See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
Notes to Condensed Consolidated Financial
Statements
June 30, 2019 and 2018
(Unaudited
)
Note 1. Nature of Business
Throughout this report, the terms “our,”
“we,” “us,” and the “Company” refer to LGBTQ Loyalty Holdings, Inc., (formerly LifeApps Brands
Inc.) including its subsidiaries. The accompanying unaudited condensed consolidated financial statements of LGBTQ Loyalty Holdings,
Inc. at and for the periods ended June 30, 2019 and 2018 have been prepared in accordance with generally accepted accounting principles
(“GAAP”) for interim financial statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31, 2018. In management’s opinion, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation to make our financial statements
not misleading have been included. The results of operations for the periods ended June 30, 2019 and 2018 presented are not necessarily
indicative of the results to be expected for the full year. The December 31, 2018 balance sheet has been derived from our audited
financial statements included in our annual report on Form 10-K for the year ended December 31, 2018.
On January 25, 2019, we acquired LGBT
Loyalty LLC, a New York limited liability company, with the goal of creating a LGBTQ Loyalty Preference Index (the “Index”)
that will provide the LGBTQ community with the power to influence the allocation of capital within the Index based upon their
consumer preferences. The Index is intended to link the economic power of the LGBTQ community with many of the top companies that
support and market their products to the LGBTQ demographic. We also plan to create ancillary businesses that are intended to complement
and support the Index including LGBTQ Loyalty Sponsorship which will be established to promote the Index along with the companies
from around the world that desire to market and advertise directly to LGBTQ consumers. We intend to join forces with some of the
most recognizable LGBTQ community leaders from around the world and have them become LGBTQ Loyalty Sponsorship members. The LGBTQ
Loyalty Sponsorship is expected to incorporate marketing and support of the companies included in the Index. All companies will
be offered the opportunity to purchase LGBTQ Loyalty Sponsorship packages.
We also plan to develop a digital media network
that will specialize in targeting highly sought-after niche demographic audiences. In that regard, we intend to focus on two core
businesses, an LGBTQ Advertising Network and an LGBTQ Media Network. Through our digital platform, we expect to aggregate content
from around the world. We also intend to create original content along with sponsored content in a 24/7 digital network. The LGBTQ
Advertising Network is intended to assist brands in global targeting of the LGBTQ demographic. The LGBTQ Advertising Network is
expected to provide advertisers and brands with over 300 mainstream digital platforms and access to this loyal, affluent and ever-expanding
audience. We intend to deliver to our audience relevant sponsored content marketing message across all spectrums of digitally
connected devices. We believe that our value proposition to our audience and sponsors will be the ability to deliver aggregated
and original content, with emphasis on interactive content and captive video.
Note 2. Summary of Significant Accounting
Policies
Going Concern
The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with GAAP, which contemplates our continuation as a going concern. We have
incurred losses to date of $6,968,415 and have negative working capital of $249,842. To date we have funded our operations through
advances from related parties, issuances of convertible debt, and the sale of our common stock. We intend to raise additional
funding through third party equity or debt financing. There is no certainty that funding will be available as needed. These factors
raise substantial doubt about our ability to continue operating as a going concern. Our ability to continue our operations as
a going concern, realize the carrying value of our assets, and discharge our liabilities in the normal course of business is dependent
upon our ability to raise capital sufficient to fund our commitments and ongoing losses, and ultimately generate profitable operations.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
Principles of Consolidation
The accompanying unaudited condensed consolidated
financial statements include the accounts of the Company and our wholly owned subsidiaries, LGBTQ Loyalty, LLC, LifeApps Inc.
and Sports One Group Inc. All material inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
Fair Value Measurements:
ASC Topic 820, Fair Value Measurements
and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which
are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy
prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical
assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 – Quoted prices
are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities
included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York
Stock Exchange.
Level 2 – Pricing inputs
are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types
of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts or priced with
models using highly observable inputs.
Level 3 – Significant
inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are
those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts
used to determine the fair value of financial transmission rights.
