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, 2020
(Unaudited)
NOTE
1 - BUSINESS
Loop
Media, Inc. (f/k/a Interlink Plus, Inc.) (the “Company”) is a Nevada corporation. The Company was incorporated under
the laws of the State of Nevada on May 11, 2015. On February 5, 2020, the Company and the Company’s wholly owned subsidiary,
Loop Media Acquisition, Inc. (“Merger Sub”), a Delaware corporation, closed the Agreement and Plan of Merger (the
“Merger Agreement”) with Loop Media, Inc. (“Loop”), a Delaware corporation. Pursuant to the Merger Agreement,
Merger Sub merged with and into Loop with Loop as surviving entity and becoming a wholly-owned subsidiary of the Company (the
“Merger”).
Pursuant
to the Merger Agreement, the Company acquired 100% of the outstanding shares of Loop in exchange for 152,823,970 (number of shares
is pre-stock split amount, the post stock split amount would be 101,882,647 shares) of the Company’s common stock at an
exchange ratio of 1:1. Loop was incorporated on May 18, 2015 under the laws of the State
of Delaware. As a result of such acquisition, the Company’s operations now are focused on premium short-form video
for businesses and consumers.
In
connection with the Merger, on February 6, 2020, the Company entered into a Purchase Agreement (the “Asset Purchase Agreement”)
with Zixiao Chen (“Buyer”) for the purchase of assets relating to the Company’s two major business segments:
travel agency assistance services and convention services (together, the “Business”). In consideration for the assets
of the Business, Buyer transferred to the Company 2,000,000 shares of its common stock and agreed to assume and discharge any
and all liabilities relating to the Business accruing up to the effective time of the Asset Purchase Agreement. The shares were
retired and restored to the status of authorized and unissued shares.
Loop
owns 100% of the capital stock of ScreenPlay. ScreenPlay is a combination of ScreenPlay, Inc. (“SPI”), a Washington
corporation incorporated in 1991, and SPE, Inc. (“SPE”), a Washington corporation incorporated in 2008. ScreenPlay
provides customized audiovisual environments that support integrated brand strategies for clients in the retail, hospitality,
and business services markets, and for online content providers.
For
accounting purposes, Loop was the surviving entity. The transaction was accounted for as a recapitalization of Loop pursuant to
which Loop was treated as the accounting acquirer, surviving and continuing entity although the Company is the legal acquirer.
The Company did not recognize goodwill or any intangible assets in connection with the Merger. Accordingly, the Company’s
historical financial statements are those of Loop and its wholly-owned subsidiary, ScreenPlay, immediately following the consummation
of this reverse merger transaction.
On
June 8, 2020, a 1 for 1.5 reverse stock split of the Company’s common stock became effective. All share and per share information
in the accompanying unaudited condensed consolidated financial statements and footnotes has been retroactively adjusted for the
effects of the reverse split for all periods presented.
Going
Concern and Management’s Plans
As
of March 31, 2020, the Company had cash of $1,173,840 and an accumulated deficit of $28,815,933. During the three months ended
March 31, 2020, the Company used net cash in operating activities of $1,168,905. The Company has incurred net losses since inception.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year from
the issuance date of the unaudited condensed consolidated financial statements.
The
Company’s primary source of operating funds since inception has been cash proceeds from debt and equity financing. The ability
of the Company to continue as a going concern is dependent upon its ability to generate sufficient revenue and its ability to
raise additional funds by way of a debt and equity financing.
Accordingly,
the accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going
concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of
assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement
values. The unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome
of this uncertainty.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Statements
The
following (a) condensed consolidated balance sheet as of March 31, 2020, which has been derived from audited financial statements,
and (b) the unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions
to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are
not necessarily indicative of results that may be expected for the year ending December 31, 2020. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the
year ended December 31, 2019 included in the Company’s Current Report on Form 8-K/A (Amendment No. 1), filed with the Securities
and Exchange Commission (“SEC”) on September 28, 2020.
