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
March 31, 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 March 31, 2018 and 2017 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 March 31, 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.
Through our wholly owned
subsidiary LifeApps, Inc., we are a licensed developer and publisher of apps for the Apple Apps Store for iPhone, iPod touch, iPad
and iPad mini. We are also a licensed developer on both Google Play and Amazon Appstore for Android. We have distributed apps on
all three platforms.
Moving
forward we are developing a digital media network specializing in targeting highly sought-after niche demographic audiences. The
company will focus on two core businesses, an LGBT Ad Network and an LGBT Digital Network. Through our digital platform we will
aggregate content from around the world. We will create original content along with sponsored content in a 24/7 digital network.
The LGBT Ad Network will assist brands in global targeting of the LGBT demographic. The Ad Network will provide advertisers
and brands with over 300 mainstream digital platforms and a “bullseye” on this loyal, affluent and ever-expanding audience.
We will deliver to our audience with a relevant sponsored content marketing message across all spectrums of digitally connected
devices. Our unique value proposition to our audience and sponsors is the ability 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 generally accepted accounting principles (“GAAP”), which
contemplates our continuation as a going concern. We have incurred losses to date of $5,596,402 and have negative working capital
of $(535,560). To date we have funded our operations through advances from related parties, 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. The accompanying 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 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.
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 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.
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 $0 and $255 for the three months ended March 31, 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 March 31, 2019
and 2018, and the outstanding stock options and warrants are anti-dilutive. Weighted average shares outstanding would have increased
by approximately 2,902,500 and 3,412,200 for the three months ended March 31, 2019 and 2018, respectively, on a fully diluted basis.
Recent Pronouncements
From time to time, new accounting pronouncements
are issued that we adopt as of the specified effective date. We believe that the impact of recently issued standards that are not
yet effective may have an impact on our results of operations and financial position.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
, to improve financial reporting about leasing transactions. This ASU will require organizations that lease
assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with
terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified
asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because
lessees must recognize lease assets and lease liabilities. This ASU leaves the accounting for the organizations that own the assets
leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting
model and Topic 606, Revenue from Contracts with Customers.
The amendments in ASU 2016-02 are effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital
and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
The Company has determined that to date the adoption of ASU 2016-02 has had no impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-04, Intangibles – Goodwill and Other, which eliminates step two of the quantitative goodwill impairment test. Step
two required determination of the implied fair value of a reporting unit, and then a comparison of this implied fair value with
the carrying amount of goodwill for the reporting unit, in order to determine any goodwill impairment. Under the new
guidance, an entity is only required to complete a one-step quantitative test, by comparing the fair value of a reporting unit
with its carrying amount, and any goodwill impairment charge is determined by the amount by which the carrying amount exceeds the
reporting unit’s fair value. However, the loss should not exceed the total amount of goodwill allocated to the reporting
unit. The standard is effective for the Company in the first quarter of 2020, with early adoption permitted as of January 1, 2017,
and is to be applied on a prospective basis.
In August 2017, the FASB issued ASU No.
2017-12, Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities, which modifies the presentation
and disclosure of hedging results. Further, it provides partial relief on the timing of certain aspects of hedge documentation
and eliminates the requirement to recognize hedge ineffectiveness separately in income. The Company has determined that to date
the adoption of this ASU has had no impact on its consolidated financial statements.
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 and Shareholder Advances
Amounts due related party represents cash
advances, salary accruals, notes payable, and amounts paid on our behalf by an officer and shareholders of the Company. These
advances are non-interest bearing, short term in nature and due on demand. The balance at March 31, 2019 and December 31, 2018
was $10,974. Notes payable to related parties at March 31, 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 three-month periods ended March 31, 2019 and 2018 amounted to $62,250 and
$81,000 respectively and net cash advances amounted to $0 and $2,770, respectively for the periods ended March 31, 2019 and 2018.
Total unpaid accrued salary was $74,350 and $348,800 as of March 31, 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 Agreement with our current and former Chief Executive
Officers provide for base compensation of $150,000 and a base annual salary of $24,000 for our President. 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 as of 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 periods ended March 31, 2019
and 2018 we recorded interest accruals of $4,645 and $658, respectively related to the contracts.
Note 4.
Notes
Payable
Notes payable to two unrelated third parties
amounted to $32,486 at March 31, 2019 and $33,000 at December 31, 2018 with interest rates of 2% and 7% per annum, respectively.
One of the notes in the amount of $17,486 at March 31, 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 in principal 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 obligation of
187,500 shares. We have yet to issue the shares but expect to issue them in the near future. 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 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 note carries face interest rates of 12% per annum. The Lender has 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 is 58% of a two-day average of the lowest trading price in the 15 range of trading days prior
the conversion. The Notes provide for additional penalties if we cannot 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 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 and at the end of each accounting period with the difference in value is recognized as gain or loss.
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 a March 6, 2018 convertible promissory note (the “Note”) in the
original principal amount of $35,000 converted $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 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.
Interest expense for the period ended
March 31, 2019 amounted to $685,170.
Note
6. Stockholders’ Equity
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. Through LGBT Loyalty,
we intend to create, establish, develop, manage and fund a LGBT Preference Index, LGBT Exchange Traded Fund and/or LGBT Loyalty
Sponsor Fund. 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 $0.01 stock options in exchange for the cancellation of $5,000 then
outstanding accounts payable due to the consultant for prior services.
During March 2019 we issued an aggregate
of 3,000,000 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 March 31, 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 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 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”).
We
recorded $66,018 and $48,990 of amortization of deferred officer compensation during the periods ended March 31, 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
7. 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
March 31, 2019
|
|
|
5,800,000
|
|
|
$
|
0.0045
|
|
|
|
2.2
|
|
|
$
|
-
|
|
Exercisable
March 31, 2019
|
|
|
5,800,000
|
|
|
$
|
0.0045
|
|
|
|
2.2
|
|
|
$
|
-
|
|
There
was no stock based compensation expense for options for the periods ended March 31, 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 6 above.
Note 8. 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 other than the following:
Effective April 3, 2019, we issued 125,000
shares of our Series B Convertible Preferred Stock to five persons at a price of $1.00 per share or an aggregate of $125,000.
Effective April 18, 2019 we issued 2,000,000
shares of our common stock to LZ Gunderson and Robert Tull (1,000,000 shares each).