Our financial instruments consist of cash,
short-term trade receivables, prepaid expenses, payables, accruals and convertible notes payable. The carrying values of cash
and cash equivalents, short-term trade receivables, prepaid expenses, payables, and accruals approximate fair value because of
the short-term maturities of these instruments. The fair value of notes payable approximated to their carrying value as generally
their interest rates reflected our effective annual borrowing rate.
Derivative Liabilities
The Company has financial instruments
that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued
separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company
measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations
during the period of change. The Company has a sequencing policy regarding share settlement wherein instruments with the
earliest issuance date would be settled first. The sequencing policy also considers contingently issuable additional shares, such
as those issuable upon a stock split, to have an issuance date to coincide with the event giving rise to the additional shares.
Intangibles
Intangibles, which include websites and databases
acquired, internet domain name costs, and customer lists, are being amortized over the expected useful lives which we estimate
to be three to five years. In accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards
Codification (“ASC”) Topic 350
Intangibles – Goodwill and Other
(“ASC 350”), the costs to
obtain and register internet domain names were capitalized. We expended $37,500 and $0 for website development for the three months
and six months ended June 30, 2019 and 2018, respectively. Amortization of these costs will begin when the website becomes active.
Property and Equipment
Fixed assets consist of furniture and
equipment and are stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives used for financial statement
purposes is 3 years. The Company purchased $2,000 of office equipment on June 25, 2019. Depreciation will begin on July 1, 2019.
Revenue Recognition
ASC Topic 606, “
Revenue from
Contracts with Customers”
establishes principles for reporting information about the nature, amount, timing and uncertainty
of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers.
Revenues are recognized when control of
the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects
to receive in exchange for those goods or services. The Company applies the following five steps in order to determine the appropriate
amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
|
●
|
identify
the contract with a customer;
|
|
●
|
identify
the performance obligations in the contract;
|
|
●
|
determine
the transaction price;
|
|
●
|
allocate
the transaction price to performance obligations in the contract; and
|
|
●
|
recognize
revenue as the performance obligation is satisfied.
|
Revenue was derived primarily from the sale
of sports and fitness apparel and equipment, and software applications designed for use on mobile devices such as smart phones
and tablets.
Adoption of ASC Topic 606, “Revenue
from Contracts with Customers”
On July 1, 2018, we adopted Topic 606
using the modified retrospective method applied to those contracts which were not completed as of July 1, 2018. Results for reporting
periods beginning after July 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to
be reported in accordance with our historic accounting under Topic 605. We did not record a change to accumulated deficit as of
July 1, 2018 due to the immaterial cumulative impact of adopting Topic 606.
Revenue is measured as the amount of consideration
we expect to receive in exchange for transferring goods or providing services. Revenue is recognized when obligations under the
terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our products to our
customers. Transfer of control to the customer for products generally occurs at the point in time when products have been shipped
to our customer by third party carriers as this represents the point in time when the customer has a present obligation to pay
and physical possession including title and risk of loss have been transferred to the customer.
The Company accounts for a contract with
a customer when there is an approval and commitment from both parties, the rights of the parties are identified, payment terms
are identified, the contract has commercial substance and collectability of the consideration is probable. The Company’s
distinct performance obligations consist mainly of transferring control of its products identified in the contracts, purchase
orders or invoices and implied PCS services.
Transaction prices are typically based
on contracted rates. Generally, payment is due from customers within 60 days of the invoice date and the contracts do not have
significant financing components or include extended payment terms.
The timing of revenue recognition, billing
and cash collections results in billed accounts receivable, deferred revenue, and customer deposits on the Consolidated Balance
Sheets. Accounts receivable are recognized in the period the Company’s right to the consideration is unconditional. Our
contract liabilities consist of advance payments (Customer deposits) recognized primarily related to deferred revenue. We classify
customer deposits as a current liability, and deferred revenue as a current or noncurrent liability based on the timing of when
we expect to fulfill these remaining performance obligations. The current portion of deferred revenue is included in other current
liabilities and the noncurrent portion is included in other long-term liabilities in our consolidated balance sheets.
