UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number: 000-54867

 

LGBTQ LOYALTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   80-0671280

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2435 Dixie Highway, Wilton Manors, FL 33305

(Address of principal executive offices, including zip code)

 

Tel: (858)-577-1746

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if this registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of November 14, 2020 the Company had 214,614,749 shares of common stock, $0.001 par value, issued and outstanding.

 

 

 

 

 

 

LGBTQ Loyalty Holdings, Inc.

 

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

 

    PAGE
     
  PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 23
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 25
     
Item 1A. Risk Factors 25
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
     
Item 3. Defaults Upon Senior Securities 26
     
Item 4. Mine Safety Disclosures 26
     
Item 5. Other Information 26
     
Item 6. Exhibits 26
     
  SIGNATURES 27

 

i

 

 

LGBTQ Loyalty Holdings, Inc.

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

  PAGE
   
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited) 2
   
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited) 3
   
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited) 4
   
Condensed Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2020 and 2019 (unaudited) 5
   
Notes to Condensed Consolidated Financial Statements (unaudited) 6

 

1
 

 

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    September 30,     December 31,  
    2020     2019  
ASSETS                
Current assets:                
Cash   $ 243,902     $ 13,188  
Other receivables     100,000       100,000  
Other current assets     6,925       9,220  
Total current assets     350,827       122,408  
Property and equipment, net     1,800       1,800  
Intangible assets, net     84,733       73,076  
Total assets   $ 437,360     $ 197,284  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
Current liabilities:                
Accounts payable   $ 1,017,090     $ 772,065  
Accrued salaries and consulting fees     399,696       650,133  
Accrued interest and dividends     171,588       71,212  
Notes payable     128,986       82,986  
Notes payable to related party     66,560       17,885  
Convertible notes payable, net of debt discount     944,379       363,769  
Derivative liability on convertible notes payable     1,291,732       1,111,879  
Total liabilities     4,020,031       3,069,929  
                 
Commitments and contingencies                
                 
Stockholders’ equity (deficit):                
Preferred stock, $0.001 par value, 10,000,000 shares authorized                

Series A, 1 share designated, no shares issued or outstanding, respectively

    -       -  
Series B, 500,000 shares designated, 50,000 and 75,000 shares issued and outstanding, respectively     50       75  
Series C, 129,559 shares designated, 129,559 and no shares issued and outstanding, respectively     130       130  
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 216,698,082 and 169,217,460 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively     216,699       169,217  
Additional paid-in capital     7,091,797       6,035,547  
Accumulated deficit     (10,891,347 )     (9,077,614 )
Total stockholders’ equity (deficit)     (3,582,671 )     (2,872,645 )
Total liabilities and stockholders’ equity (deficit)   $ 437,360     $ 197,284  

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

2
 

 

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
Revenue   $ -     $ 748     $ 560     $ 2,812  
Cost of net revenue     -       -       -       -  
Gross profit     -       748       560       2,812  
                                 
Operating expenses:                                
Personnel costs     60,979       119,608       560,441       1,017,275  
Consulting fees     93,444       375,041       261,459       479,062  
Legal and professional fees     140,873       36,606       363,216       215,967  
Merger costs     -       -       -       388,675  
Sales and marketing     25,392       31,989       32,982       41,739  
General and administrative     89,698       118,667       160,424       165,818  
Depreciation and amortization     6,448       100       19,344       100  
Total operating expenses     416,834       682,011       1,397,866       2,308,636  
                                 
Loss from operations     (416,834 )     (681,263 )     (1,397,306 )     (2,305,824 )
                                 
Other income (expense):                                
Interest expense     (436,939 )     (199,170 )     (1,174,251 )     (1,384,782 )
Other income     -       -       3,000       -  
Change in derivative liability     481,046       (225,593 )     805,918       (492,401 )
Total other income (expense), net     44,107       (424,763 )     (365,333 )     (1,877,183 )
                                 
Provision for income taxes     -       -       -       -  
Net loss   $ (372,727 )   $ (1,106,026 )   $ (1,762,639 )   $ (4,183,007 )
                                 
Net loss per common share - basic and diluted   $ (0.00 )   $ (0.01 )   $ (0.01 )   $ (0.02 )

Weighted average common shares outstanding –

basic and diluted

    214,661,045       163,569,530       196,571,521       234,277,621  

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

3
 

 

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine Months Ended  
    September 30,  
    2020     2019  
Cash flows from operating activities:                
Net loss   $ (1,762,639 )   $ (4,183,007 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Amortization of debt discount and original issue discount     584,445       124,660  
Change in fair value of derivative liability     (805,918 )     492,401  
Financing related costs - debt     471,328       1,272,879  
Merger expenses     -       388,675  
Stock-based compensation expense     213,276       562,901  
Officer deferred compensation     -       109,331  
Depreciation and amortization     19,344       -  
Changes in operating assets and liabilities:                
Accounts payable     245,024       232,247  
Accrued salaries and consulting fees     369,960       115,682  
Accrued interest and dividends     100,377       37,435  
Net cash used in operating activities     (564,803 )     (846,796 )
Cash flows from investing activities:                
Purchases of property and equipment     -       (2,000 )
Investment in intangible assets     (31,000 )     (47,500 )
Net cash used in investing activities     (31,000 )     (49,500 )
Cash flows from financing activities:                
Proceeds from issuance of convertible debenture agreements     637,000       700,000  
Net proceeds (repayments) from promissory note agreements     96,175       (7,088 )
Proceeds from Series B preferred stock     -       125,000  
Proceeds from exercise of warrants     93,342       51,569  
Net cash provided by financing activities     826,517       869,481  
Net increase (decrease) in cash     230,714       (26,815 )
Cash at beginning of period     13,188       40,908  
Cash at end of period   $ 243,902     $ 14,093  
                 
Supplemental disclosure of cash flow information:                
Cash paid for income taxes   $ -     $ -  
Cash paid for interest   $ 27,500     $ -  
                 
Supplemental disclosure of non-cash financing activities:                
Conversion of accrued consulting fees into common shares   $ 617,750     $ 348,312  
Exercise of common stock warrants - derivative liability   $ 32,742     $ -  
Amortization of preferred stock discount   $ 45,056     $ -  
Exercise of options   $ 10,400     $ -  
Conversion of notes payable   $ 15,000     $ 98,383  
Warrants issued in connection with debt   $ 41,396     $ -  

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

4
 

 

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

    Preferred Stock           Additional                 Total  
    Series A     Series B     Series C     Common Stock     Paid-in     Deferred     Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Compensation     Deficit     Deficit  
                                                                         
