See the accompanying notes to the condensed
consolidated financial statements
See the accompanying notes to the condensed
consolidated financial statements
See the accompanying notes to the condensed
consolidated financial statements
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
Note 1. Nature of Business
Throughout this report, the terms “our,”
“we,” “us,” and the “Company” refer to LifeApps Digital Media Inc., including its subsidiaries.
The accompanying unaudited condensed consolidated financial statements of LifeApps Digital Media Inc. at March 31, 2016 and
2015 have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial
statements, instructions to Form 10-Q, and Regulation S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes thereto included in our annual report on Form
10-K for the year ended December 31, 2015. In management's opinion, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation to make our financial statements not misleading have been included. The results of
operations for the periods ended March 31, 2016 and 2015 presented are not necessarily indicative of the results to be expected
for the full year. The December 31, 2015 balance sheet has been derived from our audited financial statements included in our annual
report on Form 10-K for the year ended December 31, 2015.
We are building health, fitness and sports
communities across multiple digital platforms including mobile apps, digital sports and fitness publications, sports and fitness
products, sporting events, gateway platforms, online websites and social media.
Note 2. Summary of Significant Accounting
Policies
The accompanying financial statements have
been prepared in conformity with generally accepted accounting principles (“GAAP”), which contemplates our continuation
as a going concern. We have incurred losses to date of 2,585,747. To date we have funded our operations through advances from a
related party, issuance of convertible debt, and the sale of our common stock. We intend to raise additional funding through third
party equity or debt financing. There is no certainty that funding will be available as needed. These factors raise substantial
doubt about our ability to continue operating as a going concern. Our ability to continue our operations as a going concern, realize
the carrying value of our assets, and discharge our liabilities in the normal course of business is dependent upon our ability
to raise capital sufficient to fund our commitments and ongoing losses, and ultimately generate profitable operations.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and our wholly owned subsidiaries, LifeApps Inc. and Sports One Group Inc. All material
inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
Financial Instruments
The estimated fair values for financial
instruments were determined at discrete points in time based on relevant market information. These estimates involved uncertainties
and could not be determined with precision. The carrying amounts of accounts receivable, accounts payable and accrued liabilities
approximated fair value because of the short-term maturities of these instruments. The fair value of notes payable approximated
their carrying value as generally their interest rates reflected our effective annual borrowing rate.
LifeApps Brands
Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
Fair Value Measurements:
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.
Accounts Receivable
A significant majority of our sales
are through credit cards and other electronic payment methods. When we do grant credit to our customers it is generally in
the form of short term accounts receivables, normally due in 30 days. The credit worthiness of the customer is evaluated
prior to the sale. As of March 31, 2016 all of our accounts receivable were fully reserved. There was no bad debt expense
recorded during the three month periods ended March 31, 2016 and 2015.
Inventory
Inventory consists of finished goods, sports
and fitness products, and is stated at the lower of cost or net realizable value, with cost being determined on a first-in first-out
basis.
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.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
Fixed Assets
Fixed assets consists of furniture and
equipment and are stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is calculated
on a straight line basis over the estimated useful lives of the assets. The estimated useful lives used for financial statement
purposes is 3 years.
Revenue Recognition
Revenue is derived primarily from the sale
of sports and fitness apparel and equipment, and software applications designed for use on mobile devices such as smart phones
and tablets. Revenue is recognized only when persuasive evidence of an arrangement exists, the fee is fixed or determinable, the
product or service has been delivered, and collectability is probable.
We sell our software directly via Internet
download through third party agents. We recognize revenue when payment is received from the agent. Payment is received net of commission
paid to the agent, usually 70% to us and 30% to the agent. We record the net amount received as revenue.
We also publish and sell digital magazines
through the internet. Magazines can be purchased as individual volumes or as a subscription. To date we have not had any subscription
sales.
Cost of Revenue
Cost of revenue includes the cost of amounts
paid for articles, photography, editorial and production cost of the magazine and ongoing web hosting costs. Cost of revenue related
to product sales includes the direct cost of those products sold.