Basis
of Presentation and Principles of Consolidation
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Screenplay.
All inter-company transactions and balances have been eliminated on consolidation.
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include assumptions used in the fair value of stock-based compensation,
the fair value of other equity and debt instruments, right-to-use assets, lease liabilities, fair value of intangible assets,
useful lives of assets and allowance for doubtful accounts.
Concentration
of Credit Risk
The
Company grants credit in the normal course of business to their customers. Periodically, the Company reviews past due accounts
and makes decisions about future credit on a customer by customer basis. Credit risk is the risk that one party to a financial
instrument will cause a loss for the other party by failing to discharge an obligation. As of March 31, 2020 and December 31,
2019, the Company is exposed to credit risk to the extent that its clients become unable to meet their payment obligations.
Induced
Debt Extinguishment
On
February 5, 2020, the Company issued 200,000 shares of Series B convertible preferred stock for $1,000,000 in cash and the exchange
of a $1,000,000 loan to the Company plus accrued interest of $6,594. The Company applied the guidance in ASC 470-20 resulting
in the recording of an inducement charge of $3,793,406 in the unaudited condensed consolidated statement of operations for the
three months ended March 31, 2020 (Note 8).
Fair
Value of Financial Instruments
FASB
ASC 820, Fair Value Measurements and Disclosures, requires disclosure of the fair value of financial instruments held by
the Company. FASB ASC 825, Financial Instruments, defines fair value, and establishes a three-level valuation hierarchy
for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts
reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined
as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology included quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level
3 inputs to the valuation methodology is one or more unobservable inputs which are significant to the fair value measurement.
|
The
fair value of the Company’s accounts receivable, short-term portion of notes receivable, payable for acquisition, and accounts
payable approximate their carrying value, due to their short-term nature. The fair value of the deposits, long-term portion of
notes receivable and the amount due to stockholders, and convertible notes approximate their fair values and are measured using
Level 2 of the fair value hierarchy. The Company’s cash is measured at fair value under the fair value hierarchy based on
Level 1 quoted prices in active markets for identical assets or liabilities.
Revenue
Recognition
Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), became
effective for the Company on January 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting
policies that are affected by this new standard. The Company applied the “modified retrospective” transition method
for open contracts for the implementation of Topic 606. As sales are and have been primarily from delivery of streaming services,
delivery of subscription content services in customized formats, and delivery of hardware and ongoing content delivery through
software and the Company has no significant post-delivery obligations, this new standard did not result in a material recognition
of revenue on the Company’s consolidated financial statements for the cumulative impact of applying this new standard, therefore
there was no cumulative effect adjustment required. The Company made no adjustments to its previously-reported total revenues,
as those periods continue to be presented in accordance with its historical accounting practices under Topic 605, Revenue Recognition.
The
Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. Revenue
is measured based on the consideration the Company expects to receive in exchange for those products. In instances where final
acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. Revenues
are recognized under Topic 606 in a manner that reasonably reflects the delivery of the Company’s products and services
to customers in return for expected consideration and includes the following elements:
|
●
|
executed
contracts with the Company’s customers that it believes are legally enforceable;
|
|
●
|
identification
of performance obligations in the respective contract;
|
|
●
|
determination
of the transaction price for each performance obligation in the respective contract;
|
|
●
|
allocation
of the transaction price to each performance obligation; and
|
|
●
|
recognition
of revenue only when the Company satisfies each performance obligation.
|
Performance
Obligations and Significant Judgments
The
Company’s revenue streams can be categorized into the following performance obligations and recognition patterns:
|
●
|
Delivery
of streaming services including content encoding and hosting. The Company recognizes revenue over the term of the service
based on bandwidth usage.
|
|
●
|
Delivery
of subscription content services in customized formats. The Company recognizes revenue over the term of the service.
|
|
●
|
Delivery
of hardware for ongoing subscription content delivery through software. The Company recognizes revenue at the point of hardware
delivery.
|
Transaction
prices for performance obligations are explicitly outlined in relevant agreements; therefore, the Company does not believe that
significant judgments are required with respect to the determination of the transaction price, including any variable consideration
identified.