We sell our software directly via Internet
download through third party agents. We recognize revenue when payment is received from the agent. Payment is received net of
commission paid to the agent, usually 70% to us and 30% to the agent. We record the net amount received as revenue.
We
also publish and sell digital magazines through the internet. Magazines can be purchased as individual volumes or as a subscription.
To date we have not had any subscription sales.
Research and development, Website Development
Costs, and Software Development Costs
All research and development costs are
expensed as incurred. We had no research and development costs for the three and six months ended June 30, 2019 and 2018, respectively.
Software and Website development costs
are eligible for capitalization under ASC 350-50 and ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed. We
expended $37,500 and $0 for website development for the three months and six months ended June 30, 2019 and 2018, respectively.
Amortization of these costs will begin when the website becomes active.
Rent Expense
We recognize rent expense on a straight-line
basis over the reasonably assured lease term as defined in ASC Topic 840, Leases (“ASC 840”). Our membership agreement
for shared office space expires on May 31, 2020. Rent expense was $4,223 and $0 for the three months ended June 30, 2019 and 2018,
respectively and $4,223 and $255 for the six months ended June 30, 2019 and 2018, respectively.
Earnings per share
We calculate earnings per share in accordance
with ASC Topic 260
Earnings Per Share
, which requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Diluted earnings
per share represent basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options
and warrants. The diluted earnings per share were not calculated because we recorded net losses for the periods ended June 30,
2019 and 2018, and the outstanding stock options and warrants are anti-dilutive. Weighted average shares outstanding would have
increased by approximately 7,378,000 and 3,178,600 for the six months ended June 30, 2019 and 2018, respectively, and 7,385,000
and 2,937,000 for the three months ended June 30, 2019 and 2018, respectively, on a fully diluted basis.
Recent Pronouncements
Other accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the Company’s consolidated financial statements upon adoption.
Note 3. Related Party Transactions
– Officer, Director and Shareholder Advances
Amounts
due related party represents cash advances, salary accruals, notes payable, and amounts paid on our behalf by an officer, director
and shareholders of the Company
. These advances are non-interest
bearing, short term in nature and due on demand. The balance at June 30, 2019 and December 31, 2018 was $10,974 for both periods.
Notes payable to related parties at June 30, 2019 and December 31, 2018 totaled $17,885 with a 2% annual interest rate. Currently
the Company has defaulted on all of their related party loan obligations. Forbearance has been granted by the related parties
on all loans
. Salary accruals for the six-month periods
ended June 30, 2019 and 2018 amounted to $107,000 and $348,800, respectively. Payments of accrued salaries for the three-month
periods ended June 30, 2019 and 2018 amounted to $43,000 and $0, respectively. Payments of accrued salaries for the six-month
periods ended June 30, 2019 and 2018 amounted to $80,250 and $0, respectively. Net cash advances to the Company amounted to $0
and $3,029, respectively, for the periods ended June 30, 2019 and 2018.
During the six months ended June 30, 2019
we began the accrual of director’s fees for five individuals at the rate of $25,000 per annum. Four of the directors have
agreed to receive their fee payments in shares of the Company’s common stock with the number of shares to be issued based
on the 5-day average trading price of the stock at the end of each month. During the three and six months ended June 30, 2019
we accrued an aggregate of $31,250 and $37,500, respectively, for director fees. As of June 30, 2019, an aggregate of 234,200
shares of our common stock are issuable pursuant to the director compensation agreements.
Total unpaid accrued salary and director
fees were $107,000 and $348,800 as of June 30, 2019 and December 31, 2018, respectively. On March 21, 2019 all parties to the
employment and service agreements converted amounts due thereunder at December 31, 2018 into 8,600,298 shares of common stock.
On December 19, 2017 we entered into an Employment
Services Agreements with our Chief Executive Officer and our President and an Executive Management Consulting Agreement with our
former Chief Executive Officer. The Agreements have a two-year term and are subject to automatic renewal for successive periods
of one year unless either we or the counterparties give the other written notice of intention to not renew at least 30 days prior
to the end of the existing term. The Agreements with our current and former Chief Executive Officers provide for base compensation
of $150,000 and the Agreement with our President provides for a base annual salary of $24,000. The compensation payments are payable
in bi-weekly installments. In the event any of the payments are not made within 30 days of the due date, they will accrue interest
at the rate of 10% per annum.