Balances at June 30, 2020     -     $          -       50,000     $ 50       129,559     $ 130       214,614,749     $ 214,615     $ 7,002,953     $               -     $ (10,503,660 )   $ (3,285,912 )
Warrants issued in connection with convertible debenture     -       -       -       -       -       -       -       -       41,396       -       -       41,396  
Debenture conversions     -       -               -       -       -       2,083,333       2,083       34,212       -       -       36,295  
Amortization of preferred stock discount     -       -       -       -       -       -       -       -       13,236       -       (13,236 )     -  
Dividends on preferred stock     -       -       -       -       -       -       -       -       -       -       (1,725 )     (1,725 )
Net loss     -       -       -       -       -       -       -       -       -       -       (372,726 )     (372,726 )
Balances at September 30, 2020     -     $ -       50,000     $ 50       129,559     $ 130       216,698,082     $ 216,698     $ 7,091,797     $ -     $ (10,891,347 )   $ (3,582,672 )
                                                                                                 
Balances at December 31, 2019     -     $ -       75,000     $ 75       129,559     $ 130       169,217,460     $ 169,217       6,035,547     $ -     $ (9,077,614 )   $ (2,872,645 )
Common shares issued in connection with notes payable     -       -       -       -       -       -       294,994       296       9,704       -       -       10,000  
Common shares issued for accrued services     -       -       -       -       -       -       6,662,312       6,662       311,338       -       -       318,000  
Common shares issued to board of directors     -       -       -       -       -       -       12,942,161       12,942       219,452       -       -       232,394  
Common shares issued for services and compensation     -       -       -       -       -       -       16,279,273       16,279       264,352       -       -       280,631  
Exercise of common stock warrants     -       -       -       -       -       -       4,170,000       4,170       121,914       -       -       126,084  
Exercise of stock options     -       -       -       -       -       -       4,000,000       4,000       6,400       -       -       10,400  
Warrants issued in connection with convertible debenture     -       -       -       -       -       -       -       -       41,396       -       -       41,396  
Debenture conversions     -       -       -       -       -       -       2,083,333       2,083       34,212       -       -       36,295  
Conversion of Series B preferred stock for common shares     -       -       (25,000 )     (25 )     -       -       958,333       959       (934 )     -       -       -  
Issuance of Series B dividend common shares     -       -       -       -       -       -       90,216       90       3,360       -       -       3,450  
Amortization of preferred stock discount     -       -       -       -       -       -       -       -       45,056       -       (45,056 )     -  
Dividends on preferred stock     -       -       -       -       -       -       -       -       -       -       (6,038 )     (6,038 )
Net loss     -       -       -       -       -       -       -       -       -       -       (1,762,639 )     (1,762,639 )
Balances at September 30, 2020     -     $ -       50,000     $ 50       129,559     $ 130       216,698,082     $ 216,698     $ 7,091,797     $ -     $ (10,891,347 )   $ (3,582,672 )

 

    Preferred Stock                 Additional                 Total  
    Series A     Series B     Series C     Common Stock     Paid-in     Deferred     Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Compensation     Deficit     Deficit  
                                                                         
Balances at June 30, 2019     -     $         -       125,000     $ 125       129,559     $ 130       162,920,724     $ 162,921     $ 5,290,276     $ (85,723 )   $ (6,968,416 )   $ (1,471,257 )
Conversion of Series B preferred stock     -       -       (100,000 )     (25 )     -       -       734,918       735       (710 )     -       -       -  
Amortization and revaluation of preferred stock discount     -       -       -       -       -       -       -       -       9,301       -       (9,301 )     -  
Issuance of Series B dividend shares     -       -       -       -       -       -       16,794       17       1,421       -       -       1,438  
Amortization of deferred compensation     -       -       -       -       -       -       -       -       -       43,313       -       43,313  
Dividends on preferred stock     -       -       -       -       -       -       -       -       -       -       (8,338 )     (8,338 )
Debenture conversions     -       -       -       -       -       -       427,500       427       45,620       -       -       46,047  
Exercise of common stock warrants     -       -       -       -       -       -       1,405,000       1,405       116,155       -       -       117,560  
Net loss     -       -       -       -       -       -       -       -       -       -       (1,106,026 )     (1,106,026 )
Balances at September 30, 2019     -     $ -       25,000     $ 100       129,559     $ 130       165,504,936     $ 165,505     $ 5,462,063     $ (42,410 )   $ (8,092,081 )   $ (2,377,263 )
                                                                                                 
Balances at December 31, 2018     -     $ -       -     $ -       -     $ -       121,984,192     $ 121,984     $ 3,242,449     $ (195,054 )   $ (3,880,234 )   $ (710,855 )
Merger with Maxim Partners     1       -       -       -       -       -       129,558,574       129,559       259,116       -       -       388,675  
Common shares issued for related party debt conversions     -       -       -       -       -       -       8,600,298       8,600       339,712       -       -       348,312  
Maxim exchange agreement     (1)       -       -       -       129,559       129,559       (129,558,574 )     (129,559 )     -       -       -       0  
Common shares issued pursuant to note conversions     -       -       -       -       -       -       26,586,234       26,587       750,773       -       -       777,360  
Common shares issued for services performed     -       -       -       -       -       -       5,250,000       5,250       557,651       -       -       562,901  
Exercise of stock options     -       -       -       -       -       -       500,000       500       4,500       -       -       5,000  
Debenture conversions     -       -       -       -       -       -       427,500       427       45,620       -       -       46,047  
Exercise of common stock warrants     -       -       -       -       -       -       1,405,000       1,405       116,155       -       -       117,560  
Issuance of Series B dividend shares     -       -       -       -       -       -       16,794       17       1,421       -       -       1,438  
Issuance of Series B preferred stock, net of discount     -       -       125,000       125       -       -       -       -       124,875       -       -       125,000  
Conversion of Series B preferred stock     -       -       (25,000 )     (25 )     -       -       734,918       735       (710 )     -       -       -  
Amortization and revaluation of preferred stock discount     -       -       -       -       -       -       -       -       9,301       -       (9,301 )     -  
Amortization of preferred stock discount     -       -       -       -       -       -       -       -       11,201       -       (11,201 )     -  
Dividends on preferred stock     -       -       -       -       -       -       -       -       -       -       (8,338 )     (8,338 )
Amortization of deferred compensation     -       -       -       -       -       -       -       -       -       152,644       -       152,644  
Net loss     -       -       -       -       -       -       -       -       -       -       (4,183,007 )     (4,183,007 )
Balances at September 30, 2019     -     $ -       100,000     $ 100       129,559     $ 130       165,504,936     $ 165,505     $ 5,462,063     $ (42,410 )   $ (8,092,081 )   $ (2,377,263 )

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

5
 

 

LGBTQ LOYALTY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2020

 

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.

 

On January 25, 2019, we acquired LGBT Loyalty LLC, a New York limited liability company, with the goal of creating the first LGBTQ Loyalty Preference Index ETF (the “Index ETF”) to provide the LGBTQ community with the power to influence the allocation of capital within a financial Index ETF based upon LGBTQ consumer preferences. The Index ETF is intended to link the growing economic influence of the LGBTQ community and their allies with many of the top Fortune 500 companies that support and implement diversity, inclusion and equality policies within their organizations. The incorporation of diversity and inclusion in a company’s recruitment and human resource policies is becoming a key concern to investors as part of their growing focus on Environment, Social and Corporate Governance (“ESG”) allocations. Our data and analytics unequivocally reinforce that corporations that have embraced diversity and inclusion policies within their corporate culture perform at a higher level financially than their peers. This includes advancing a more invigorated workforce that attracts and retains the best talent. Innovation and agility have been identified as great benefits of diversity, and there is an increasing awareness of what has come to be known as ‘the power of difference’.