Disaggregation
of Revenue
The
Company’s revenues are disaggregated into the following revenue streams. The content and streaming services revenue including
content encoding and hosting are recognized over the term of the service based on bandwidth usage. The content subscription services
revenue in customized formats is recognized over the term of the service. The hardware for ongoing subscription content delivery
is recognized at the point of hardware delivery. The following table represents revenue by category for the three months ended
March 31, 2020 and 2019:
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
Content and streaming services
|
|
$
|
383,541
|
|
|
$
|
433,272
|
|
Content subscription services
|
|
|
411,029
|
|
|
|
364,335
|
|
Hardware for ongoing subscription content
|
|
|
31,818
|
|
|
|
52,703
|
|
Total revenue
|
|
$
|
826,388
|
|
|
$
|
850,310
|
|
Customer
Acquisition Costs
The
Company records commission expense associated with subscription revenue. The Company has elected the practical expedient that
allows the Company to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization
period of the asset that the Company otherwise would have recognized is one year or less.
Cost
of revenue
Cost
of revenue represents the cost of delivered hardware and bundled software and is recognized at the time of sale. For ongoing licensing
and hosting fees, cost of sales is recognized over time based on usage patterns.
Deferred
income
The
Company bills subscription services in advance of when the service period is performed. The deferred income recorded at March
31, 2020 and December 31, 2019, represents the Company’s accounting for the timing difference in when the subscription fees
are received and when the performance obligation is satisfied.
Net
loss Per Share
The
Company accounts for net loss per share in accordance with Accounting Standards Codification (“ASC”) subtopic 260-10,
Earnings Per Share (“ASC 260-10”), which requires presentation of basic and diluted earnings per share (“EPS”)
on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS.
Basic
net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares
of common stock outstanding during each period. It excludes the dilutive effects of any potentially issuable common shares.
Diluted
net loss per share is calculated by including any potentially dilutive share issuances in the denominator. The following securities
are excluded from the calculation of weighted average diluted shares at March 31, 2020 and 2019, respectively, because their inclusion
would have been anti-dilutive.
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Options to purchase common stock
|
|
|
5,812,307
|
|
|
|
6,173,418
|
|
Warrants to purchase common stock
|
|
|
8,217,376
|
|
|
|
21,572,181
|
|
Series A preferred stock
|
|
|
3,066,700
|
|
|
|
—
|
|
Series B preferred stock
|
|
|
20,000,000
|
|
|
|
—
|
|
Convertible debentures
|
|
|
6,670,602
|
|
|
|
5,570,999
|
|
Total common stock equivalent
|
|
|
43,766,985
|
|
|
|
33,316,598
|
|
Application
of New Accounting Standards
In
August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-13, Fair Value Measurement (Topic 820),
which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure
requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other
comprehensive income (loss). The ASU is effective for public entities for fiscal years beginning after December 15, 2019. The
Company has not historically had any transfers between Level 1 and Level 2 or assets or liabilities measured at fair value under
Level 3. The Company adopted the standard effective January 1, 2020 with no material effect on its financial statements.
Recent
Accounting Pronouncements
There
are various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s financial position, results of
operations or cash flows.
