
|
$
|
1
|
|
|
$
|
(72,923
|
)
|
|
$
|
(72,922
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(41,492
|
)
|
|
|
(41,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2014
|
|
|
25,000
|
|
|
$
|
1
|
|
|
$
|
(114,415
|
)
|
|
$
|
(114,414
|
)
|
See accompanying notes to financial statements
F-38
Sostre Enterprises, Inc.
Statement of Cash Flows
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(41,492
|
)
|
|
Adjustments to reconcile net loss to cash used in operations:
|
|
|
|
|
|
Depreciation
|
|
|
1,534
|
|
|
Allowance for doubtful accounts
|
|
|
5,341
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,682
|
)
|
|
Inventories
|
|
|
21,551
|
|
|
Accounts payable
|
|
|
(4,370
|
)
|
|
Accrued expenses
|
|
|
4,772
|
|
|
Deferred revenue
|
|
|
14,286
|
|
|
Net cash used in operating activities
|
|
|
(8,060
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Restricted cash
|
|
|
(10,004
|
)
|
|
Net cash used in investing activities
|
|
|
(10,004
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from notes payable, net of repayments
|
|
|
11,560
|
|
|
Proceeds from loans payable, net of repayments
|
|
|
(777
|
)
|
|
Net cash provided by financing activities
|
|
|
10,783
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(7,281
|
)
|
|
Cash at beginning of period
|
|
|
31,894
|
|
|
Cash at end of period
|
|
$
|
24,613
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
Interest
|
|
$
|
34,857
|
|
|
Income taxes
|
|
$
|
-----
|
|
See accompanying notes to financial statements
F-39
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year Ended December 31, 2014
Note 1 – Organization and Nature of Operations
Sostre Enterprises, Inc. (“Company,” “we,” “us,” “our” or “Sostre”) was organized under the laws of the State of Florida in 2003. The Company, through its Black Helmet®, Apparel brand has an apparel and targeted accessories business comprised of various website properties and content, social media content, inventory and other intellectual property rights. Launched June 2008, Black Helmet clothing and accessories feature designs that are hand drawn, unique and relay the courageous side of firefighting and other first responders. Our Black Helmet products are sold primarily through our website at www.blackhelmetapparel.com.
In addition, the Company, through its brand WebLift®, provides marketing, consulting, design, and development services for businesses, non-profits, and municipalities. Specialties include branding and expertise in digital marketing solutions and search engine optimization.
Note 2 – Going Concern
The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company sustained a net loss of $41,492 and used cash in operating activities of $8,060 for the year ended December 31, 2014. The Company had an accumulated deficit of $114,415 at December 31, 2014. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving loans, many at high interest rates, to sustain its current level of operations.
Note 3 – Summary of Significant Accounting Policies
Use of Estimates
Our financial statements are prepared in accordance with Accounting Principles Generally Accepted in the United States (“GAAP”). These accounting principles require management 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 our financial statements as well as reported amounts of revenue 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. Significant estimates included in the accompanying financial statements include revenue recognition, valuation of inventory, and estimates of depreciation period for fixed assets.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments and Fair Value Measurements
The Company measures its financial assets and liabilities in accordance with GAAP. For certain of our financial instruments, including cash, accounts payable, accrued expenses, and short-term debt, the carrying amounts approximate fair value due to their short maturities.
F-40
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year Ended December 31, 2014
We adopted accounting guidance for financial and non-financial assets and liabilities in accordance with ASC 820 “
Fair Value Measurements and Disclosures
.” This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which are primarily related to revenues related to the WebLift services. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
Inventories
Inventories consist of finished goods and are stated at the lower of cost or market using the first in, first out (FIFO) method. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Fixed Assets
Fixed assets are recorded at cost. Expenditures for maintenance and repairs along with fixed assets below our capitalization threshold of $500 are expensed as incurred.
|
|
|
|
Fixed Asset Type
|
|
Depreciable Years
|
|
|
|
|
|
Computer Equipment
|
|
5 Years
|
|
Office Furniture
|
|
7 Years
|
|
Video Equipment
|
|
5 Years
|
Restricted Cash
As of December 31, 2014, the Company has restricted cash in the amount of $10,004 related to a deposit to secure a line of credit from a financial institution utilized for working capital.
F-41
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year Ended December 31, 2014
Revenue Recognition
The Company’s Black Helmet division generates revenue from the online sale of merchandise, primarily targeting first responders and their families. Our Weblift division provides marketing, consulting, design, and development services for businesses, non-profits, and municipalities.
Revenue recognition requires that persuasive evidence of a sale arrangement exists, services are delivered or delivery of goods occurs through transfer of title and the risk and rewards of ownership, the selling price is fixed or determinable and collectability is reasonably assured. Provisions for discounts and rebates to customers are established as a reduction to revenue in the period the related sales are recorded.
Cost of Sales
Components of costs of sales related exclusively to our Black Helmet Apparel division and include product costs, shipping costs to customers and any inventory adjustments.
Shipping and Handling Costs
The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs for shipments to customers as cost of revenues.
Sales Return Reserve Policy
Our return policy generally allows our end users to return purchased products for refund or in exchange for new products. We estimate a reserve for sales returns, if any, and record that reserve amount as a reduction of sales and as a sales return reserve liability. Sales to consumers on our web site generally may be returned within a reasonable period of time.
Concentrations
The Company has historically purchased a substantial amount of its products from two vendors. These vendors provide our Black Helmet division with our custom designed clothing and accessory items. Purchases from these vendors for the year ended December 31, 2014 accounted for 19% and 13% of our total purchases, respectively. Although we continue to add additional product vendors and we continue to expand our product line and vendor relationships, due to continued high concentration and reliance on these two vendors, the loss of one or both of these vendors could adversely affect the Company’s operations.
General and Administrative Costs
General and administrative costs are primarily comprised of salaries and benefits associated with finance, legal, and other administrative personnel, overhead and occupancy costs, outside professional services, insurance, rent and miscellaneous costs.
Advertising and Marketing
Advertising and marketing expenses are primarily comprised of online marketing of our websites and, email marketing.
F-42
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year Ended December 31, 2014
Income taxes
The Company is a Subchapter S Corporation for Federal and State income taxes, whereas taxable income or loss flows through to the shareholders on their individual tax returns rather than at the corporate level. The tax returns of the Company for the years ending 2012 through 2016 are subject to examination by the Internal Revenue Service, generally for three years after they are filed. The Company has not yet filed its 2014 or 2015 tax returns.
Note 4 – Accounts Receivable
At December 31, 2014, accounts receivable totaled $5,235. Our accounts receivable is comprised primarily to revenues related to the WebLift services.
Note 5 – Inventories
Inventory, net of reserves, is comprised of finished goods only as the Company does not carry raw materials used for any work-in-process production or manufacturing. At December 31, 2014 inventory totaled $63,232.
Note 6 – Fixed Assets
Fixed assets consist of the following at December 31, 2014:
|
|
|
|
|
|
Fixed Asset Type
|
|
Total
|
|
|
|
|
|
|
|
Computer Equipment
|
|
$
|
3,135
|
|
|
Video Equipment
|
|
|
2,934
|
|
|
Total
|
|
|
6,069
|
|
|
Less accumulated depreciation
|
|
|
(5,062
|
)
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
1,007
|
|
For the year ended December 31, 2014, depreciation expense totaled $1,534.
Note 7 – Loans Payable
Loans payable consists of the following at December 31, 2014:
|
|
|
|
|
|
Loan
|
|
Total
|
|
|
|
|
|
|
|
Kabbage Inc.
|
|
$
|
12,788
|
|
|
Revelation Media Networks
|
|
|
30,000
|
|
|
Citi Financials
|
|
|
250
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,038
|
|
The Company enters into short-term loan agreements with Kabbage, Inc., generally with a term of a year or shorter to meet working capital requirements. Interest on the loans may range from 10% to above 35% and are generally serviced through direct withdrawal from Company accounts. Lenders may or may not require collateral and when required, is general related to cash flows from the Company’s e-commerce transactions. The line of credit from Citi Financials is secured by a restricted cash balance of $10,004 held in the same institution.