 

On October 30, 2019, through our wholly-owned subsidiary Loyalty Preference Index, Inc. (“LPI”) and our strategically aligned partnerships with crowd sourced data and analytic providers, we launched the LGBTQ100 ESG Index which integrates LGBTQ community survey data into the methodology for a benchmark listing of the nation’s highest financially performing large-cap publicly listed corporations that our respondents believe are most committed to advancing equality. LPI is the index provider for the LGBTQ + ESG100 ETF; LGBTQ Loyalty was the Sponsor for the prospectus that was filed by the licensed Fund Adviser ProcureAM, and was approved by the Securities and Exchange Commission (“SEC”) in early January 2020. The LGBTQ + ESG100 ETF (the “Fund”) seeks to track the investment results (before fees and expenses) of the LGBTQ100 ESG Index. The Fund earns management fees based on assets under management (“AUM”) and is expected to launch in the first quarter of 2021 on the NASDAQ.

 

On June 24, 2020, we formed two wholly-owned subsidiaries, Crowdex Equity Inc. and Advancing Equality Financial Network, Inc.

 

6
 

 

Note 2. Summary of Significant Accounting Policies

 

Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“US GAAP”), which contemplates our continuation as a going concern. We have incurred losses to date of $10,891,347 and have negative working capital of $3,669,204 as of September 30, 2020. 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. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Basis of Presentation

 

We have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These condensed consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for fiscal year 2020. Certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of LGBTQ Loyalty Holdings, Inc. and our wholly owned subsidiaries, LGBTQ Loyalty, LLC, LifeApps Inc., Sports One Group Inc., Loyalty Preference Index, Inc, Crowdex Equity Inc. and Advancing Equality Financial Network, Inc. All material inter-company transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in accordance with US 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.

 

7
 

 

Reclassifications

 

The Company has reclassified certain previously reported amounts in its consolidated financial statements. Accordingly, prior year amounts were reclassified to conform to the current year presentation. The reclassifications did not change the previously reported results of operations.

 

8
 

 

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 and derivative liabilities.

 

Our financial instruments consist of cash, other current assets, accounts payables, accruals, and notes payable. The carrying values of these instruments approximate fair value because of the short-term maturities. The fair value of the Company’s convertible debentures and promissory notes approximates their carrying values as the underlying imputed interest rates approximates the estimated current market rate for similar instruments. The derivative is measured as a Level 3 instrument due to the various inputs which requires significant management judgment. Refer to Note 6 for detail.

 

The following table is a summary of our financial instruments measured at fair value:

 

    Fair Value Measurements  
    as of September 30, 2020:  
    Level 1     Level 2     Level 3     Total  
Liabilities:                        
Derivative liability on convertible notes payable   $            -     $                 -     $ 1,291,732     $ 1,291,732  
    $ -     $ -     $ 1,291,732     $ 1,291,732  

 

    Fair Value Measurements  
    as of December 31, 2019:  
    Level 1     Level 2     Level 3     Total  
Liabilities:                                
Derivative liability on convertible notes payable   $      -     $     -     $ 1,111,879     $ 1,111,879  
    $ -     $ -     $ 1,111,879     $ 1,111,879  

 

Other Receivables – Related Party

 

Other receivables represent amounts held in escrow at the Fund’s custodian. The Company expects to retrieve the funds upon commencement of the Fund’s operations.

 

9
 

 

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 three and nine months ended September 30, 2020 and 2019, and the outstanding stock options and warrants are anti-dilutive. For the three and nine months ended September 30, 2020 and 2019, the following number of potentially dilutive shares have been excluded from diluted net loss since such inclusion would be anti-dilutive:

 

    Nine Months Ended  
    September 30,  
    2020     2019  
Stock options outstanding     1,800,000       5,800,000  
Warrants     7,500,000       -  
Shares to be issued upon conversion of notes     260,440,810       17,961,345  
      269,740,810       23,761,345  

 

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. Intangible Assets

 

During the year ended December 31, 2019, the Company capitalized costs pertaining to the development of the LGBTQ100 ESG Index website. The Company began amortizing upon the launch of the index, and will amortize the costs over a three-year useful life.

 

At September 30, 2020 and December 31, 2019, intangible assets, net was $84,733 and $73,076, respectively. Amortization expense was $6,448 and $19,344, respectively, for the three and nine months ended September 30, 2020.

 

10
 

 

Note 4. Notes Payable

 

As of September 30, 2020 and December 31, 2019, the Company has a note payable outstanding in the amount of $3,986 and $7,986, respectively. The note is past due at September 30, 2020 and is therefore in default. The note accrues interest at a rate of 2% per annum.

 

In January 2020, the Company issued a note payable to a lender for a principal amount of $50,000. The Company received proceeds of $47,500 and the note matured on February 5, 2020. As of September 30, 2020, the note is past due and in default. As of September 30, 2020 and December 31, 2019, the outstanding balance was $50,000.

 

In December 2019, the Company issued a promissory note to Pride Partners LLC (“Pride”) for $75,000. The note is secured, accrues interest at a rate of 10% per annum, and matures on June 20, 2020. As of September 30, 2020, the note is past due and in default. As of September 30, 2020 and December 31, 2019, the outstanding balance was $75,000.

 

Note 5. Convertible Notes Payable

 

Convertible Note

 

In February 2019, the holder of a March 2018 convertible promissory note in the original principal amount of $35,000 converted $26,920 in principal and $4,255 in interest into an aggregate of 26,398,704 shares of our common stock at a conversion price of $0.0015 per share. As the result of such conversions, this note has been repaid in full and terminated.

 

Convertible Debenture

 

On February 12, 2020, the Company entered into a Securities Purchase Agreement with Cavalry Fund I LP (the “Calvary Note”). Pursuant to the terms of the Calvary Note, the lender agreed to purchase from the Company, for a purchase price of $100,000, a 10% convertible note in the principal amount of $115,500. The Cavalry Note matures and becomes due and payable on November 11, 2020 and accrues interest at a rate of 10% per annum. The Calvary Note, plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.