Research and development, Website Development
Costs, and Software Development Costs
All research and development costs are
expensed as incurred. Software development costs eligible for capitalization under ASC 350-50,
Website Development Cost
,
and ASC 985-20,
Software-Costs of Software to be Sold, Leased or Marketed
, were not material to our financial statements
for the periods ended March 31, 2016 and 2015. Research and development expenses amounted to $0 and $7,797 for three months ended
March 31, 2016 and 2015, respectively. Research and development expenses were included in general and administrative expenses.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
Advertising Costs
We recognize advertising expense when incurred.
Advertising expense was $130 and $1,939 for the three months ended March 31, 2016 and 2015, respectively.
Rent Expense
We recognize rent expense on a straight-line
basis over the reasonably assured lease term as defined in ASC Topic 840,
Leases
(“ASC 840”). Our lease is short
term and will be renewed on a month to month basis. Rent expense was $2,145 and $2,064 for the for three months ended March 31,
2016 and 2015, respectively.
Income Taxes
The provision for income taxes is determined
in accordance with the provisions of ASC Topic 740,
Accounting for Income Taxes
(“ASC 740”). Under this method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements, uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the for three months ended March 31,
2016 and 2015 we did not have any interest, penalties or any significant unrecognized uncertain tax positions.
Earnings per share
We calculate earnings per share in accordance
with ASC Topic 260
Earnings Per Share
, which requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Diluted earnings
per share represent basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options and
warrants. The diluted earnings per share were not calculated because we recorded net losses for the for three months ended March
31, 2016 and 2015, and the outstanding stock options and warrants are anti-dilutive.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
Recent Pronouncements
From time to time, new accounting pronouncements
are issued that we adopt as of the specified effective date. We believe that the recently issued standards that are not yet effective
will not have an impact on our results of operations and financial position.
Note 3. Fixed Assets
At March 31, 2016 and December 31, 2015,
fixed assets consisted of the following:
|
|
2016
|
|
|
2015
|
|
Furniture and Equipment
|
|
$
|
7,670
|
|
|
$
|
7,670
|
|
Less accumulated depreciation
|
|
|
(7,628
|
)
|
|
|
(7,021
|
)
|
|
|
$
|
42
|
|
|
$
|
649
|
|
The amount charged to depreciation expense
for furniture and equipment was $607 and $639 for the three months ended March 31, 2016 and 2015, respectively.
Note 4. Intangible Assets
At March 31 2016 and December 31, 2015,
intangible assets consist of the following:
|
|
2016
|
|
|
2015
|
|
Internet domain names
|
|
$
|
58,641
|
|
|
$
|
58,641
|
|
Less accumulated amortization
|
|
|
(58,586
|
)
|
|
|
(55,062
|
)
|
|
|
$
|
55
|
|
|
$
|
3,580
|
|
|
|
|
|
|
|
|
|
|
Website and data bases
|
|
$
|
56,050
|
|
|
$
|
56,050
|
|
Less accumulated amortization
|
|
|
(56,050
|
)
|
|
|
(51,380
|
)
|
|
|
$
|
-
|
|
|
$
|
4,760
|
|
|
|
|
|
|
|
|
|
|
Customer and supplier lists
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
Less accumulated amortization
|
|
|
(2,700
|
)
|
|
|
(2,475
|
)
|
|
|
$
|
1,800
|
|
|
$
|
2,025
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
$
|
119,191
|
|
|
$
|
119,191
|
|
|
|
|
(117,336
|
)
|
|
|
(108,917
|
)
|
|
|
$
|
1,855
|
|
|
$
|
10,274
|
|
We recognized goodwill and identifiable
intangibles arising from the allocation of the purchase prices of assets acquired in accordance with ASC 805. Goodwill represents
the excess of cost over fair value of all identifiable assets less any liabilities assumed. We have not recognized any goodwill
in these financial statements. Additionally, ASC 805 gives guidance on five types of assets: marketing-related, customer-related,
artistic-related, contract-related, and technology based intangible assets. We identified identifiable intangibles that are marketing-related,
customer-related, and technology based.
The amount charged to amortization expense
for all intangibles was $8,419 and $9,027 for the three months ended March 31, 2016 and 2015, respectively.
Estimated future amortization expense related
to the intangibles as of March 31, 2016 is as follows:
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
Year Ended December 31,
|
|
|
|
2016
|
|
|
730
|
|
2017
|
|
|
900
|
|
2018
|
|
|
225
|
|
|
|
$
|
1,855
|
|
Note 5. Amounts Due Related Parties
Parties, which can be a corporation or
an individual, are considered to be related if we have the ability, directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and operating decisions. Companies are also considered to be related
if they are subject to common control or common significant influence.