The Company entered into a loan payable agreement with Revelation Media Networks. The loan has a one-time interest charge of $3,000. The loan is due on demand.
F-43
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year Ended December 31, 2014
Note 8 – Notes Payable
Notes payable consists of the following at December 31, 2014:
|
|
|
|
|
|
Note
|
|
Total
|
|
|
|
|
|
|
|
On Deck Capital
|
|
$
|
63,844
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,844
|
|
The Company has entered into Note agreements to provide working capital. All notes are current obligations and have interest rates ranging from 15% to 35%. One note is secured by e-commerce proceeds under terms providing for the creditor to directly withdraw from the Company’s accounts each working day.
Note 9 – Commitments and Contingencies
The Company leases its warehouse and office facility for its Black Helmet Apparel division in Orlando Florida. The facility is approximately 2,667 square feet primarily consisting of warehouse storage. Lease expense for the year ended December 31, 2014 totaled approximately $14,000. The lease was renewed for a three year term in April 2016 at an initial base rate of $1,641 per month plus CAM charges. The lease has an initial three year term.
In addition, the Company leases administrative office space in Miami Florida on a month-to-month basis.
Lease expense for this location totaled approximately $7,000 for the year ended December 31, 2014. The lease is cancellable by the Company upon 30 days written notice.
Future minimum lease commitments are as follows:
|
|
|
|
|
|
2015
|
|
$
|
25,088
|
|
|
2016
|
|
|
16,410
|
|
|
2017
|
|
|
21,102
|
|
|
2018 and thereafter
|
|
|
21,964
|
|
|
|
|
$
|
84,564
|
|
Note 10 – Subsequent Events
In December 2016, pursuant to the terms of an Asset Purchase Agreement, we sold our Black Helmet Apparel operations to Bright Mountain Media, Inc. for total consideration of $660,000. Considerations received consisted of $250,000 in cash including direct payment to creditors of $80,000, forgiveness of $200,000 in working capital advances made by Bright Mountain to the Company, assumption of $40,000 in debt and the issuance of $200,000 for their common shares with a fair value of $170,000.
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through February 28, 2017 the date the financial statements were issued.
F-44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Director of
Sostre Enterprises, Inc.
We have audited the accompanying balance sheet of Sostre Enterprises, Inc. (the “Company”) as of December 31, 2015 and the related statement of operations, changes in shareholders’ deficit, and cash flows for the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Sostre Enterprises, Inc. as of December 31, 2015 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company has a net loss of $91,550 and used cash in operations of $89,602 and an accumulated deficit of $205,965 at December 31, 2015. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
LIGGETT & WEBB, P.A.
Certified Public Accountants
Boynton Beach, Florida
February 28, 2017
F-45
Sostre Enterprises, Inc.
Balance Sheet
December 31, 2015
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Currents Assets
|
|
|
|
|
Cash
|
|
$
|
1,127
|
|
|
Cash - restricted
|
|
|
10,009
|
|
|
Accounts receivable, net
|
|
|
5,821
|
|
|
Inventories, net
|
|
|
124,521
|
|
|
Total Current Assets
|
|
|
141,478
|
|
|
Fixed Assets, net
|
|
|
1,104
|
|
|
Total Assets
|
|
$
|
142,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts Payable
|
|
$
|
105,376
|
|
|
Accrued Expenses
|
|
|
56,365
|
|
|
Deferred Revenue
|
|
|
12,670
|
|
|
Loans Payable
|
|
|
66,191
|
|
|
Notes Payable
|
|
|
107,944
|
|
|
Total Current Liabilities
|
|
|
348,546
|
|
|
Total Liabilities
|
|
|
348,546
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Deficit
|
|
|
|
|
|
Common stock, par value $0, 25,000 shares authorized, 25,000
|
|
|
|
|
|
issued and outstanding at December 31, 2015
|
|
|
1
|
|
|
Accumulated Deficit
|
|
|
(205,965
|
)
|
|
Total Shareholders' Deficit
|
|
|
(205,964
|
)
|
|
Total Liabilities and Shareholders' Deficit
|
|
$
|
142,582
|
|
See accompanying notes to financial statements
F-46
Sostre Enterprises, Inc.
Statement of Operations
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Revenues from product sales
|
|
$
|
1,238,270
|
|
|
Revenues from services
|
|
|
143,849
|
|
|
Total Revenues
|
|
|
1,382,119
|
|
|
Cost of sales
|
|
|
641,154
|
|
|
Gross profit
|
|
|
740,965
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
Advertising and promotion
|
|
|
319,397
|
|
|
Salaries and wages
|
|
|
271,659
|
|
|
Selling, general and administrative expenses
|
|
|
211,916
|
|
|
Total operating expenses
|
|
|
802,972
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(62,007
|
)
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
Interest expense
|
|
|
(29,543
|
)
|
|
Total other income (expense)
|
|
|
(29,543
|
)
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(91,550
|
)
|
|
Income taxes
|
|
|
----
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(91,550
|
)
|
See accompanying notes to financial statements
F-47
Sostre Enterprises, Inc.
Statement of Changes in Shareholders' Deficit
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2014
|
|
|
25,000
|
|
|
$
|
1
|
|
|
$
|
(114,415
|
)
|
|
$
|
(114,414
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(91,550
|
)
|
|
|
(91,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December 31, 2015
|
|
|
25,000
|
|
|
$
|
1
|
|
|
$
|
(205,965
|
)
|
|
$
|
(205,964
|
)
|
See accompanying notes to financial statements
F-48
Sostre Enterprises, Inc.
Statement of Cash Flows
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(91,550
|
)
|
|
Adjustments to reconcile net loss to cash used in operations:
|
|
|
|
|
|
Depreciation
|
|
|
1,035
|
|
|
Allowance for doubtful accounts
|
|
|
8,676
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,262
|
)
|
|
Inventory
|
|
|
(61,289
|
)
|
|
Accounts payable
|
|
|
33,016
|
|
|
Accrued expenses
|
|
|
39,852
|
|
|
Deferred revenue
|
|
|
(10,080
|
)
|
|
Net cash used in operating activities
|
|
|
(89,602
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Restricted cash
|
|
|
(5
|
)
|
|
Purchase of fixed assets
|
|
|
(1,132
|
)
|
|
Net cash used in investing activities
|
|
|
(1,137
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from notes payable, net of repayments
|
|
|
23,153
|
|
|
Proceeds from loans payable, net of repayments
|
|
|
44,100
|
|
|
Net cash provided by financing activities
|
|
|
67,253
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(23,486
|
)
|
|
Cash at beginning of period
|
|
|
24,613
|
|
|
Cash at end of period
|
|
$
|
1,127
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
Interest
|
|
$
|
29,543
|
|
|
Income taxes
|
|
$
|
-----
|
|
See accompanying notes to financial statements
F-49
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year ended December 31, 2015
Note 1 – Organization and Nature of Operations
Sostre Enterprises, Inc. (“Company,” “we,” “us,” “our” or “Sostre”) was organized under the laws of the State of Florida in 2003. The Company, through its Black Helmet®, Apparel brand has an apparel and targeted accessories business comprised of various website properties and content, social media content, inventory and other intellectual property rights. Launched June 2008, Black Helmet clothing and accessories feature designs that are hand drawn, unique and relay the courageous side of firefighting and other first responders. Our Black Helmet products are sold primarily through our website at www.blackhelmetapparel.com.
In addition, the Company, through its brand WebLift®, provides marketing, consulting, design, and development services for businesses, non-profits, and municipalities. Specialties include branding and expertise in digital marketing solutions and search engine optimization.