 

The Calvary Note is convertible into shares of the Company’s common stock at any time at a conversion price (the “Conversion Price”) equal to the lower of: (i) the lowest closing price of the common stock during the preceding twenty (20) trading day period ending on the latest complete trading day prior to the issuance date of the Note (the “Closing Price”), (ii) $0.04, or (iii) 60% of the lowest traded price for the Common Stock on the principal market on which the Common Stock is then trading during the twenty (20) consecutive trading days on which at least 100 shares of Common Stock were traded including and immediately preceding the date of conversion. Upon an event of default, the holder may elect to convert at an alternate conversion price which is the lower of: (i) the closing price of the Common Stock on the Principal Market on the Trading Day immediately preceding the issue date of the Calvary Note or (ii) 60% of either the lowest traded price or the closing bid price, whichever is lower for the common stock on the principal market during any trading day in which the event of default has not been cured. The conversion price of the Note will be further adjusted by another 15% reduction, regardless of whether there is an event of default, if (A) the Common stock is no longer a reporting company pursuant to the Securities Exchange Act of 1934, as amended, (B) the Note cannot be converted into free trading shares after 181 days from the issuance date of the Note, (C) the Common Stock is chilled for deposit at DTC or becomes chilled at any point while the Note remains outstanding, (D) deposit or other additional fees are payable due to a Yield Sign, Stop Sign or other trading restrictions, or (E) if the closing price at any time falls below $0.015. The conversion price is subject to customary adjustments. The conversion price is not subject to a floor.

 

Effective July 14, 2020, the Company and Calvary Fund I LP entered into an amendment to the Calvary Note to extend the maturity date of the note from November 11, 2020 to December 31, 2020, prohibit any conversions of the note prior to October 31, 2020, and extend the prepayment option from August 9, 2020 to December 31, 2020.

 

On March 10, 2020, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up Note”). Pursuant to the terms of the Power Up Note, the lender agreed to purchase from the Company, for a purchase price of $75,000, a 10% convertible note in the principal amount of $85,800. The Power Up Note matures and becomes due and payable on March 10, 2021 and accrues interest at a rate of 10% per annum. The Power Up Note, plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.

 

11
 

 

The Power Up Note is convertible into shares of the Company’s common stock at any time at a conversion price (the “Conversion Price”), which shall equal the Variable Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price, which is the lowest Trading Price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. The conversion price is subject to customary adjustments. The conversion price is not subject to a floor. As of September 30, 2020, the noteholder had converted $15,000 in principal for 2,083,333 shares of common stock.

 

On May 26, 2020, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up May Note”). Pursuant to the terms of the Power Up May Note, the lender agreed to purchase from the Company, for a purchase price of $75,000, a 10% convertible note in the principal amount of $85,800. The Power Up May Note matures and becomes due and payable on May 26, 2021 and accrues interest at a rate of 10% per annum. The Power Up Note, plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.

 

The Power Up May Note is convertible into shares of the Company’s common stock at any time at a conversion price (the “Conversion Price”), which shall equal the Variable Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price, which is the lowest Trading Price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. The conversion price is subject to customary adjustments. The conversion price is not subject to a floor.

 

On August 11, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with Auctus Fund, LLC (“Auctus”). Pursuant to the terms of the SPA, the Purchaser agreed to purchase from the Company, for a purchase price of $132,000, a 12% Convertible Note in the principal amount of $150,000. The Note matures and becomes due and payable on August 11, 2021 and accrues interest at a rate of 12% per annum while the Note remains outstanding. The Note may be prepaid on a monthly basis commencing six months after closing. The Note is convertible into shares of the Company’s common stock at any time at a conversion price (“Conversion Price”) equal to the lesser of (i) Current Market Price and (ii) the Variable Conversion Price. The Variable Conversion Price shall mean 100% multiplied by the Market Price (representing a discount rate of 0%). Market Price means the average of the previous 5 days volume weighted average price. In connection with the Note, the Company issued two common stock purchase warrants to purchase up to an aggregate of 15,000,000 shares of common stock (separately, “Warrant A” and “Warrant B”, and together, the “Warrants” and each a “Warrant”), upon the terms and subject to the limitations and conditions set forth in the Note. As of September 30, 2020, one warrant to purchase 7,500,000 shares was issued and outstanding to Auctus. The fair value of the warrants was determined to be $45,068 and was recorded as a debt discount to the note.

 

On September 28, 2020, the Company entered into a convertible promissory note (“JSJ Note”) with JSJ Investments, Inc., pursuant to which JSJ purchased from the Company, at a purchase price of $100,000, a 10% Convertible Note in the principal amount of $108,000.

 

The JSJ Note accrues interest at a rate of 10% per annum and matures on September 28, 2021. The JSJ Note, plus all accrued but unpaid interest and other amounts due on the JSJ Note, may be prepaid at any time prior to the maturity date. Upon an event of default, the interest rate shall increase to 18% for as long as the event of default is continuing (“Default Interest”). At any time on or after the Maturity Date, the Company may repay the then outstanding principal plus accrued interest and Default Interest, if any, to JSJ.

 

The JSJ Note is convertible into shares of the Company’s common stock at any time after 180 days from the issuance date. The conversion price is 60% multiplied by the lowest trading price for the common stock during the 20 trading day period ending on the latest complete trading day prior to the date of a conversion notice.

 

On September 29, 2020, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up September Note”). Pursuant to the terms of the Power Up September Note, the lender agreed to purchase from the Company, for a purchase price of $80,000, a 10% convertible note in the principal amount of $91,300. The Power Up September Note matures and becomes due and payable on September 29, 2021 and accrues interest at a rate of 10% per annum. The Power Up September Note, plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.

 

12
 

 

The Power Up September Note is convertible into shares of the Company’s common stock at any time at a conversion price (the “Conversion Price”), which shall equal the Variable Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price, which is the lowest Trading Price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. The conversion price is subject to customary adjustments. The conversion price is not subject to a floor.

 

On March 11, 2020, the Company entered into a Securities Purchase Agreement (the “EMA Note”) with EMA Financial, LLC. Pursuant to the terms of the EMA Note, EMA agreed to purchase from the Company, for a purchase price of $75,000, a 10% Convertible Note in the principal amount of $85,000.

 

The EMA Note accrues interest at a rate of 10% per annum and matures on November 5, 2020. The EMA Note, plus all accrued but unpaid interest and other amounts due on the EMA Note, may be prepaid at any time prior to the maturity date.

 

The EMA Note is convertible into shares of the Company’s common stock. The conversion price shall be the lower of: (i) the lowest closing price of the common stock during the preceding 20 trading day period ending on the latest complete trading day prior to March 11, 2020, (ii) $0.04, or (iii) 60% of the lowest traded price for the common stock on the principal market during the 20 consecutive trading days on which at least 100 shares of common stock were traded including and immediately preceding the conversion date. Additional discounts to the conversion price and penalties will apply if certain events occur, including if the closing price drops below $0.015, if the Company’s stock is subject to a DTC chill, or if the EMA Note cannot be converted in free trading shares after 181 days from the issuance date.

 

Effective as of September 29, 2020, the Company and EMA entered into an Amendment to the Note (the “EMA Amendment”), pursuant to which EMA and the Company agreed to amend the issuance date of the EMA Note from March 11, 2020 to September 29, 2020 and to extend the maturity date of the EMA Note from November 5, 2020 to September 29, 2021.