The Agreements contain customary termination
provisions including terminations with or without cause, for good reason or voluntarily, non-competition and non-solicitation
provisions, and an inventions and patents provision which provides that all the work produced by the counterparties, which is
created, designed, conceived or developed by them in the course of their employment under the Agreements belong to us. Effective
January 1, 2018, the Agreements were modified to remove the conversion right provisions. On February 15, 2019 the Executive Management
Consulting Agreement with our former Chief Executive Officer was terminated by mutual agreement.
During the three months ended June 30, 2019
and 2018 we recorded interest accruals of $2,020 and $2,646, respectively, related to the contracts. During the six months ended
June 30, 2019 and 2018 we recorded interest accruals of $6,485 and $2,646, respectively, related to the contracts.
Note 4. Notes Payable
Notes payable to two unrelated third parties
amounted to $15,986 at June 30, 2019 and $33,000 at December 31, 2018 with interest rates of 2% and 7% per annum, respectively.
The note in the amount of $15,986 at June 30, 2019 is past due and is, therefore, in default. The other notes were issued in August
and December of 2018 aggregating $15,000. On March 7, 2019, the lender agreed to convert the $15,000 in loan principal into shares
of our common stock at a conversion price of $0.08 per share resulting in an issuance of 187,500 shares during the quarter ended
June 30, 2019. The lender also agreed to waive all interest due on the loans.
Note 5. Convertible Note Payable
On March 6, 2018, we executed a Promissory
Note (the “2018 Note”) to an unrelated entity and received an aggregate of $32,000. The 2018 Note has an initial term
of one year and provides for an original issue discount of $3,000, which is being amortized over the initial term. The 2018 Note
carries a face interest rate of 12% per annum. The lender had the right, at any time and/or after 180 days at their election to
convert all or part of the outstanding and unpaid principal and accrued interest into shares of our common stock. The conversion
price was 58% of a two-day average of the lowest trading price in the range of 15 trading days prior to the conversion. The 2018
Note provided for additional penalties if we could not deliver the underlying common stock on a timely basis.
We evaluated the terms of the conversion
features of the convertible note in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s
Own Stock and determined it is indexed to the Company’s common stock and that the conversion features meet the definition
of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
We valued the conversion feature at origination
of the 2018 Note at $55,118 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 1
year to maturity, risk free interest rate of 3.03% and annualized volatility of 298.79%. $32,000 of the value assigned to the
derivative liability was recognized as a debt discount on the convertible debenture. The debt discount was recorded as reduction
(contra-liability) to the convertible note and is being amortized over the initial term of the convertible note. The balance of
$23,118 of the value assigned to the derivative liability was recognized as origination interest on the derivative liability and
expensed on origination.
To determine the fair value of our embedded
derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine
fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair
value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative
liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant
fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.
During the quarter ended September 30, 2018,
the Company became subject to a penalty assessment of $17,500 due to a loan covenant violation. Such amount has been expensed
as additional interest. Additionally, the fair value of the derivative liability associated with the penalty amounted to $29,265
and has been recorded as additional interest expense.
On September 20, 2018, the lender exercised
conversion rights pursuant to the loan agreement and converted $8,000 of the loan principal into 1,777,778 shares of common stock.
The Company recognized an aggregate of $10,375 of shareholder equity as a result of the conversion based of a fair value calculation
at the conversion date and related adjustments to remaining loan discounts applicable to the converted loan amount. On December
31, 2018, the lender exercised conversion rights pursuant to the loan agreement and converted $8,000 of the loan principal into
5,305,040 shares of common stock. The Company recognized an aggregate of $7,583 of shareholder equity as a result of the conversion
based of a fair value calculation at the conversion date and related adjustments to remaining loan discounts applicable to the
converted loan amount.