NOTE
3 – INVENTORY
The
Company’s inventory consisted of the following at March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Computers
|
|
$
|
28,213
|
|
|
$
|
8,623
|
|
Hasp keys
|
|
|
5,760
|
|
|
|
2,240
|
|
Loop player
|
|
|
17,532
|
|
|
|
17,532
|
|
Total inventory
|
|
$
|
51,505
|
|
|
$
|
28,395
|
|
NOTE
4 – PROPERTY AND EQUIPMENT, NET
The
Company’s property and equipment consisted of the following at March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Equipment
|
|
$
|
456,610
|
|
|
$
|
456,610
|
|
Software
|
|
|
53,450
|
|
|
|
53,450
|
|
Less: accumulated depreciation
|
|
|
(485,046
|
)
|
|
|
(482,033
|
)
|
Total
|
|
$
|
25,014
|
|
|
$
|
28,027
|
|
Depreciation
expense charged to operations amounted to $3,013 and $2,269 for the three months ended March 31, 2020 and 2019, respectively.
NOTE
5 – GOODWILL AND OTHER INTANGIBLE ASSETS
As
of March 31, 2020 and December 31, 2019, the Company had goodwill recorded of $583,086.
Other
intangible assets consisted of the following at March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Software acquired as intellectual property
|
|
$
|
—
|
|
|
$
|
6,350,000
|
|
Screenplay brand
|
|
|
130,000
|
|
|
|
130,000
|
|
Customer relationships
|
|
|
1,012,000
|
|
|
|
1,012,000
|
|
Content library
|
|
|
198,000
|
|
|
|
198,000
|
|
Less: Impairment of intangible assets acquired in 2019
|
|
|
—
|
|
|
|
(6,350,000
|
)
|
Less: accumulated amortization
|
|
|
(267,736
|
)
|
|
|
(211,445
|
)
|
Total
|
|
$
|
1,072,264
|
|
|
$
|
1,128,555
|
|
Amortization
expense charged to operations amounted to $56,291 and $52,861 for the three months ended March 31, 2020 and 2019, respectively.
NOTE
6 – LEASES
Operating
leases
The
Company has operating leases for office space and office equipment and automobiles. Many leases include one or more options to
renew, some of which include options to extend the leases for a long-term period, and some leases include options to terminate
the leases within 30 days. In certain of the Company’s lease agreements, the rental payments are adjusted periodically to
reflect actual charges incurred for capital area maintenance, utilities, inflation and/or changes in other indexes.
Lease
liability is summarized below:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Total lease liability
|
|
$
|
460,485
|
|
|
$
|
507,827
|
|
Less: short term portion
|
|
|
(136,468
|
)
|
|
|
(147,458
|
)
|
Long term portion
|
|
$
|
324,017
|
|
|
$
|
360,369
|
|
Maturity
analysis under these lease agreements are as follows:
Nine months ended December 31, 2020
|
|
$
|
131,367
|
|
2021
|
|
|
180,420
|
|
2022
|
|
|
185,834
|
|
2023
|
|
|
37,584
|
|
Total undiscounted cash flows
|
|
|
535,205
|
|
Less: 10% Present value discount
|
|
|
(74,720
|
)
|
Lease liability
|
|
$
|
460,485
|
|
Lease
expense for the three months ended March 31, 2020 and 2019 was comprised of the following:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease expense
|
|
$
|
44,444
|
|
|
$
|
71,891
|
|
Short-term lease expense
|
|
|
1,115
|
|
|
|
9,821
|
|
|
|
$
|
45,559
|
|
|
$
|
81,712
|
|
Operating
lease expense is included in selling, general and administration expenses in the condensed consolidated statement of operations.
For
the three months ended March 31, 2020, cash payments against lease liabilities totaled $38,517, accretion on lease liability of
$11,999 and non-cash transactions totaled $20,825 to recognize assumption of lease by a related party.
For
the three months ended March 31, 2019, cash payments against lease liabilities totaled $70,708, accretion on lease liability of
$10,557 and non-cash transactions of $444,112 to bring on leases as part of the adoption of ASC 842 and an added lease during
the period of $75,274.