 

During the three and nine months ended September 30, 2020, the Company recorded amortization of debt discount and original discount of $181,681 and $584,445, respectively, for all convertible debentures. This amount is included in interest expense in our consolidated statements of operations.

 

The following is a summary of the activity of the convertible notes payable and convertible debenture for the nine months ended September 30, 2020:

 

    Total  
Balance as of December 31, 2019   $ 363,769  
Issuance of convertible debenture - principal amount     721,400  
Issuance of convertible debenture - debt discount and original issue discount     (725,235 )
Amortization of debt discount and original issue discount     584,445  
Balance as of September 30, 2020   $ 944,379  

 

The following comprises the balance of the convertible debenture outstanding at September 30, 2020 and December 31, 2019:

 

    September 30,     December 31,  
    2020     2019  
Principal amount outstanding   $ 1,784,490     $ 1,078,090  
Less: Unamortized original issue discount     (53,118 )     (62,779 )
Less: Unamortized debt discount     (786,993 )     (651,542 )
    $ 944,379     $ 363,769  

 

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Note 6. Derivative Liability

 

We evaluated the terms of the conversion features of the debentures in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock, and determined they are indexed to the Company’s common stock and that the conversion features meet the definition of a liability. Therefore, we 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 value the conversion feature at origination of the notes using the Black-Scholes valuation model. We value the derivative liability at the end of each accounting period, and upon conversion of the underlying note or warrant, with the difference in value recognized as gain or loss included in other income (expense) in our consolidated statements of operations.

 

The original debentures had conversion features that resulted in derivative liabilities. We valued the conversion features at each origination date with the following assumptions, on a weighted-average basis:

 

    Nine Months  
    Ended  
    September 30, 2020  
Risk-free interest rate     0.39 %
Expected term (in years)     0.96  
Expected volatility     191.1 %
Expected dividend yield     0 %
Exercise price of underlying common shares   $ 0.01  

 

    Year Ended December 31, 2019  
    Tranche 1     Tranche 2     Tranche 3     Warrants  
Risk-free interest rate     2.11 %     1.75 %     1.67 %     2.11 %
Expected term (in years)     1.25       1.03       0.89       1.25  
Expected volatility     312.4 %     303.70 %     326.88 %     312.4 %
Expected dividend yield     0 %     0 %     0 %     0 %
Exercise price of underlying common shares   $ 0.09     $ 0.04     $ 0.04     $ 0.08  

 

14
 

 

During the nine months ended September 30, 2020, the entire value of the principal of the debentures were assigned to the derivative liability and recognized as a debt discount on the convertible debentures. The debt discount is recorded as reduction (contra-liability) to the debentures and are being amortized over the initial term. The balance of $440,182 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 debentures would be settled subsequent to the Company’s Series B preferred stock.

 

The following is a summary of the activity of the derivative liability for the nine months ended September 30, 2020:

 

    Debenture     Warrants     Total  
Balance as of December 31, 2019   $ 1,047,977     $ 63,902     $ 1,111,879  
Initial fair value on issuance of convertible debenture     1,039,620       -       1,039,620  
Debenture conversions     (21,296 )     -       (21,296 )
New warrant issuances     -       39,690       39,690  
Common stock warrant exercises     -       (72,244 )     (72,244 )
Change in fair value of derivative liability     (774,569 )     (31,348 )     (805,917 )
Balance as of September 30, 2020   $ 1,291,732     $ -     $ 1,291,732  

  

Note 7. Stockholders’ Equity (Deficit)

 

Common Stock

 

2020 Transactions

 

In January 2020, we issued 294,994 shares of common stock to a bridge noteholder in connection with promissory notes received.

 

During the nine months ended September 30, 2020, we issued an aggregate of 10,052,318 shares of common stock to consultants for 2019 services which were accrued at a fair value of $459,417.

 

In March 2020, we issued 1,000,000 shares to Orlando Reece pursuant to his appointment to the Board of Directors.

 

In May 2020, we issued an aggregate of 11,942,161 shares to directors as compensation.

 

In April 2020, we issued 90,216 shares and 958,333 shares of common stock to a Series B Preferred Stock investor for accrued dividends and conversion of 25,000 shares of the Series B Preferred Stock.

 

In May 2020, we issued an aggregate of 12,889,267 shares of common stock to executives, officers and consultants for services rendered for a total fair value of $139,215.

 

In June 2020, two option holders exercised their outstanding options for a total of 4,000,000 shares of common stock at an exercise price of $0.0026. The value of $10,400 was converted from outstanding accounts payable.

 

During the nine months ended September 30, 2020, we issued an aggregate of 4,170,000 shares of common stock to Pride Partners pursuant to warrant exercises. Refer to Note 8.

 

In September 2020, the Company issued 2,083,333 shares of common stock pursuant to conversion of a debenture in the principal amount of $15,000.

 

2019 Transactions

 

In January 2019, we entered into and closed a securities exchange under a Securities Exchange Agreement (the “Securities Exchange Agreement”) with LGBT Loyalty LLC (“LGBT Loyalty”) and Maxim Partners, LLC (“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. On June 4, 2019 we entered into a Securities Exchange Agreement with Maxim pursuant to which the Maxim exchanged 129,558,574 shares of common stock for 129,559 shares of our Series C Preferred Stock.

 

In February 2019, we issued an aggregate of 750,000 shares of common stock to a consultant in accordance with a service contract that provided for a 250,000 share stock grant for services performed of $7,500, as well as 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.

 

In March 2019, we issued an aggregate of 8,600,298 shares of our common stock pursuant to the automatic exercise of warrants issued to two current and prior company officers.

 

In March and April 2019, we issued an aggregate of 5,000,000 shares of common stock to five unrelated individuals in accordance with their appointment as directors of the Company.

 

During the nine months ended September 30, 2019, we issued 26,586,204 shares of our common stock to a lender pursuant to note conversions.

 

During the nine months ended September 30, 2019, we issued 427,500 shares and 1,405,000 shares to Pride pursuant to debenture conversions and exercise of common stock warrants.

 

Series B Convertible Preferred Stock

 

As of September 30, 2020, we had $10,350 in remaining accrued Series B dividends.

 

15
 

 

Note 8. Options and Warrants

 

Options

 

As of September 30, 2020 and December 31, 2019, we had 1,800,000 and 5,800,000 options, respectively, remaining outstanding pursuant to the 2012 Equity Incentive Plan.

 

There was no stock based compensation expense for options for the nine months ended September 30, 2020 and 2019. There will be no additional compensation expense recognized in future periods.

 

Warrants

 

During the nine months ended September 30, 2020, Pride exercised an aggregate of 4,170,000 shares of common stock pursuant to the exercise provisions of the warrant, including a simultaneous grant and exercise of 2,285,000 warrants. As of September 30, 2020, Pride had no outstanding warrants remaining. The Company received total proceeds of $93,342 a result of the warrant exercises.

 

In May 2020, we cancelled warrants that were issued in 2019 to board members to purchase an aggregate of 7,000,000 shares of our common stock. See Note 9.