Note 2 – Going Concern
The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company sustained a net loss of $91,550 and used cash in operating activities of $89,602 for the year ended December 31, 2015. The Company had an accumulated deficit of $209,965 at December 31, 2015. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving loans, many at high interest rates, to sustain its current level of operations.
Note 3 – Summary of Significant Accounting Policies
Use of Estimates
Our financial statements are prepared in accordance with Accounting Principles Generally Accepted in the United States (“GAAP”). These accounting principles require management 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 our financial statements as well as reported amounts of revenue 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. Significant estimates included in the accompanying financial statements include revenue recognition, valuation of inventory, and estimates of depreciation period for fixed assets.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments and Fair Value Measurements
The Company measures its financial assets and liabilities in accordance with GAAP. For certain of our financial instruments, including cash, accounts payable, accrued expenses, and short-term debt, the carrying amounts approximate fair value due to their short maturities.
F-50
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year ended December 31, 2015
We adopted accounting guidance for financial and non-financial assets and liabilities in accordance with ASC 820 “
Fair Value Measurements and Disclosures
.” This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which are primarily related to revenues related to the WebLift services. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
Inventories
Inventories consist of finished goods and are stated at the lower of cost or market using the first in, first out (FIFO) method. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Fixed Assets
Fixed assets are recorded at cost. Expenditures for maintenance and repairs along with fixed assets below our capitalization threshold of $500 are expensed as incurred.
|
|
|
|
Fixed Asset Type
|
|
Depreciable Years
|
|
|
|
|
|
Computer Equipment
|
|
5 Years
|
|
Office Furniture
|
|
7 Years
|
|
Video Equipment
|
|
5 Years
|
Restricted Cash
As of December 31, 2015, the Company has restricted cash in the amount of $10,009 related to a deposit to secure a line of credit from a financial institution utilized for working capital.
F-51
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year ended December 31, 2015
Revenue Recognition
The Company’s Black Helmet division generates revenue from the online sale of merchandise, primarily targeting first responders and their families. Our Weblift division provides marketing, consulting, design, and development services for businesses, non-profits, and municipalities.
Revenue recognition requires that persuasive evidence of a sale arrangement exists, services are delivered or delivery of goods occurs through transfer of title and the risk and rewards of ownership, the selling price is fixed or determinable and collectability is reasonably assured. Provisions for discounts and rebates to customers are established as a reduction to revenue in the period the related sales are recorded.
Cost of Sales
Components of costs of sales related exclusively to our Black Helmet Apparel division and include product costs, shipping costs to customers and any inventory adjustments.
Shipping and Handling Costs
The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs for shipments to customers as cost of revenues.
Sales Return Reserve Policy
Our return policy generally allows our end users to return purchased products for refund or in exchange for new products. We estimate a reserve for sales returns, if any, and record that reserve amount as a reduction of sales and as a sales return reserve liability. Sales to consumers on our web site generally may be returned within a reasonable period of time.
Concentrations
The Company has historically purchased a substantial amount of its products from two vendors. These vendors provide our Black Helmet division with our custom designed clothing and accessory items. Purchases from these vendors for the year ended December 31, 2015 accounted for 29% and 14% of our total purchases, respectively. Although we continue to add additional product vendors and we continue to expand our product line and vendor relationships, due to continued high concentration and reliance on these two vendors, the loss of one or both of these vendors could adversely affect the Company’s operations.
General and Administrative Costs
General and administrative costs are primarily comprised of salaries and benefits associated with finance, legal, and other administrative personnel, overhead and occupancy costs, outside professional services, insurance, rent and miscellaneous costs.
Advertising and Marketing
Advertising and marketing expenses are primarily comprised of online marketing of our websites and, email marketing.
F-52
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year ended December 31, 2015
Income taxes
The Company is a Subchapter S Corporation for Federal and State income taxes, whereas taxable income or loss flows through to the shareholders on their individual tax returns rather than at the corporate level. The tax returns of the Company for the years ending 2013 through 2016 are subject to examination by the Internal Revenue Service, generally for three years after they are filed. The Company has not yet filed its 2014 or 2015 tax returns.
Note 4 – Accounts Receivable
At December 31, 2015, accounts receivable totaled $5,821. Our accounts receivable is comprised primarily to revenues related to the WebLift services.
Note 5 – Inventories
Inventory, net of reserves, is comprised of finished goods only as the Company does not have any raw materials used for any work-in-process production or manufacturing. At December 31, 2015 total inventory was $124,521. The reserve for potential inventory losses at December 31, 2015 was $-0-.
Note 6 – Fixed Assets
Fixed assets consist of the following at December 31, 2015:
|
|
|
|
|
|
Fixed Asset Type
|
|
Total
|
|
|
|
|
|
|
|
Computer Equipment
|
|
$
|
4,267
|
|
|
Video Equipment
|
|
|
2,934
|
|
|
Total
|
|
|
7,201
|
|
|
Less accumulated depreciation
|
|
|
(6,097
|
)
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
1,104
|
|
For the year ended December 31, 2015, depreciation expense totaled $1,035.
Note 7 – Loans Payable
Loans payable consists of the following at December 31, 2015:
|
|
|
|
|
|
Loan
|
|
Total
|
|
|
|
|
|
|
|
Kabbage Inc.
|
|
$
|
35,214
|
|
|
Revelation Media Networks
|
|
|
21,000
|
|
|
Citi Financials
|
|
|
9,977
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,191
|
|
The Company enters into short-term loan agreements with Kabbage, Inc., generally with a term of a year or shorter to meet working capital requirements. Interest on the loans may range from 10% to above 35% and are generally serviced through direct withdrawal from Company accounts. Lenders may or may not require collateral and when required, is general related to cash flows from the Company’s e-commerce transactions. The line of credit from Citi Financials is secured by a restricted cash balance of $10,009 held in the same institution.
The Company entered into a loan payable agreement with Revelation Media Networks. The loan has a one-time interest charge of $3,000. The loan is due on demand.
F-53
Sostre Enterprises, Inc.
Notes to the Financial Statements
For the Year ended December 31, 2015
Note 8 – Notes Payable
Notes payable consists of the following at December 31, 2015:
|
|
|
|
|
|
Note
|
|
Total
|
|
|
|
|
|
|
|
Unrelated party
|
|
$
|
40,000
|
|
|
On Deck Capital
|
|
|
45,944
|
|
|
PayPal working capital
|
|
|
22,000
|
|
|
Total
|
|
$
|
107,944
|
|
The Company has entered into Note agreements with On Deck Capital and Paypal Working Capital to provide working capital. All notes are current obligations and have interest rates ranging from 15% to 35%. One note is secured by e-commerce proceeds under terms providing for the creditor to directly withdraw from the Company’s accounts each working day.
On December 23, 2015, the Company entered into a note payable agreement with an unrelated party for $40,000. The note is bearing interest of 15% and is due on March 31, 2016. The Company fully paid off the balance on the maturity date.
Note 9 – Commitments and Contingencies
The Company leases its warehouse and office facility for its Black Helmet Apparel division in Orlando Florida. The facility is approximately 2,667 square feet primarily consisting of warehouse storage. Lease expense for the year ended December 31, 2015 totaled approximately $18,000. The lease was renewed for a three year term in April 2016 at an initial base rate of $1,641 per month plus CAM charges. The lease has an initial three year term.
In addition, the Company leases administrative office space in Miami Florida on a month-to-month basis.
Lease expense for this location totaled approximately $7,000 for the year ended December 31, 2015. The lease is cancellable by the Company upon 30 days written notice.