Amount due to related parties represent
cash advances, salary accruals and amounts paid on our behalf by officers and shareholders of the Company. These advances are non-interest
bearing, short-term in nature and due on demand. The balance at March 31, 2016 and December 31, 2015, was $382,053 and $329,554,
respectively. Salary accruals for each period amounted to $37,500 and net cash advances amounted to $15,000 and $21,700, respectively
for the three months ended March 31, 2016 and 2015.
On March 25, 2015, we entered into a debt
conversion agreement with our CEO and principal stockholder. The agreement provided the CEO with the right to convert $31,250 owed
to him for working capital loans made to the Company for 1,666,667 restricted shares of our common stock. The conversion price
was based on the following formula - equal to the lesser of $1.02 or 60% of the lowest trade price ($0.0025) in the 25 trading
days previous to the conversion. (In the event that Conversion Shares are not deliverable by DWAC, an additional 10% discount shall
apply; if the shares are ineligible for deposit into the DTC system and only eligible for Xclearing deposit, an additional 5% discount
shall apply; and in the case of both, an additional cumulative 15% discount shall apply.) The conversion price as calculated was
$0.01875 per share (post-split basis). We recognized a loss on conversion of $47,500, the difference between the conversion price
and the closing trading price on the date of the conversion.
Note 6. Convertible Notes Payable
During 2014, we executed a Promissory Note
(the “Note”) and received three draws totaling $135,000. The Note is due March 17, 2016 and provides for an original
issue discount of $15,185, which will be amortized over 24 months, and face interest rate of 12% per annum. The Lender had the
right, at any time at its election to convert all or part of the outstanding and unpaid principal and accrued interest into shares
of our common stock. The conversion price is the lesser of $0.0485 or 60% of the lowest trading price in the 25 trading days prior
the conversion. The Note provides for additional penalties if we cannot deliver the underlying common stock on a timely basis.
The Note also provides that the principal amount may be increased, with the consent of the lender to $445,000.
We evaluated the terms of the conversion
features of the convertible debenture in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's
Own Stock and determined it is indexed to the Company's common stock and that the conversion features meet the definition of a
liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
We valued the conversion feature at
origination of all draws at $230,408 using the Black Scholes valuation model with the following assumptions: dividend yield
of zero, 1.25 to 2 years to maturity, risk free interest rate of 0.38% to 0.58% and annualized volatility of 97.34% to 146%.
$135,000 of the value assigned to the derivative liability was recognized as a debt discount on the convertible debenture.
The debt discount portion was recorded as reduction (contra-liability) to the convertible debenture and is being amortized
over the life of the convertible debenture. The balance of $95,408 of the value assigned to the derivative liability was
recognized as origination interest on the derivative liability and expensed on origination.
We valued the derivative liability at
the end of each accounting period the difference in value is recognized as gain or loss. At March 31, 2015 we determined the
valuation using the Black-Sholes valuation model with the following assumptions: dividend yield of zero, 0.96 years
to maturity, risk free interest rate of 0.56% and annualized volatility of 167%. We recognized $134,895 of expense for
the change in value of the derivative for the three months ended March 31, 2015.
During the three months ended March
31, 2015, the lender converted $21,294 of the principal of the Note into 555,782 shares of our $0.001 common stock. The
remaining loans were fully converted to common stock during August of 2015.
Note 7. Stockholders’ Equity
During the three months ended March 31,
2015 we issued 2,222,449 shares of common stock as a result of conversion of debt. As more fully described in Notes 5 and 6 above,
of the shares issued, 555,782 were to an unrelated note holder and 1,666,667 were to officers and/or directors of the Company.
During the three months ended March 31,
2016 we issued 597,545 shares of common stock in settlement of $8,058 in previously accrued legal services.