 

In August 2020, we issued 7,500,000 shares to Auctus in connection with the Auctus Note. The exercise price of the Auctus Warrants is $0.15 per share.

 

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.

 

The following is a summary of the warrant activity for the nine months ended September 30, 2020:

 

    Warrants    

Weighted Average

Exercise Price

 
Outstanding as of December 31, 2019     8,885,000     $ 0.04  
Granted     9,785,000       0.03  
Exercised     (4,170,000 )     0.08  
Forfeited     (7,000,000 )     0.03  
Outstanding as of September 30, 2020     7,500,000     $ 0.02  

 

Note 9. Related Party Transactions

 

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.

 

Notes Payable to Related Party

 

During the quarter ended September 30, 2020, the Company received proceeds of $48,675 pursuant to short-term promissory notes with related parties. Currently the Company has defaulted on all of their related party loan obligations. Forbearance has been granted by the related parties on all loans.

 

Accrued Salaries

 

In March 2019, we issued an aggregate of 8,600,298 shares of our common stock pursuant to the automatic exercise of warrants issued to two current and prior company officers. The warrants were issued in exchange for the cancellation of an aggregate of $348,312 of salary and interest accruals through December 31, 2018.

 

As of September 30, 2020 and December 31, 2019, accrued salaries to our company officers and executive director totaled $193,552 and $91,352, respectively, and is included in accrued salaries and consulting fees in our consolidated balance sheets.

 

16
 

 

Board of Directors

 

In March 2020, the Company issued 1,000,000 shares to Orlando Reece pursuant to his appointment to the board, and recognized $17,800 in compensation expense.

 

In May 2020, we issued an aggregate of 11,942,161 shares to directors as compensation, including 3,942,161 shares pursuant to accrued monthly fees and 8,000,000 shares pursuant to 2020 annual compensation. In conjunction with this transaction, we cancelled 7,000,000 warrants that were issued to the board in December 2019. We accounted for the modification in accordance with ASC 718-20-35. Total fair value of the shares issued and warrant modification was $214,595.

 

In March and April 2019, we issued an aggregate of 5,000,000 shares of common stock to five unrelated individuals in accordance with their appointment as directors of the Company, and recognized $555,401 in compensation expense.

 

Total accrued directors’ compensation of $50,834 and $80,000 at September 30, 2020 and December 31, 2019, respectively, is included in accrued salaries and consulting fees on our consolidated balance sheets.

 

A board member is the co-founder and president of ProcureAM, LLC, the fund advisor for the Fund. As of September 30, 2020 and December 31, 2019, we have $100,000 included as other receivables on our consolidated balance sheet, which represents amounts held in escrow at the Fund’s custodian.

 

Note 10. Subsequent Events

 

Management has evaluated all activity up to November 16, 2020 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:

 

In October 2020, the Company issued 16,718,951 shares of common stock pursuant to conversion of a debenture in the principal amount of $74,700.

 

On October 8, 2020, the Company entered into a Securities Purchase Agreement (the “Auctus October Note”) with Auctus Fund, Pursuant to the terms of the Auctus October Note, Auctus agreed to purchase from the Company, for a purchase price of $300,000: (i) a Convertible Promissory Note in the principal amount of $300,000 (the “Auctus Note”); (ii) a common stock purchase warrant permitting Auctus to purchase up to 100,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at an exercise price of $0.015 per share (the “Warrant A”); and (iii) a common stock purchase warrant permitting Auctus to purchase up to 100,000,000 shares of the Company’s Common Stock at an exercise price of $0.015 per share (the “Warrant B”) and together with the Warrant A, the “Warrants”).

 

The Auctus October Note accrues interest at a rate of 12% per annum and matures on October 8, 2021. The Auctus October Note is convertible into shares of the Company’s Common Stock, subject to the adjustments described therein. The conversion price shall be the “Market Price” which is defined as the volume weighted average price for the Common Stock during the 5 trading day period ending on the latest complete trading day prior to the conversion date.

 

17
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”), including our unaudited condensed consolidated financial statements as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019 and the related notes. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “us,” “we,” “our,” and similar terms refer to LGBTQ Loyalty Holdings, Inc., a Delaware corporation. This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

 

We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risk factors in Item 2.01 in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on May 14, 2020. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

 

Business Overview

 

On January 25, 2019, we acquired LGBT Loyalty LLC, a New York limited liability company, with the goal of creating the first LGBTQ Loyalty Preference Index ETF (the “Index ETF”) to provide the LGBTQ community with the power to influence the allocation of capital within a financial Index ETF based upon LGBTQ consumer preferences. The Index ETF is intended to link the growing economic influence of the LGBTQ community and their allies with many of the top Fortune 500 companies that support and implement diversity, inclusion and equality policies within their organizations. The incorporation of diversity and inclusion in a company’s recruitment and human resource policies is becoming a key concern to investors as part of their growing focus on ESG allocations. Our data and analytics unequivocally reinforce that corporations that have embraced diversity and inclusion policies within their corporate culture perform at a higher level financially than their peers. This includes advancing a more invigorated workforce that attracts and retains the best talent. Innovation and agility have been identified as great benefits of diversity, and there is an increasing awareness of what has come to be known as ‘the power of difference’.

 

On October 30, 2019, through our wholly-owned subsidiary Loyalty Preference Index, Inc. (“LPI”) and our strategically aligned partnerships with crowd sourced data and analytic providers, we launched the LGBTQ100 ESG Index which integrates LGBTQ community survey data into the methodology for a benchmark listing of the nation’s highest financially performing large-cap publicly listed corporations that our respondents believe are most committed to advancing equality. LPI is the index provider for the LGBTQ + ESG100 ETF; LGBTQ Loyalty was the Sponsor for the prospectus that was filed by the highly regarded licensed Fund Adviser ProcureAM, a wholly owned subsidiary of Procure Holdings, LLC., which is through our platform service agreement (“PSA”), and was approved by the Securities and Exchange Commission (“SEC”) in early January 2020. The LGBTQ + ESG100 ETF (the “Fund”) seeks to track the investment results (before fees and expenses) of the LGBTQ100 ESG Index. The Fund earns management fees based on assets under management (“AUM”) and is expected to launch in Q1 - 2021 on the NASDAQ.

 

LGBTQ Loyalty has generated an abundance of media coverage for our premier LGBTQ Index product with the launch and listing on NYSE of the LGBTQ100 ESG Index. The exclusive media launch with Bloomberg Media was instrumental in propelling the LGBTQ100 brand to center stage overnight in the financial sector. In addition, LGBTQ Loyalty was featured at the Inside ETFs Summit in early 2020 with Board Members, Barney Frank and Billy Bean speaking on the “The Power of Inclusion & Equality” for investors. Our media strategy objective is to lay the groundwork for additional high-profile positioning of the brand as we work to achieve the desired increased financial media coverage and growth in AUM valuation for our company and shareholders.