Future minimum lease commitments are as follows:
|
|
|
|
|
|
2016
|
|
$
|
16,410
|
|
|
2017
|
|
|
21,102
|
|
|
2018
|
|
|
21,964
|
|
|
2019
|
|
|
3,680
|
|
|
2020
|
|
|
---
|
|
|
|
|
$
|
63,156
|
|
Note 10 – Subsequent Events
In December 2016, pursuant to the terms of an Asset Purchase Agreement, we sold our Black Helmet Apparel operations to Bright Mountain Media, Inc. for total consideration of $660,000. Considerations received consisted of $250,000 in cash including direct payment to creditors of $80,000, forgiveness of $200,000 in working capital advances made by Bright Mountain to the company, assumption of $40,000 in debt and the issuance of $200,000 for their common shares with a fair value of $170,000.
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through February 28, 2017 the date the financial statements were issued.
F-54
Sostre Enterprises, Inc.
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currents Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
488
|
|
|
$
|
1,127
|
|
|
Cash - restricted
|
|
|
10,009
|
|
|
|
10,009
|
|
|
Accounts receivable, net
|
|
|
3,042
|
|
|
|
5,821
|
|
|
Inventories, net
|
|
|
29,773
|
|
|
|
124,521
|
|
|
Total Current Assets
|
|
|
43,312
|
|
|
|
141,478
|
|
|
Fixed Assets, net
|
|
|
328
|
|
|
|
1,104
|
|
|
Total Assets
|
|
$
|
43,640
|
|
|
$
|
142,582
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
48,190
|
|
|
$
|
105,376
|
|
|
Accrued Expenses
|
|
|
80,451
|
|
|
|
56,365
|
|
|
Deferred Revenue
|
|
|
22,747
|
|
|
|
12,670
|
|
|
Loans Payable
|
|
|
55,230
|
|
|
|
66,191
|
|
|
Notes Payable
|
|
|
117,651
|
|
|
|
107,944
|
|
|
Total Current Liabilities
|
|
|
324,269
|
|
|
|
348,546
|
|
|
Total Liabilities
|
|
|
324,269
|
|
|
|
348,546
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Deficit
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0, 25,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
25,000 shares issued and outstanding at September 30, 2016
|
|
|
|
|
|
|
|
|
|
and December 31, 2015, respectively
|
|
|
1
|
|
|
|
1
|
|
|
Accumulated Deficit
|
|
|
(280,630
|
)
|
|
|
(205,965
|
)
|
|
Total Shareholders' Deficit
|
|
|
(280,629
|
)
|
|
|
(205,964
|
)
|
|
Total Liabilities and Shareholders' Deficit
|
|
$
|
43,640
|
|
|
$
|
142,582
|
|
See accompanying notes to the condensed unaudited financial statements
F-55
Sostre Enterprises, Inc.
Condensed Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Revenues from product sales
|
|
$
|
683,902
|
|
|
$
|
865,719
|
|
|
Revenues from services
|
|
|
118,824
|
|
|
|
111,800
|
|
|
Total revenues
|
|
|
802,726
|
|
|
|
977,519
|
|
|
Cost of sales
|
|
|
420,298
|
|
|
|
409,003
|
|
|
Gross profit
|
|
|
382,428
|
|
|
|
568,516
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Advertising and promotion
|
|
|
158,066
|
|
|
|
225,304
|
|
|
Salaries and wages
|
|
|
185,834
|
|
|
|
211,444
|
|
|
Selling, general and administrative expenses
|
|
|
100,912
|
|
|
|
166,859
|
|
|
Total operating expenses
|
|
|
444,812
|
|
|
|
603,607
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(62,384
|
)
|
|
|
(35,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(12,281
|
)
|
|
|
(15,847
|
)
|
|
Total other income (expense)
|
|
|
(12,281
|
)
|
|
|
(15,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(74,665
|
)
|
|
|
(50,938
|
)
|
|
Income taxes
|
|
|
----
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(74,665
|
)
|
|
$
|
(50,938
|
)
|
See accompanying notes to the condensed unaudited financial statements
F-56
Sostre Enterprises, Inc.
Condensed Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(74,665
|
)
|
|
$
|
(50,938
|
)
|
|
Adjustments to reconcile net loss to cash provided by (used in) operations:
|
|
|
|
|
|
|
Depreciation
|
|
|
776
|
|
|
|
776
|
|
|
Allowance for Doubtful Accounts
|
|
|
4,527
|
|
|
|
3,819
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,748
|
)
|
|
|
(13,229
|
)
|
|
Inventory
|
|
|
94,748
|
|
|
|
(35,128
|
)
|
|
Accounts payable
|
|
|
(57,186
|
)
|
|
|
(15,392
|
)
|
|
Accrued expenses
|
|
|
24,086
|
|
|
|
30,036
|
|
|
Deferred revenue
|
|
|
10,077
|
|
|
|
(7,900
|
)
|
|
Net cash provided by (used in) operating activities
|
|
|
615
|
|
|
|
(87,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows in financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from loans payable, net of repayments
|
|
|
(10,961
|
)
|
|
|
12,752
|
|
|
Proceeds from notes payable, net of repayments
|
|
|
9,707
|
|
|
|
51,138
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,254
|
)
|
|
|
63,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(639
|
)
|
|
|
(24,066
|
)
|
|
Cash at beginning of period
|
|
|
1,127
|
|
|
|
24,613
|
|
|
Cash at end of period
|
|
$
|
488
|
|
|
$
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
12,281
|
|
|
$
|
15,847
|
|
|
Income taxes
|
|
|
----
|
|
|
|
----
|
|
See accompanying notes to the condensed unaudited financial statements
F-57
Sostre Enterprises, Inc
Notes to the Condensed Financial Statements
September 30, 2016 and 2015 (Unaudited)
Note 1 – Organization and Nature of Operations
Sostre Enterprises, Inc. (“Company,” “we,” “us,” “our” or “Sostre”) was organized under the laws of the State of Florida in 2003. The Company, through its Black Helmet® Apparel brand has an apparel and targeted accessories business comprised of various website properties and content, social media content, inventory and other intellectual property rights. Launched June 2008, Black Helmet clothing and accessories feature designs that are hand drawn, unique and relay the courageous side of firefighting and other first responders. Our Black Helmet products are sold primarily through our website at www.blackhelmetapparel.com.
In addition, the Company, through its brand WebLift®, provides marketing, consulting, design, and development services for businesses, non-profits, and municipalities. Specialties include branding and expertise in digital marketing solutions and search engine optimization.
Note 2 - Going Concern
The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company sustained net losses of $74,665 and $50,938, respectively, for the nine month periods ending September 30, 2016 and 2015. The Company had an accumulated deficit of $280,630 and a working capital deficit of $280,457 at September 30, 2016. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving loans, many at high interest rates, to sustain its current level of operations.
Note 3 – Summary of Significant Accounting Policies
Use of Estimates
Our financial statements are prepared in accordance with Accounting Principles Generally Accepted in the United States (“GAAP”). These accounting principles require management 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 our financial statements as well as reported amounts of revenue 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. Significant estimates included in the accompanying financial statements include revenue recognition, valuation of inventory, and estimates of depreciation period for fixed assets.
Basis of Presentation
The accompanying condensed unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.
It is management’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
F-58
Sostre Enterprises, Inc
Notes to the Condensed Financial Statements
September 30, 2016 and 2015 (Unaudited)
Fair Value of Financial Instruments and Fair Value Measurements
The Company measures its financial assets and liabilities in accordance with GAAP. For certain of our financial instruments, including cash, accounts payable, accrued expenses, and short-term debt, the carrying amounts approximate fair value due to their short maturities.
We adopted accounting guidance for financial and non-financial assets and liabilities in accordance with ASC 820 “
Fair Value Measurements and Disclosures
.” This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which are primarily related to revenues related to the WebLift services. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.
Inventories
Inventories consist of finished goods and are stated at the lower of cost or market using the first in, first out (FIFO) method. Provisions have been made to reduce excess or obsolete inventories to their net realizable value.