Note 8. Stock Based Compensation
In prior periods, our Board of Directors
adopted the 2012 Equity Incentive Plan (“2012 Plan”), which was approved by our shareholders. The 2012 Plan provided
for the issuance of up to 666,667 shares of our common stock. During October 2015 the Board of Directors amended the plan to increase
the number of shares issuable under the LifeApps Digital Media Inc. 2012 Equity Incentive Plan to 20,000,000, on a post-Reverse
Stock Split basis. The plan provides for the award of options, stock appreciation rights, performance share awards, and restricted
stock and stock units. The plan is administered by the Board of Directors. Pursuant to the 2012 Plan our Board of Directors granted
options to purchase 418,333 shares of our common stock. Subsequent to the grant 20,000 options were cancelled. All options were
granted prior to the year ended December 31, 2015. The options vested from three months to one year. The option all had a term
of three years. The fair value of the options previously granted, $215,628, was estimated at the date of grant using the Black-Scholes
option pricing model, with the following assumptions:
Expected life (in years)
|
|
|
3
|
|
Volatility (based on a comparable company)
|
|
|
117
|
%
|
Risk Free interest rate
|
|
|
0.36 - 0.48
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
There was no stock based compensation expense
recorded for the periods ended March 31, 2016 and 2015 as the options were fully vested during 2014 and 2015.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
The following is a summary of stock option
issued to employees and directors:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
240,000
|
|
|
$
|
0.57
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2016
|
|
|
240,000
|
|
|
$
|
0.57
|
|
|
|
.21
|
|
|
|
-
|
|
Exercisable March 31, 2016
|
|
|
240,000
|
|
|
$
|
0.57
|
|
|
|
.21
|
|
|
|
-
|
|
There will be no additional compensation
expense recognized in future periods.
The following is a summary of stock options
issued to non-employees, excluding Directors:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value at date
of grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
375,000
|
|
|
$
|
0.87
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2016
|
|
|
375,000
|
|
|
$
|
0.87
|
|
|
|
.21
|
|
|
$
|
-
|
|
Exercisable March 31, 2016
|
|
|
375,000
|
|
|
$
|
0.87
|
|
|
|
.21
|
|
|
$
|
-
|
|
There will be no additional compensation
expense recognized in future periods.
Note 9. Outstanding Warrants
There were no warrants issued during the
periods ended March 31, 2016 or 2015. The following is a summary of outstanding warrants as of March 31, 2016:
|
|
Number of
warrants
|
|
|
Exercise price
per share
|
|
|
Average
remaining
term in years
|
|
|
Aggregate
intrinsic value
at date of
grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with private placement of units in 2012
|
|
|
400,000
|
|
|
$
|
15.00
|
|
|
|
1.47
|
|
|
$
|
-
|
|
The warrants expire on September 20, 2017.
LifeApps Brands Inc.
Notes to Condensed Consolidated Financial
Statements
March 31, 2016 and 2015
(Unaudited)
Note 10. Income Taxes
Income tax provision (benefit) for the
periods ended March 31, 2016 or 2015, is summarized below:
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(21,400
|
)
|
|
|
(51,000
|
)
|
State
|
|
|
(3,500
|
)
|
|
|
(8,300
|
)
|
Total deferred
|
|
|
(24,900
|
)
|
|
|
(59,300
|
)
|
Increase in valuation allowance
|
|
|
24,900
|
|
|
|
59,300
|
|
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 March 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Income tax provision at the federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
5.5
|
%
|
|
|
5.5
|
%
|
Increase in valuation allowance
|
|
|
(39.5
|
)%
|
|
|
(39.5
|
)%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
There are open statutes of limitations
for taxing authorities in federal and state jurisdictions to audit our tax returns from 2010 through the current period. Our policy
is to account for income tax related interest and penalties in income tax expense in the consolidated statement of operations.
There have been no income tax related interest or penalties assessed or recorded.
Note 11. Business Segments
We currently have two business segments;
(i) the sale of physical products (“Products”) and (ii) digital publishing (“Publishing”). The accounting
policies of the segments are the same as those described in the summary of significant accounting policies.
The publishing segment does not meet the
quantitative threshold for disclosure as outlined ASC Topic 280
Segment Reporting.
All of our revenue is generated in the
United States and accordingly no geographic segment reporting is included.
No customers accounted for more than 10%
of our revenues in the periods March 31, 2016 and 2015.
Note 12. Subsequent Events
Management has evaluated all activity and
concluded that no subsequent events have occurred that would require recognition in these financial statements or disclosure in
the notes to these financial statements.