We value the derivative liability at estimated
fair market value and at the end of each accounting period. The difference in value is recognized as gain or loss in the statement
of operations. At March 31, 2018 we determined the valuation using the Black-Sholes valuation model with the following assumptions:
dividend yield of zero, .94 years to maturity, risk free interest rate of 2.85% and annualized volatility of 289.61%. We recognized
$15,730 of expense for the change in value of the derivative for the three months ended March 31, 2018. Interest expense for the
period includes $23,118 of origination interest, amortization of debt discounts of $2,394 and interest accrual of $288.
During
the period February 6, 2019 through and including February 11, 2019, the holder of the 2018 Note in the original principal amount
of $35,000
converted the remaining $26,920 in
principal and $4,255 in interest into an aggregate of 26,398,734 shares of our common stock at a conversion price of $0.0015 per
share. As the result of such conversions, the 2018 Note has been repaid in full and terminated. The shares were issued in reliance
on Section 4(a)(2) of the Securities Act of 1933, as amended.
Note 6. Long-term Debt
On June 4, 2019 (the “Closing Date”),
we entered into and closed a Securities Purchase Agreement (the “SPA”) with Pride Partners LLC (the “Purchaser”),
a New York limited liability company, pursuant to which for a purchase price of $500,000, the Purchaser purchased $550,000 in
principal amount of a 10% Original Issue Discount Senior Convertible Debenture (the “Debenture”) due 15 months following
the date of issuance and an 18 month common stock purchase warrant (the “Warrant”) exercisable for up to 6,250,000
shares (subject to adjustment thereunder) of our common stock.
Subject to earlier conversion or redemption,
the Debenture is due on September 4, 2020 (the “Maturity Date”). At any time after June 4, 2019, the Debenture is
convertible, in whole or in part, into shares of common stock (the “Conversion Shares”) at the option of the holder,
at any time and from time to time (subject to a 4.99% beneficial ownership limitation). If, on the Maturity Date, the outstanding
principal balance of the Debenture is $50,000 or less, the Debenture, including all accrued and unpaid interest then due thereon,
is automatically convertible into common stock. Subject to adjustment, the per share conversion price for the Debenture on any
conversion date is the lesser of (i) $0.1069 or (ii) 85% of the lowest single trading date volume weighted average price for our
Common stock during the 5 trading days prior to the conversion date. No later than the earlier of (i) 2 trading days after our
receipt of a notice of conversion and (ii) the number of trading days comprising the standard settlement period after our receipt
of a notice of conversion, we are required to deliver Conversion Shares which, when permitted under applicable securities laws,
will be delivered free of restrictive legends and trading restrictions. In the event that we fail to deliver Conversion Shares
by the applicable delivery date, the holder may rescind such conversion until such time that the Conversion Shares are received
by the holder. Our failure to timely deliver Conversion Shares subjects us to the payment of liquidated damages to the holder
as well as buy-in liability under circumstances where the holder is required to purchase Common Stock in the open market in satisfaction
of a sale by the holder of Conversion Shares which the holder was entitled to receive. We are required to reserve and keep available
from our authorized and unissued shares of Common Stock a sufficient number of shares to cover conversions of the Debenture. The
number and amount of Conversion Shares issuable upon conversion is subject to adjustment in the event of stock splits and stock
dividends. The Debenture also provides for full ratchet anti-dilution price adjustments under circumstances where, during the
term of the Debenture, we issue Common Stock or common stock equivalents, exclusive of Exempt Issuances, at prices below the then
applicable Debenture conversion price. The Debenture further provides for adjustments in the event of certain rights offerings,
pro rata distributions to shareholders and fundamental transactions. The Debenture is subject to optional redemption by us, for
cash, in whole or in part, upon 20 trading days prior written notice by us but only in the event, unless waived by the holder,
we satisfy the Equity Conditions (as such term is defined in the Debenture) during such 20 trading day period. Penalty interest
is payable by us if we fail to effect an optional redemption by the applicable optional redemption date. The Debenture subjects
us to negative covenants while the Debenture is outstanding.