Fixed Assets
Fixed assets are recorded at cost. Expenditures for maintenance and repairs along with fixed assets below our capitalization threshold of $500 are expensed as incurred.
|
|
|
|
Fixed Asset Type
|
|
Depreciable Years
|
|
|
|
|
|
Computer Equipment
|
|
5 Years
|
|
Office Furniture
|
|
7 Years
|
|
Video Equipment
|
|
5 Years
|
F-59
Sostre Enterprises, Inc
Notes to the Condensed Financial Statements
September 30, 2016 and 2015 (Unaudited)
Restricted Cash
As of September 30, 2016 and December 31, 2015, the Company has restricted cash in the amount of $10,009 related to a deposit to secure a line of credit from a financial institution utilized for working capital.
Revenue Recognition
The Company’s Black Helmet division generates revenue from the online sale of merchandise, primarily targeting first responders and their families. Our Weblift division provides marketing, consulting, design, and development services for businesses, non-profits, and municipalities.
Revenue recognition requires that persuasive evidence of a sale arrangement exists, services are delivered or delivery of goods occurs through transfer of title and the risk and rewards of ownership, the selling price is fixed or determinable and collectability is reasonably assured. Provisions for discounts and rebates to customers are established as a reduction to revenue in the period the related sales are recorded.
Cost of Sales
Components of costs of sales related exclusively to our Black Helmet Apparel division and include product costs, shipping costs to customers and any inventory adjustments.
Shipping and Handling Costs
The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs for shipments to customers as cost of revenues.
Sales Return Reserve Policy
Our return policy generally allows our end users to return purchased products for refund or in exchange for new products. We estimate a reserve for sales returns, if any, and record that reserve amount as a reduction of sales and as a sales return reserve liability. Sales to consumers on our web site generally may be returned within a reasonable period of time.
Concentrations
The Company has historically purchased a substantial amount of its products from two vendors. These vendors provide our Black Helmet division with our custom designed clothing and accessory items. Purchases from these vendors for the nine month periods ending September 30, 2016 and 2015 accounted for 31% and 47%, of our total purchases, respectively. Although we continue to add additional product vendors and we continue to expand our product line and vendor relationships, due to continued high concentration and reliance on these two vendors, the loss of one or both of these vendors could adversely affect the Company’s operations.
General and Administrative Costs
General and administrative costs are primarily comprised of salaries and benefits associated with finance, legal, and other administrative personnel, overhead and occupancy costs, outside professional services, insurance, rent and miscellaneous costs.
Advertising and Marketing
Advertising and marketing expenses are primarily comprised of online marketing of our websites and, email marketing.
F-60
Sostre Enterprises, Inc
Notes to the Condensed Financial Statements
September 30, 2016 and 2015 (Unaudited)
Income taxes
The Company is a Subchapter S Corporation for Federal and State income taxes, whereas taxable income or loss flows through to the shareholders on their individual tax returns rather than at the corporate level. The tax returns of the Company for the years ending 2013 through 2016 are subject to examination by the Internal Revenue Service, generally for three years after they are filed. The Company has not yet filed its 2014 or 2015 tax returns.
Note 4 – Accounts Receivable
At September 30, 2016 and December 31, 2015, accounts receivable totaled $3,042 and $5,821, respectively. Our accounts receivable is comprised primarily to revenues related to the WebLift services.
Note 5 – Inventories
Inventory, net of reserves, is comprised of finished goods only as the Company does not have any raw materials used for any work-in-process production or manufacturing. At September 30, 2016 and December 31, 2015 total inventory was $29,773 and $124,521, respectively.
Note 6 – Fixed Assets
Fixed assets consist of the following at September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
Fixed Asset Type
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Computer Equipment
|
|
$
|
4,267
|
|
|
$
|
4,267
|
|
|
Video Equipment
|
|
|
2,934
|
|
|
|
2,934
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,201
|
|
|
|
7,201
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(6,873
|
)
|
|
|
(6,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets, net
|
|
$
|
328
|
|
|
$
|
1,104
|
|
For the nine months ended September 30, 2016 and 2015, depreciation expense totaled $776 and $776, respectively.
Note 7 – Loans Payable
Loans payable consists of the following at September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
Loan
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Kabbage Inc.
|
|
$
|
33,199
|
|
|
$
|
35,214
|
|
|
Citi Financials
|
|
|
9,031
|
|
|
|
9,977
|
|
|
Revelation Media Networks
|
|
|
13,000
|
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,230
|
|
|
$
|
66,191
|
|
The Company enters into short-term loan agreements with Kabbage, Inc., generally with a term of a year or shorter to meet working capital requirements. Interest on the loans may range from 10% to above 35% and are generally serviced through direct withdrawal from Company accounts. Lenders may or may not require collateral and when required, is general related to cash flows from the Company’s e-commerce transactions. The line of credit from Citi Financials is secured by a restricted cash balance of $10,009, held in the same institution.
The Company entered into a loan payable agreement with Revelation Media Networks. The loan has a one-time interest charge of $3,000. The loan is due on demand.
F-61
Sostre Enterprises, Inc
Notes to the Condensed Financial Statements
September 30, 2016 and 2015 (Unaudited)
Note 8 – Notes Payable
Notes payable consists of the following at September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
Note
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Unrelated party
|
|
$
|
16,417
|
|
|
$
|
40,000
|
|
|
Paypal Working Capital
|
|
|
61,097
|
|
|
|
22,000
|
|
|
On Deck Capital
|
|
|
40,137
|
|
|
|
45,944
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,651
|
|
|
$
|
107,944
|
|
The Company has entered into Note agreements to provide working capital. All notes are current obligations and have interest rates ranging from 15% to 35%. One note is secured by e-commerce proceeds under terms providing for the creditor to directly withdraw from the Company’s accounts each working day.
On May 31, 2016, the Company entered into a note payable agreement with an unrelated party for $20,000. The note is bearing interest of 15% and is due on July 31, 2016. The note balance on this note was $16,417. The Company is currently in default.
On December 23, 2015, the Company entered into a note payable agreement with an unrelated party for $40,000. The note is bearing interest of 15% and is due on March 31, 2016. The Company fully paid off the balance on the maturity date.
Note 9 – Commitments and Contingencies
The Company leases its warehouse and office facility for its Black Helmet Apparel division in Orlando Florida. The facility is approximately 2,667 square feet primarily consisting of warehouse storage. Lease expense for the nine month periods ending September 30, 2016 and 2015 totaled approximately $17,900 and $12,617, respectively. The lease was renewed for a three year term in April 2016 at an initial base rate of $1,641 per month plus CAM charges. The lease has an initial three year term.
In addition, the Company leases administrative office space in Miami Florida on a month-to-month basis.
Lease expense for this location totaled approximately $4,800 and $5,300 for the nine month periods ended September 30, 2016 and 2015, respectively. The lease is cancellable by the Company upon 30 days notice by the Company.
Note 10 – Subsequent Events
In December 2016, pursuant to the terms of an Asset Purchase Agreement, we sold our Black Helmet Apparel operations to Bright Mountain Media, Inc. for total consideration of $660,000. Considerations received consisted of $250,000 in cash, forgiveness of $200,000 in working capital advances made by Bright Mountain to the company, assumption of $40,000 in debt and the issuance 200,000 shares of common stock with a fair value of $170,000.
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through February 28, 2017 the date the financial statements were issued.
F-62
![[BMTM_S1012.JPG]](http://content.edgar-online.com/edgar_conv_img/2017/04/12/0001553350-17-000391_BMTM_S1012.JPG)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Director of:
Daily Engage Media Group, LLC
We have audited the accompanying balance sheets of Daily Engage Media Group, LLC (the “Company”) as of December 31, 2016 and 2015 and the related statements of operations, changes in member’s’ equity, and cash flows for the year ended December 31, 2016 and for the period from February 10, 2015 (Inception) to December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly in all material respects, the financial position of Daily Engage Media Group, LLC as of December 31, 2016 and 2015 and the results of its operations and its cash flows for the year ended December 31, 2016 and for the period from February 10, 2015 (Inception) to December 31, 2015 then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a net loss of $33,607, used cash in operations of $223,140 and an accumulated deficit of $25,331 at December 31, 2016. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Liggett & Webb, P.A.