 

On June 24, 2020, we formed two wholly-owned subsidiaries, Crowdex Equity Inc. (“Crowdex”) and Advancing Equality Financial Network, Inc. (“AEF”). AEF focuses on bringing to market and sales distribution a suite of thematic-ESG (Environmental, Social and Governance) Index financial products promoting diversity and inclusion (D&I) practices of leading corporations. This includes the first financial index branded as LGBTQ100 ESG Index (NYSE Index Ticker: LGBTQ100) representing 100 large-cap U.S. entities that are deemed the top LGBTQ Equality corporations. LGBTQ100 ESG Index was listed on the NYSE in Q4 of 2019. Crowdex is currently in the process of finalizing a service provider relationship, which will be announced before the end of Q3 2020.

 

18
 

 

Our Products

 

Our mission is to build a sustainable and well recognized brand focused on unlocking the growing purchasing power of the LGTBQ community globally by offering a robust LGBTQ Index and core ETF portfolio that attracts key institutional investors and corporations.

 

At the nucleus of our LGBTQ Loyalty Preference Index is our partner-driven Crowd Preference Index Methodology (CPIM) which disrupts ESG investing. This is achieved through an elevated screening process of financial performance data and ESG standards and practices, whereby LGBTQ community data on diversity and inclusion compliance directly impacts corporate financial results and transparently identifies and recognizes high performance companies who have consistently outperformed the S&P 500 index or equivalent sector standards and norms.

 

We intend to extend the LGBTQ Loyalty Index brand with future plans to develop indices with a focus on the ‘Social’ component of ESG utilizing our proprietary financial slogan of “Advancing Equality” within other gender, minority interest groups.

 

Revenue

 

The Company focus in 2019 was to create and launch our first of many financial Index products through an equality driven thematic ESG screened and alpha performance benchmark. The Company achieved this through its LGBTQ100 ESG Index listing and performance on the NYSE starting on October 30, 2019. In 2020 our collective efforts and focus is to monetize and scale our model by capturing recurring revenue streams through our current financial Index product. Our goal is to accelerate our revenue pursuits through our partnership and licensed relationships to achieve a break-even point when we have secured AUM benchmarked against the LGBTQ100 Index in excess of $50,000,000.

 

We intend to introduce a new key partnered revenue source derived from Direct Index Licensing Fees generated by financial institutions and asset management companies for creating a product (e.g. , Index Funds, Structured Financial Products, Turnkey Asset Management Providers) based on or linked to the LGBTQ100 index. This includes fees to use the LGBTQ100 index to track the performance of funds or as benchmarks for actively managed portfolios. We plan to capture Data Subscriptions which could provide recurring subscription revenue from our LGBTQ Index. This includes ongoing and historical data and information generated by our wholly owned division Loyalty Preference Index, Inc., and through our strategic partnerships for new potential financial equality-driven Indices.

 

New initiatives in 2020 include a plan to create ancillary revenue streams to complement and support this unique platform for the top 100 Equality driven Corporations in America represented in the LGBTQ100 Index. We believe our index will reward and elevate the status of those corporations that have adopted diversity and inclusion best practices, cared for their employees and positively impacted LGBTQ communities. Expert LGBTQ economists have repeatedly stressed the value of the LGBTQ brand loyalty to corporations. We consider the companies that best capture the spending trends and loyalty of the LGBTQ consumer will be better positioned for financial growth and success. Given the opportunity to link to the power and status generated between the LGBTQ community, these companies and their own workforce, we will launch a Partner Loyalty Program which includes benefits afforded to defined sponsorship tiers. The LGBTQ Loyalty Sponsorship is designed to attract the significant marketing dollars Fortune 500 companies are allocating to D&I programs with an opportunity to purchase LGBTQ Loyalty Sponsorship packages, including participation and brand exposure at planned conferences and events. Companies will be offered the opportunity to purchase LGBTQ Loyalty Sponsorship packages starting in Q1-2021.

 

Our initial investments in creating a high performing product with a well-recognized brand have been established. As we begin to move into planning for the post-COVID-19 world, we will now shift our efforts to cultivate new revenue stream opportunities while building AUM as we construct a profitable business platform.

 

We have achieved no revenues to date from our LGBTQ related operations and have been focused on building our product and achieving performance results and media branding over the course of the past twelve months. There are no assurances that can be given that we will achieve revenues or profitability in the future.

 

19
 

 

Critical Accounting Policies and Estimates

 

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 $10,891,347 and have negative working capital of $3,669,204 as of September 30, 2020. 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. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Use of Estimates

 

The preparation of financial statements in accordance with US 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.

 

Derivative Financial Instruments:

 

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 a fixed conversion price or floor would be settled first, and interest payable in shares settle next. Thereafter, share settlement order is based on instrument issuance date – earlier dated instruments settling before later dated. 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. The policy includes all shares issuable pursuant to debenture and preferred stock instruments as well as shares issuable under service and employment contracts and interest on short term loans.

 

Results of Operations

 

Three months ended September 30, 2020 compared with the three months ended September 30, 2019

 

There were no revenues during the three months ended September 30, 2020, and revenues of $748 for the three months ended September 30, 2019.

 

20
 

 

The following is a breakdown of our operating expenses for the three months ended September 30, 2020 and 2019:

 

    Three Months Ended              
    September 30,              
    2020     2019     Change $     Change %  
Personnel costs   $ 60,979     $ 119,608     $ (58,629 )     -49 %
Consulting fees     93,444       375,041       (281,597 )     -75 %
Legal and professional fees     140,873       36,606       104,267       285 %
Sales and marketing     25,392       31,989       (6,597 )     -21 %
General and administrative     89,698       118,667       (28,971 )     -24 %
Depreciation and amortization     6,448       100       6,348       100 %
    $ 416,834     $ 682,011     $ (265,177 )     -39 %

 

Personnel costs include officer salaries, directors’ compensation and deferred officer compensation. The decrease in personnel costs is primarily due to amortization of deferred compensation in the prior year.

 

Consulting fees decreased by $281,5957 during the nine months ended September 30, 2020, primarily due to the initial development of the Index in the third quarter of 2019. Consulting fees represent our efforts to launch the LGBTQ100 ESG Index and LGBTQ + ESG100 ETF.

 

Legal and professional fees increased by $104,267, primarily because of increased accounting and audit fees in 2020.

 

Sales and marketing expenses decreased in 2020 due to marketing efforts being halted with COVID-19.

 

General and administrative expenses decreased by $28,870 in 2020 due to decreased travel and other cost cutting measures in our operations.

 

Depreciation and amortization expense was $6,448 in the three months ended September 30, 2020, which represents amortization on our index development costs.

 

The following is a breakdown of our other income (expenses) for the three months ended September 30, 2020 and 2019:

 

    Three Months Ended              
    September 30,              
    2020     2019     Change $     Change %  
Interest expense   $ (436,939 )   $ (199,170 )     (237,769 )     119 %
Other income     -       -       -       0 %
Change in derivative liability     481,046       (225,593 )     706,639       -313 %
    $ 44,107     $ (424,763 )   $ 468,870       -110 %

 

Interest expense increased by $237,769 in the three months ended September 30, 2020, primarily attributable to origination interest and amortization of debt discount of the various debentures.