We evaluated the terms of the conversion
features of the Debenture and the Warrant in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s
Own Stock and determined it is indexed to the Company’s common stock and that the conversion features meet the definition
of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
To determine the fair value of our embedded
derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine
fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair
value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative
liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant
fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.
We valued the conversion features at origination
of the Debenture and the Warrant at $962,887 using the Black Scholes valuation model with the following assumptions: dividend
yield of zero, 1.25 year to maturity, risk free interest rate of 2.11% and annualized volatility of 312.4%. $500,000 of the value
assigned to the derivative liability was recognized as a debt discount on the convertible debenture. The debt discount was recorded
as reduction (contra-liability) to the convertible debenture and is being amortized over the initial term of the convertible debenture.
The balance of $462,887 of the value assigned to the derivative liability was recognized as origination interest on the derivative
liability and expensed on origination. In accordance with the Company’s sequencing policy, shares issuable pursuant to the
convertible debenture would be settled subsequent to the Company’s Series B preferred stock as described in Note 7.
A summary of the derivative liability associated
with the SPA for the period ended June 30, 2019 is as follows:
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Debenture
|
|
|
Warrant
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Initial valuation
|
|
$
|
469,956
|
|
|
$
|
492,931
|
|
|
$
|
962,887
|
|
Change in derivative value
|
|
|
191,530
|
|
|
|
75,278
|
|
|
|
266,808
|
|
Balance at June 30, 2019
|
|
$
|
661,485
|
|
|
$
|
568,210
|
|
|
$
|
1,229,695
|
|
Note
7. Stockholders’ Equity
Common
Stock
On
January 25, 2019, we entered into and closed a securities exchange under a Securities Exchange Agreement (the “Securities
Exchange Agreement”) with LGBT Loyalty LLC, a New York limited liability company (“LGBT Loyalty”), and Maxim
Partners, LLC, a New York limited liability company (“Maxim”), pursuant to which we acquired all of the membership
interests of LGBT Loyalty, making LGBT Loyalty a wholly owned subsidiary of ours, in exchange for 120,959,996 shares (the “Shares”)
of our restricted common stock and one share of our newly created Series A Convertible Preferred Stock (the “Series A Preferred
Stock”). The Shares issued to Maxim represented, upon issuance, 49.99% of our then issued and outstanding shares of common
stock. On March 29, 2019 an additional 8,598,578 shares were issued to Maxim for the conversion of the Series A Convertible Preferred
Stock. LGBT Loyalty has no assets, liabilities nor operations at the exchange date, therefore, the value ascribed to the issued
stock ($388,675) has been charged to operations as expenses of the merger.
Effective
February 20, 2019 we issued an aggregate of 750,000 shares of restricted common stock to a consultant in accordance with a service
contract that provided for a 250,000 share stock grant and the exercise of 500,000 stock options in exchange for the cancellation
of $5,000 then outstanding accounts payable due to the consultant for prior services.
During
the six months ended June 30, 2019 we issued an aggregate of 5,000,000 shares of restricted common stock to three unrelated individuals
in accordance with their appointment as directors of the Company.
Effective
March 26, 2019 we issued an aggregate of 8,600,298 shares of our restricted common stock pursuant to the automatic exercise of
warrants issued to two current and prior company officers on January 25, 2019. The warrants were issued in exchange for the cancellation
of an aggregate of $348,312 of salary and interest accruals through December 31, 2018.
During
the period ended June 30, 2018 we issued 3,000,000 shares of common stock in connection with consulting agreements with two unrelated
entities. The shares were valued at the respective trading prices of our common stock on the dates the agreements were signed.
On June 26, 2019 we issued 187,500 shares
of restricted common stock in connection with the conversion of notes payable as described in Note 4 above.