LIGGETT & WEBB, P.A.
Certified Public Accountants
Boynton Beach, Florida
April 7, 2017
F-63
Daily Engage Media Group, LLC
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currents Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,903
|
|
|
$
|
20
|
|
|
Accounts receivable, net
|
|
|
804,673
|
|
|
|
60,471
|
|
|
Total current assets
|
|
|
807,576
|
|
|
|
60,491
|
|
|
Total assets
|
|
$
|
807,576
|
|
|
$
|
60,491
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expense
|
|
$
|
603,274
|
|
|
$
|
48,605
|
|
|
Factor advances, net
|
|
|
188,015
|
|
|
|
—
|
|
|
Total current liabilities
|
|
|
791,290
|
|
|
|
48,605
|
|
|
Total liabilities
|
|
|
791,290
|
|
|
|
48,605
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 5)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' equity
|
|
|
|
|
|
|
|
|
|
Members' contributions
|
|
|
41,618
|
|
|
|
3,610
|
|
|
Accumulated (deficit)/equity
|
|
|
(25,331
|
)
|
|
|
8,276
|
|
|
Total members' Equity
|
|
|
16,287
|
|
|
|
11,886
|
|
|
Total liabilities and members' equity
|
|
$
|
807,576
|
|
|
$
|
60,491
|
|
See accompanying notes to financial statements
F-64
Daily Engage Media Group, LLC
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
2016
|
|
|
For the period from
February 10, 2015
(inception) to
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,647,596
|
|
|
$
|
60,471
|
|
|
Cost and Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
1,449,136
|
|
|
|
50,621
|
|
|
Salaries
|
|
|
154,353
|
|
|
|
447
|
|
|
Sales and Marketing
|
|
|
8,225
|
|
|
|
—
|
|
|
General and administrative expenses
|
|
|
51,900
|
|
|
|
1,127
|
|
|
Total cost and expenses
|
|
|
1,663,614
|
|
|
|
52,195
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/ (Loss) from operations
|
|
|
(16,018
|
)
|
|
|
8,276
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
17,589
|
|
|
|
—
|
|
|
Total other expense
|
|
|
17,589
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/ (Loss)
|
|
$
|
(33,607
|
)
|
|
$
|
8,276
|
|
See accompanying notes to financial statements
F-65
Daily Engage Media Group, LLC
Statements of Changes in Members' Equity
for the Year Ended December 31, 2016 and for the Period from
February 10, 2015 (Inception) to December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members'
contribution
|
|
|
Accumulated Equity/(deficit)
|
|
|
Total members'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 10, 2015 (Inception)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
3,610
|
|
|
|
|
|
|
|
3,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period from February 10, 2015 (Inception) to December 31, 2015
|
|
|
|
|
|
|
8,276
|
|
|
|
8,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
3,610
|
|
|
|
8,276
|
|
|
|
11,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
38,008
|
|
|
|
|
|
|
|
38,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2016
|
|
|
|
|
|
|
(33,607
|
)
|
|
|
(33,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
41,618
|
|
|
$
|
(25,331
|
)
|
|
$
|
16,287
|
|
See accompanying notes to financial statements
F-66
Daily Engage Media Group, LLC
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
2016
|
|
|
For the period
from
February 10, 2015
(inception) to
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(33,607
|
)
|
|
$
|
8,276
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(744,202
|
)
|
|
|
(60,471
|
)
|
|
Accounts payable and accrued expense
|
|
|
554,669
|
|
|
|
48,605
|
|
|
Net cash used in operating activities
|
|
|
(223,140
|
)
|
|
|
(3,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Members' contributions
|
|
|
38,008
|
|
|
|
3,610
|
|
|
Proceeds from factor advances, net of repayments
|
|
|
188,015
|
|
|
|
—
|
|
|
Net cash provided by financing activities
|
|
|
226,023
|
|
|
|
3,610
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,883
|
|
|
|
20
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
20
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
2,903
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
Cash paid for interest expense
|
|
$
|
8,355
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying notes to financial statements
F-67
Daily Engage Media Group, LLC
Notes to the Financial Statements
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception)
to December 31, 2015
Note 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Daily Engage Media Group LLC (“we”, “us” or the “Company”) is a limited liability company organized under the laws of the State of New Jersey in February 10, 2015 (Inception) and which began active operations in November 2015.
We are an advertising network company that matches advertisers with publishers. The Company offers video, display, mobile and native ads, providing focused promotion for advertisers of products and services while helping websites monetize their visitor traffic.
Our advertising exchange platform is being designed to be a trading desk for publishers and advertisers where they will be able to log-in and choose from various features. Publishers will be able to select a variety of advertising units for their video, mobile, display and native advertisements and also have the ability to create their own unique advertising formats. Advertisers will be able to choose where their advertisements will be seen using our filters or by connection directly with the publisher through our platform.
Use of Estimates
Our financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”). These accounting principles require management 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 our financial statements as well as reported amounts of revenue 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. Significant estimates included in the accompanying financial statements include revenue recognition.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments and Fair Value Measurements
The Company measures its financial assets and liabilities in accordance with GAAP. For certain of our financial instruments, including cash, accounts payable, accrued expenses, and debt, the carrying amounts approximate fair value due to their short maturities.
We adopted accounting guidance for financial and non-financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) 820 “
Fair Value Measurements and Disclosures
.” This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
F-68
Daily Engage Media Group, LLC
Notes to the Financial Statements
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception)
to December 31, 2015
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Accounts Receivable
Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual payment terms of each customer, which are generally net 45 or net 60 days. Once collection efforts by the Company are exhausted, the determination for charging off uncollectible receivables is made. As of December 31, 2016, we had one customer that made up 84% of accounts receivable. As of December 31, 2015, we had four customers that made up 47%, 19%, 15% and 11% of accounts receivable.
Revenue Recognition
The Company recognizes revenue on our products in accordance with ASC 605, “
Revenue Recognition
.” Under these guidelines, revenue is recognized on sales transactions when all of the following exist: persuasive evidence of an arrangement did exist; services have been provided to the customers; the amount of fees to be paid by the customers is fixed or determinable; and collectability is reasonably assured.
Revenue is recognized by the Company when ads appear and are viewed on websites drawn from our portfolio of publishers. We offer video, display mobile and native ads providing our advertisers with focused promotion of their products and services. The Company acts as a principal in revenue transactions as we are the primary obligor, have latitude in establishing our pricing, monitor and often change aspects or specifications of ads running and has credit risk. Accordingly, revenue is recognized on a gross basis, with publisher and media expenses identified as directly related to the generation of revenue being recorded as cost of revenues.
Cost of Revenue
Cost of revenues represents payments to media providers and website publishers, ad serving fee, payments to independent contractor providing programming, website management and maintenance fees and customer support functions. The Company becomes obligated to make payments when the advertising impressions are delivered or occur. These costs are recorded in the period in which the corresponding revenues are recognized.
Website Development Costs
The Company accounts for its website development costs in accordance with ASC 350-50, “
Website Development Costs
” (“ASC 350-50”). These costs, if any, will be included in intangible assets in our financial statements or expensed immediately if the Company cannot support recovery of these costs from positive future cash flows.
ASC 350-50 requires the expensing of all costs of the preliminary project stage and the training and application maintenance stage and the capitalization of all internal or external direct costs incurred during the application and infrastructure development stage. Upgrades or enhancements that add functionality are capitalized while other costs during the operating stage are expensed as incurred. The Company will amortize the capitalized website development costs over their estimated useful life.
F-69
Daily Engage Media Group, LLC
Notes to the Financial Statements
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception)
to December 31, 2015
As of December 31, 2016 and 2015, all website development costs have been expensed.