 

Change in derivative liability includes the mark-to-market adjustment of the derivative liability in connection with our convertible debenture.

 

Net loss was $372,727 and $1,106,026 for the three months ended September 30, 2020 and 2019, respectively.

 

21
 

 

Nine months ended September 30, 2020 compared with the nine months ended September 30, 2019

 

Revenues for the nine months ended September 30, 2020 and 2019 were $560 and $2,812, respectively. Revenues were primarily from the sale of sports apparel and health and fitness products. We continue to have a limited number of apps in the Apple App store.

 

The following is a breakdown of our operating expenses for the nine months ended September 30, 2020 and 2019:

 

    Nine Months Ended              
    September 30,              
    2020     2019     Change $     Change %  
Personnel costs   $ 560,441     $ 1,017,275     $ (456,834 )     -45 %
Consulting fees     261,459       479,062       (217,603 )     -45 %
Legal and professional fees     363,216       215,967       147,249       68 %
Merger costs     -       388,675       (388,675 )     -100 %
Sales and marketing     32,982       41,739       (8,757 )     -21 %
General and administrative     160,425       165,818       (5,393 )     -3 %
Depreciation and amortization     19,344       100       19,244       19244 %
    $ 1,397,867     $ 2,308,636     $ (910,769 )     -39 %

 

Personnel costs include officer salaries, directors’ compensation and deferred officer compensation. The decrease in personnel costs is primarily due to compensation associated with the formation of our board of directors in nine months ended September 30, 2019 as well as amortization of deferred compensation in the prior year.

 

Consulting fees decreased by $217,603 during the nine months ended September 30, 2020, primarily due to the initial development of the Index in 2019.

 

Legal and professional fees increased by $147,249 primarily due to increased accounting and auditing and public relations costs.

 

Merger costs represents expenses incurred upon the acquisition of LGBT Loyalty LLC in March 2019.

 

Sales and marketing expenses decreased in 2020 due to marketing efforts being halted with COVID-19.

 

General and administrative expenses decreased by $5,393 in 2020.

 

Depreciation and amortization expense was $19,344 in the nine months ended September 30, 2020, which represents amortization on our index development costs.

 

The following is a breakdown of our other income (expenses) for the nine months ended September 30, 2020 and 2019:

 

    Nine Months Ended              
    September 30,              
    2020     2019     Change $     Change %  
Interest expense   $ (1,174,251 )   $ (1,384,782 )     210,531       -15 %
Other income     3,000       -       3,000       100 %
Change in derivative liability     805,918       (492,401 )     1,298,319       -264 %
    $ (365,333 )   $ (1,877,183 )   $ 1,511,850       -81 %

 

22
 

 

Interest expense increased by $210,531 in the nine months ended September 30, 2020, primarily attributable to origination interest on 2020 debentures and amortization of debt discount in connection with our convertible debentures.

 

Change in derivative liability includes the mark-to-market adjustment of the derivative liability in connection with our convertible debenture.

 

Net loss was $1,762,639 and $4,183,007 for the nine months ended September 30, 2020 and 2019, respectively.

 

Liquidity and Capital Resources

 

Historically, we have been financed through advances from related parties, issuances of convertible debt, and the sale of our common and preferred stock. Our existing sources of liquidity will not be sufficient for us to implement our business plans. There are no assurances that we will be able to raise additional capital as and when needed. As of September 30, 2020, we had no cash on hand. Based on our current planned expenditures, we will require approximately $2.5 million over the next 12 months. Our existing sources of liquidity may not be sufficient for us to implement our continuing business plan. Our need for future capital will be dependent upon the speed at which we expand our product offerings. There are no assurances that we will be able raise additional capital as and when needed.

 

As of September 30, 2020, we had a working capital deficit of $3,669,204 and $3,682,790 as compared to a working capital deficit of $2,947,521 at December 31, 2019.

 

During the nine months ended September 30, 2020 and 2019, operations used cash of $564,803 and $846,796, respectively.

 

During the nine months ended September 30, 2020 and 2019, net cash used in investing activities was $31,000 and $49,500, respectively, primarily attributable to capitalized costs pertaining to the development of the LGBTQ100 ESG Index and ETF website.

 

During 2020, we received an aggregate of $637,000 in proceeds from the issuance of convertible debentures and $96,175 in proceeds from short-term promissory note agreements. We also received $93,343 from the exercise of warrants. We received $125,000 proceeds from the issuance of Series B convertible preferred stock , $700,000 in proceeds from the issuance of the Pride convertible debenture and $51,569 from the exercise of warrants during the nine months ended September 30, 2019.

 

We will continue to seek out additional capital in the form of debt or equity under the most favorable terms we can find.

 

The Company is currently, and has for some time, been in financial distress. It has no cash resources and current assets and has no ongoing source of revenue. Management is continuing to address numerous aspects of the Company’s operations and obligations, including, without limitation, debt obligations, financing requirements, and regulatory compliance, and has taken steps to continue to raise new debt and equity capital to fund the Company’s business activities.

 

The Company is continuing its efforts to raise additional capital in order to be able to pay its liabilities and fund its business activities on a going forward basis and regularly evaluates various measures to satisfy the Company’s liquidity needs. Though the Company actively pursues opportunities to finance its operations through external sources of debt and equity financing, there can be no assurance that such financing will be available on terms acceptable to the Company, or at all.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information required under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are not effective due to a lack of audit committee and segregation of duties caused by limited personnel to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

23
 

 

Limitations on Effectiveness of Controls and Procedures

 

Our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Management believes that the material weakness set forth above did not have an effect on our financial results.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

24
 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no pending, nor to our knowledge threatened, legal proceedings against us.

 

ITEM 1A. RISK FACTORS

 

As of the date of this filing, there have been no material changes to the Risk Factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on May 14, 2020, which may be accessed via EDGAR through the Internet at www.sec.gov (the “2019 Form 10-K”). The Risk Factors set forth in the 2019 Form 10-K should be read carefully in connection with evaluating the Company’s business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2019 Form 10-K could materially adversely affect the Company’s business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities

 

Other than what has previously been disclosed in public filings, there are no new sales of unregistered securities.

 

25
 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

We are in default under a $20,000 Promissory Note dated May 20, 2017 that became due on August 31, 2017. We have entered into a payment plan with the payee thereunder wherein we are making monthly cash payments to reduce the outstanding balance due. At September 30, 2020 the outstanding balance was approximately $3,986.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  Description of Exhibit
31.1*   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document

 

* Filed herewith
** This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

26
 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  LGBTQ LOYALTY HOLDINGS, INC.
     
November 16, 2020 By: /s/ Robert A. Blair
    Robert A. Blair, Chief Executive Officer

 

November 16, 2020 By: /s/ Eric Sherb
    Eric Sherb, Chief Financial Officer

 

27

 

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