Series
B Convertible Preferred Stock
On
April 3, 2019 we filed a Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock with the
Delaware Secretary of State to create a new class of preferred stock, $0.001 par value per share, designated Series B Convertible
Preferred Stock (“Series B Preferred Stock”) and authorized the issuance of up to 1,500,000 shares of Series B Preferred
Stock. The Series B Preferred Stock has no voting, liquidation or other rights other than the right to receive dividends and to
convert into common stock. The stated value of each share of Series B Convertible Preferred Stock for purposes of conversions
and dividends is $1.15 (the “Conversion/Dividend Stated Value”). The stated value of each share of Series B Convertible
Preferred for purposes of redemptions is $1.35 (the “Redemption Stated Value”). On April 3, 2019 we received an aggregate
of $125,000 from the issuance of 125,000 shares of the Series B Convertible Preferred Stock. We recorded a discount of $89,611
based on the excess of the intrinsic value of the common stock conversion shares over the proceeds. The intrinsic value was computed
using the Black-Sholes valuation model with the following assumptions: dividend yield of zero, 2 years to maturity, risk free
interest rate of 2.33% and annualized volatility of 307.5%. Amortization of the discount will continue through April 3, 2021 and
amounted to $11,201 for the period ended June 30, 2019. Subject to earlier conversion or redemption, the Series B Preferred
Stock will automatically convert into fully paid and non-accessible shares of our common stock 24 months following the date of
issuance of such Series B Preferred Stock without any action or payment required on the part of the holder of the Series B Convertible
Preferred Stock. Subject to a floor price limitation of $0.03 per share, the automatic conversion price to which the Conversion/Dividend
Stated Value will be applied will be the lower of (i) $0.10 per share of common stock; or (ii) a 20% discount to the lowest volume
weighted average price (“VWAP”) for our common stock on our principal trading market during the five (5) trading days
immediately prior to the automatic conversion date.
Series
C Convertible Preferred Stock
On
June 3, 2019 we filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred
Stock (the “Series C COD”) with the Delaware Secretary of State to create a new class of preferred stock, $0.001
par value per share, designated Series C Convertible Preferred Stock (“Series C Preferred Stock”) and authorized
the issuance of up to 129,559 shares of Series C Preferred Stock. On the Closing Date, all of the 129,559 shares of Series
C Preferred Stock were issued to Pride Partners LLC, the assignee of Maxim Partners LLC. On June 4, 2019 we entered into a Securities
Exchange Agreement with Maxim Partners LLC (the “Holder”) pursuant to which the Holder exchanged 129,558,574 shares
of Common Stock for 129,559 shares (the “Exchange Shares”) of our Series C Preferred Stock (the “Share
Exchange”). At the request of the Holder, the Exchange Shares were issued to Holder’s assignee, the Purchaser. The
Series C Preferred Stock has no voting or other rights other than the right to receive dividends on a pari passu basis with
holders of our Common Stock, the right to receive assets in the event of liquidation, dissolution or winding up on a pari passu
basis with holders of our Common Stock and the right to convert into common stock. The stated value of each share of Series C
Convertible Preferred for purposes of conversions is $1,000 (the “Stated Value”).
Each
share of Series C Preferred Stock is convertible, at any time and from time to time, at the option of the holder thereof, into
that number of shares of Common Stock (subject in each case to a 4.99% beneficial ownership limitation) determined by dividing
the Stated Value of such share of Series C Preferred Stock by the Series C Preferred Stock conversion price of $1.00
per share. Consequently, each Share of Series C Preferred Stock is presently convertible into 1,000 shares of Common Stock.
Deferred
Officer Compensation
We
recorded $109,331 and $97,980 of amortization of deferred officer compensation during the periods ended June 30, 2019 and 2018,
respectively. The 2019 amount includes the full amortization of the remaining balance due under the now terminated Executive Management
Consulting Agreement with our former Chief Executive Officer.
Note
8. Options and Warrants
The
following is a summary of stock options issued pursuant to the 2012 Equity Incentive Plan:
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
(in years)
|
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2019
|
|
|
6,300,000
|
|
|
$
|
0.0049
|
|
|
|
2.4
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
500,000
|
|
|
$
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding June 30, 2019
|
|
|
5,800,000
|
|
|
$
|
0.0045
|
|
|
|
1.9
|
|
|
$
|
-
|
|
Exercisable June 30, 2019
|
|
|
5,800,000
|
|
|
$
|
0.0045
|
|
|
|
1.9
|
|
|
$
|
-
|
|
There
was no stock based compensation expense for options for the periods ended June 30, 2019 and 2018. There will be no additional
compensation expense recognized in future periods.