Concentrations
Currently, for video ads, the Company is working with three advertising platforms, supplying ads to their contracted websites approximately as follows:
Advertiser A
90%
Advertiser B
8%
Advertiser C
2%
For display ads, the Company typically may use 10-15 advertising platforms, supplying ads to their contracted websites approximately as follows:
Advertiser A
25%
Advertiser B
25%
Advertiser C
25%
The Company draws on a portfolio of approximately 200 publishers for placements of ads with concentrations approximately as follows:
Video ads:
Publisher A
15%
Publisher B
15%
Publisher C
8%
Display ads;
Publisher D
35%
Publisher E
20%
Publisher F
10%
Publisher G
10%
General and Administrative Costs
General and administrative costs are primarily comprised of rent and travel expenses.
Income taxes
The Company is a limited liability company for Federal and State income taxes, where taxable income or loss “flows through” to the members on their individual tax returns rather than at the corporate level. The tax returns of the Company for the year ended December 31, 2016 and for the period from February 10, 2015 (Inception) to December 31, 2015 are subject to examination by the Internal Revenue Service, generally for three years after they are filed. The Company has not yet filed its 2015 or 2016 tax returns.
Advertising, Marketing and Promotion Costs
Advertising, marketing and promotion expenses are expensed as incurred and are included sales and marketing expenses on the accompanying statement of operations. For the year ended December 31, 2016 and for the period from February 10, 2015 (Inception) to December 31, 2015, advertising, marketing and promotion expense was $8,225 and $0, respectively
F-70
Daily Engage Media Group, LLC
Notes to the Financial Statements
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception)
to December 31, 2015
Recent Accounting Pronouncements
In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) ASU No. 2016-15,
“Classification of Certain Cash Receipts and Cash Payments”
ASU 2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
In April 2016, the FASB issued ASU 2016–10
“Revenue from Contract with Customers
(Topic 606):
Identifying Performance Obligations and Licensing.”
The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In February 2016, the FASB issued ASU 2016-02 “Leases,” which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
Note 2 –Going Concern
The Company’s financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has a net loss of $33,607 for the year ended December 31, 2016, used cash in operations of $223,140 and an accumulated deficit of $25,331 at December 31, 2016. The Company expects to continue to incur expenditures in subsequent periods necessary in the ordinary course of business in order to continue to offer and make its services available to prospective customers, which depending on future revenues may exceed the current level of working capital.
Management recognizes that the Company must generate additional resources to successfully commercialize its services. If the Company is not able to timely and successfully obtain new financing, complete a strategic transaction and/or achieve positive cash flows, its business, financial condition, cash flows and results of operations will be materially and adversely affected. The financial statements do not reflect any adjustments if the Company is unable to continue as a going concern.
Note 3 –Factor Advances
On August 26, 2016, the Company executed a Financing and Security Agreement with FPP Sandbox LLC, an affiliate of Fast Pay Partners LLC (“FastPay”), (collectively, the “FastPay Agreement”), with FastPay creating an account receivable-based credit facility.
F-71
Daily Engage Media Group, LLC
Notes to the Financial Statements
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception)
to December 31, 2015
Under the terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase the Company’s eligible accounts receivables. Upon any acquisition of accounts receivable, FastPay will advance the Company up to 70% of the gross value of the purchased accounts, up to a maximum of $100,000 of advances. Each account receivable purchased by FastPay will be subject to a factoring fee rate specified in the FastPay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over 30 days. The Company is subject to a concentration limitation on the percentage of debt from any single customer of 50% of the total amount outstanding on its purchased accounts.
The Company will be obligated to repurchase accounts remaining uncollected after a specific deadline, and FastPay will generally have full recourse against the Company in the event of nonpayment of any purchased accounts. The Company’s obligations under the FastPay Agreement are secured by a first position security interest in its accounts receivable, deposit accounts and all proceeds therefrom.
The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts receivable and audit rights. The Company is also required to provide FastPay with a 30 day notice of any transaction that results, or would result in, a “change of control” as defined in the FastPay Agreement. The failure to satisfy covenants under the FastPay Agreement or the occurrence of other specified events that constitute an event of default could result in the termination of the FastPay Agreement and/or the acceleration of the Company’s obligations. The FastPay Agreement contains provisions relating to events of default that are customary for agreements of this type.
The Company has granted a continuing first priority security interest in the receivables based proceeds.
The balance due under this Agreement was $100,881 at December 31, 2016.
On November 17, 2016, the Company entered into Sales of Future Revenue Agreement with Gibraltar Capital Advance LLC (“Gibraltar”). Under the terms of the Agreement, the Company has sold $132,000 in future accounts and contract rights for $100,000 (the “Purchase Price”). The difference between the amount sold and the purchase price of $32,000 has been recorded as a debt discount. In exchange for the purchased amount, the Company authorized Gibraltar to ACH debit $629 daily from the Company’s bank account until Gibraltar has received the purchase amount of $132,000. The agreement contains standard covenants regarding conduct of the business, on-site inspections, audit rights and transfer of assets limitations As of December 31, 2016, the balance due to Gibraltar was $87,134, net of the debt discount of $27,883.
On July 12, 2016, the Company entered into Sales of Future Revenue Agreement with Legend Advance Funding II, LLC (“Legend”). Under the terms of the Agreement, the Company has sold $13,500 in future accounts and contract rights for $10,000 (the “Purchase Price”). The difference between the amount sold and the purchase price of $3,500 has been recorded as a debt discount. In exchange for the purchased amount, the Company authorized Legend to ACH debit $129 daily from the Company’s bank account until Legend has received the purchase amount of $13,500. As of December 31, 2016, the balance was fully repaid.
Future minimum payments due under these factor advance agreements at December 31 are as follows:
|
|
|
|
|
|
2017
|
|
$
|
215,898
|
|
|
2018
|
|
|
—
|
|
|
2019
|
|
|
—
|
|
|
2020
|
|
|
—
|
|
|
2021 and after
|
|
|
—
|
|
|
|
|
$
|
215,898
|
|
F-72
Daily Engage Media Group, LLC
Notes to the Financial Statements
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception)
to December 31, 2015
Note 4 – Members’ Equity
The Company is governed by the terms and conditions of the Limited Liability Company Operating Agreement (the “Operating Agreement”) dated February 12, 2015. The members may contribute in proportionate amounts any additional capital deemed necessary for the operation of the Company, provided, however, that in the event any member deems it advisable to refuse or fails to contribute such member’s share of any or all of the additional capital, then the other members or any one of them may contribute the additional capital not paid by the refusing member and will receive an increase in their ownership in direct proportion to the additional capital contributed. The Operating Agreement further provides that all profits and losses of the Company shall be shared in proportion to the percentage of interest each member holds. For the year ended December 31, 2016 and for the period from February 10, 2015 (Inception) to December 31, 2015, the members contributed capital of $38,008 and $3,610, respectively.
The Company is composed of three members with an equal ownership interest of 33.33%.
Note 5 – Commitments and Contingencies
The Company leases its office space in New Jersey. The lease agreement was entered into on January 1, 2016. The lease commenced on January 1, 2016 and will terminate on October 1, 2018 at a current base rent of for a term of $1,000 per month. An additional security deposit of $1,500 was required. The Company and landlord mutually agreed to terminate the lease in November 2016. For the year ended December 31, 2016 and for the period from February 10, 2015 (Inception) to December 31, 2015, the rent expense was $10,632 and $0, respectively.