On
January 25, 2019 we issued warrants to two Company executives in exchange for the cancellation of an aggregate of $348,312 of
salary and interest accruals through December 31, 2018. The warrants were fully exercised as described in Note 7 above.
On
June 4, 2019 we issued a warrant to purchase an aggregate of 6,250,000 shares of our common stock. The warrant is exercisable
through December 4, 2020. The exercise price per share of Common Stock under this Warrant shall be the lesser of (i) $0.0855,
or (ii) 75% of the lowest single trading day closing price during the five trading days prior to the exercise date.
Note
9. Income Taxes
Income
tax provision (benefit) for the periods ended June 30, 2019 and 2018, is summarized below:
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total current
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal (21% tax rate in 2018)
|
|
|
(472,500
|
)
|
|
|
(75,100
|
)
|
State
|
|
|
(123,800
|
)
|
|
|
(19,700
|
)
|
Total deferred
|
|
|
(596,300
|
)
|
|
|
(94,800
|
)
|
Valuation allowance
|
|
|
596,300
|
|
|
|
94,800
|
|
Total provision
|
|
$
|
—
|
|
|
$
|
—
|
|
The
provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before
provision for income taxes.
The
sources and tax effects of the differences as of June 30, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Income tax provision at the federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
Increase in valuation allowance
|
|
|
(26.5
|
)%
|
|
|
(26.5
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Components
of the net deferred income tax assets at June 30, 2019 and December 31, 2018 were as follows:
|
|
2019
|
|
|
2018
|
|
Net operating loss carryovers (adjusted for revised tax rate)
|
|
$
|
1,124,500
|
|
|
$
|
528,200
|
|
Valuation allowance
|
|
|
(1,124,500
|
)
|
|
|
(528,200
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
In
accordance with ASC 740, at June 30, 2019 and December 31, 2018 we determined that a valuation allowance should be recognized
against deferred tax assets because, based on the weight of available evidence, it is more likely than not (i.e., greater than
50% probability) that some portion or all of the deferred tax asset will not be realized in the future. We recognized a reserve
of 100% of the amounts of the deferred tax benefit in the amount of $1,124,500 and $528,200 at June 30, 2019 and December 31,
2018, respectively.
As
of June 30, 2019, we had cumulative net operating loss carry forwards of $3,989,000 which expire from 2032 through 2039.
There
are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2010
through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the
consolidated statement of operations. There have been no income tax related interest or penalties assessed or recorded.
Note
10. Subsequent Events
Management
has evaluated all activity up to August 14, 2019 and concluded that no subsequent events have occurred that would require recognition
in these financial statements or disclosure in the notes to these financial statements other than the following:
On July 3, 2019 the Company filed a Registration
Statement on Form S-1 relating to the sale of up to 93,456,658 shares of common stock, par value $0.001 per share, by the selling
stockholders as listed in the prospectus. Of the shares being offered, 6,250,000 are issuable upon exercise of common stock purchase
warrants (at the fixed exercise price of $0.1069 per share), 5,144,996 are issuable upon conversion of convertible debentures
(at the fixed conversion price of $0.1069 per share), 6,250,000 represent a good faith estimate of the number of additional shares
which may become issuable if the common stock purchase warrants referenced above are exercised at the variable exercise price
applicable to the common stock purchase warrants or if the price protected anti-dilution provision applicable to the common stock
purchase warrants is triggered, 5,144,996 represent a good faith estimate of the number of shares which may become issuable if
the debentures referenced above are converted at the variable conversion price applicable to the debentures or if the price protected
anti-dilution provision applicable to the debentures is triggered, 53,000,000 are issuable upon conversion of 53,000 shares of
our Series C convertible preferred stock and 17,666,666 are presently issued and outstanding. The Registration Statement
became effective on July 24, 2019.