In connection with our ongoing operations, we have entered into a series of agreements with contractors, which may be terminated by either party upon notice, targeting market growth and support services including:
·
Agreement dated December 15, 2015 providing publisher business development support for bi-weekly compensation of $2,000 starting on January 15, 2016;
·
Agreement dated January 1, 2016 to provide ad operations support for a flat monthly fee of $2,000 plus an additional $4 per hour for hours worked by the contractors team members on Company projects starting on January 1, 2016;
·
Agreement dated March 15, 2016 to provide data processing and data reporting services for a monthly fee of $2,200 starting on March 15, 2016;
·
Agreement dated July 1, 2016 providing publisher business development support for bi-weekly compensation of $300 starting on July 1,2 016 and increased to $375 starting on September 1, 2016; and
·
Agreement dated July 6, 2016 providing business development support for bi-weekly compensation of $1,000.
In connection with our display ads, we have entered into a series of agreements with advertising platforms which require us to pay a minimum monthly ad serving fee starting from $1,000 and may vary based upon usage.
F-73
Daily Engage Media Group, LLC
Notes to the Financial Statements
For the Year Ended December 31, 2016 and the period from February 10, 2015 (inception)
to December 31, 2015
Note 6– Subsequent Events
Subsequent to the year ended December 31, 2016, the members contributed capital of $7,195.
On March 3, 2017, the Company entered into a Membership Interest Purchase Agreement (“Purchase Agreement”) with Bright Mountain Media, Inc. (“Bright Mountain”). Under the terms of the Purchase Agreement, Bright Mountain will purchase all of the membership interests in the Company for $4.9 million consisting of $1.9 million in cash and $3 million in shares of Bright Mountain’ common stock valued at a to be determined by Bright Mountain’s stock offering price. The closing of the acquisition is subject to a number of conditions precedent, including, but not limited to, the closing of a pending public offering by Bright Mountain. In connection with the acquisition, the Company will also enter into three year employment agreements with Messrs. Rezitis and Pagoulatos, members of the Company, which provide for an annual base compensation plus the ability to earn bonuses. The employment agreements contain customary confidentiality, non-intervention and assignment clauses.
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through April 7, 2017 the date the financial statements were issued.
F-74
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDING DECEMBER 31, 2016
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Historical Information
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Bright
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Black
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Historic
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Mountain
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Helmet
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Pro Forma
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Proforma
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Daily
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Pro Forma
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Proforma
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Media, Inc.
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Apparel
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Combined
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Adjustments
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Combined
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Notes
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Engage
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Notes
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Adjustments
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Combined
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Revenues from product sales
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1,499,010
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1,130,638
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2,629,648
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2,629,648
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1,647,596
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4,277,244
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Revenues from services
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434,775
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434,775
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434,775
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434,775
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Total revenue
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1,933,785
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1,130,638
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3,064,423
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3,064,423
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1,647,596
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4,712,019
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Cost of sales - products
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1,133,872
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666,212
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1,800,084
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1,800,084
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1,449,136
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3,249,220
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Gross profit
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799,913
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464,426
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1,264,339
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1,264,339
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198,460
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1,462,799
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Selling General and administrative expenses
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3,093,295
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432,134
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3,525,429
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259,000
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3,784,429
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b, d, e
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214,478
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f, g, h
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119,000
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4,117,907
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Income (loss) from operations
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(2,293,382
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)
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32,292
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(2,261,090
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)
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(259,000
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)
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(2,520,090
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)
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(16,018
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)
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(119,000
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)
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(2,655,108
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)
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Other income (expense)
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Interest income
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69
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69
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69
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Interest expense
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(373,738
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)
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(12,283
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)
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(386,021
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)
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(73,000
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)
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(459,021
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)
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a, c
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(17,589
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)
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(476,610
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)
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Total other income (expense)
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(373,669
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)
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(12,283
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)
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(385,952
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)
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(73,000
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)
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(458,952
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)
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(17,589
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)
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(476,541
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Net loss before taxes
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(2,667,051
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)
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20,009
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(2,647,042
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)
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(332,000
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)
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(2,979,042
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)
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(33,607
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)
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(119,000
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)
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(3,131,649
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)
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Income taxes
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—
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—
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—
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—
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—
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—
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—
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—
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Net loss
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$
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(2,667,051
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)
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|
$
|
20,009
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|
$
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(2,647,042
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)
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|
$
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(332,000
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)
|
|
$
|
(2,979,042
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)
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|
|
|
|
|
$
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(33,607
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)
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|
|
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|
$
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(119,000
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)
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|
$
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(3,131,649
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)
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F-75
The following tables summarizes the impact of pro forma adjustments to operating expense and interest classifications resulting from the assumed acquisition of the Black Helmet Apparel business presented in the unaudited pro forma condensed combined statements of operations for the period from January 1, 2016 through December 15, 2016 (date of acquisition).
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|
|
|
|
|
|
|
|
Black Helmet Apparel
|
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General and
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Administrative
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Expenses
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Interest
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Total
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For the Period Ended December 15, 2016
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(a)
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Interest
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$
|
—
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$
|
(12,000
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)
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$
|
(12,000
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)
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|
(b)
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Amortization
|
|
|
97,000
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|
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|
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|
97,000
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(c)
|
Interest
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|
85,000
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|
85,000
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(d)
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Service agreements
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|
112,000
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|
|
|
|
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|
|
112,000
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|
(e)
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Other general and administrative expenses
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|
50,000
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|
|
|
|
|
|
|
50,000
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|
|
|
|
|
$
|
259,000
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|
|
$
|
73,000
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|
$
|
332,000
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(a)
Adjustment to reflect settlement of Sostre debts at closing from cash proceeds.
(b)
Adjustment to recognize amortization expense on acquired definite-lived intangible assets.
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|
|
|
|
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|
|
|
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|
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Allocation
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2016
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|
Life
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Inventory
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$
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58,000
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|
$
|
—
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|
N/A
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|
|
Website
|
|
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80,000
|
|
|
|
26,000
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|
3 years
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|
|
Trade names
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|
150,000
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|
|
|
|
|
|
N/A
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|
|
Customer relationships
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|
|
252,000
|
|
|
|
48,000
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|
|
5 years
|
|
|
Non competes
|
|
|
120,000
|
|
|
|
23,000
|
|
|
5 years
|
|
|
|
|
$
|
660,000
|
|
|
$
|
97,000
|
|
|
|
|
|
(c)
Adjustment to reflect interest on funds borrowed in connection with cash component of acquisition. Cash component of $490,000 X 18% = 2016 (11.5 months) = $85,000.
(d)
Adjustment to recognize cost of two service agreements entered into in connection with Black Helmet acquisition.
(e)
Adjustment to recognize one additional administrative employee.
The following tables summarizes the impact of pro forma adjustments to operating expense and interest classifications resulting from the assumed acquisition of the Daily Engage Media, LLC presented in the unaudited pro forma condensed combined statements of operations for the period ending December 31, 2016.
|
|
|
|
|
|
|
|
|
|
General and
|
|
|
|
|
|
Administrative
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
(f)
|
Employment agreements (incremental increase)
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|
$
|
34,000
|
|
|
(g)
|
Amortization
|
|
|
35,000
|
|
|
(h)
|
Other general and administrative expenses
|
|
|
50,000
|
|
|
|
|
|
$
|
119,000
|
|
(f)
Adjustment to recognize incremental compensation paid to company executives and proposed employment agreements.
(g)
Adjustment to recognize amortization expense on acquired definite-lived intangible assets.
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|
|
|
|
|
|
|
|
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|
|
Allocation
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|
2016
|
|
Life
|
|
Website
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|
$
|
100,000
|
|
|
$
|
33,000
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|
3 years
|
|
Non competes
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|
|
120,000
|
|
|
|
2,000
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|
5 years
|
|
|
|
$
|
220,000
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|
|
$
|
35,000
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|
(h)
Adjustment to recognize one additional administrative employee.
F-76
________ Shares of Common Stock
Warrants to Purchase _______ Shares of Common Stock
![[BMTM_S1013.JPG]](http://content.edgar-online.com/edgar_conv_img/2017/04/12/0001553350-17-000391_BMTM_S1013.JPG)
——————
PROSPECTUS
——————
Joseph Gunnar & Co.
_____________,
2017