Weighted-average
remaining lease term and discount rate for operating leases are as follows:
Weighted-average
remaining lease term
|
|
|
2.93
|
years
|
|
|
|
|
|
Weighted-average
discount rate
|
|
|
10
|
%
|
NOTE
7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Accounts payable
|
|
$
|
263,533
|
|
|
$
|
357,982
|
|
Interest payable
|
|
|
182,137
|
|
|
|
94,069
|
|
Accrued liabilities
|
|
|
377,663
|
|
|
|
566,696
|
|
Payroll liabilities
|
|
|
52,152
|
|
|
|
26,048
|
|
|
|
$
|
875,485
|
|
|
$
|
1,044,795
|
|
NOTE
8 – LOANS PAYABLE
On
December 18, 2019, the Company entered to a loan agreement with a related party for $1,000,000. The loan provided an interest
rate of 5% compounded annually and calculated on a 360-day basis. The principal and accrued unpaid interest will be due on June
30, 2020. The loan is secured by a secondary interest in all assets of both Loop and ScreenPlay.
On
February 5, 2020, the Company issued 200,000 shares of Series B convertible preferred stock for (i) $1,000,000 in cash (Note 12)
and (ii) the exchange of a $1,000,000 loan to the Company plus accrued interest of $6,594. The fair value of the common stock
into which the Series B convertible preferred stock is convertible was $9,600,000 on the date of issuance. The Company applied
the guidance in ASC 470-20.
The
Company recognized an inducement expense equal to the excess of the allocated fair value of the Series B Convertible
preferred stock and the carrying value of the loan payable as of the date the inducement offers were accepted. The excess of the
fair value of the Series B Convertible preferred stock over the carrying value of the loan payable was $3,793,406 which amount
was included as an inducement expense in the statement of operations for the three months ended March 31, 2020.
NOTE
9 – CONVERTIBLE NOTES PAYABLE
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Convertible Debentures issued to related parties, amended on October 23, 2020, interest at 10% per annum, unpaid interest accrued at 18% per annum through October 23, 2020 amounting to $179,803 is paid by making a cash payment of $97,979 and increasing the principal amount of the convertible note by $81,824 on the date of this agreement. From October 23, 2020 through March 31, 2021, interest will be accrued at 12.5% per annum and payable monthly in arrears beginning November 1, 2020. Beginning April 1, 2021, the Company will pay equal monthly installments of principal and interest at 10% per annum through December 1, 2023
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Debenture issued to a founder and former officer of the Company in conjunction with redemption of 20,000,000 shares of common stock, interest at 10% per annum, amended terms as of October 22, 2020 provided that the unpaid interest accrued through May 31, 2020 of $43,011 plus principal of $29,324 and interest of $11,490 that were due under the original agreement (described below) beginning June 1, 2020 to October 1, 2020 is paid on October 22, 2020. The November 1, 2020 payment per the amendment will be deferred until December 1, 2020 while the terms of the conversion are discussed further. If the convertible note is not converted into the Company’s common stock by November 30, 2020, then the terms of the original note will resume on December 1, 2020, if agreement is reached to convert by November 30, 2020, the remaining balance of the convertible debenture amounting to $257,676 will be converted to 429,459 shares of the Company’s common stock. This $287,000 convertible debenture is secured by 5,000,000 shares of the Company’s common stock owned by the Company’s CEO
|
|
|
287,000
|
|
|
|
287,000
|
|
|
|
|
|
|
|
|
|
|
Secured(1) convertible debenture, interest at 11% per annum, accrued monthly and the outstanding principal and unpaid accrued interest is due January 8, 2021
|
|
|
326,143
|
|
|
|
326,143
|
|
Convertible debentures payable
|
|
$
|
3,613,143
|
|
|
$
|
3,613,143
|
|
Less: debt discount associated with Convertible payables
|
|
|
(2,234,137
|
)
|
|
|
(2,385,189
|
)
|
Total convertible debentures payable
|
|
$
|
1,379,006
|
|
|
$
|
1,227,954
|
|
|
(1)
|
Secured
by primary interest in all assets of both Loop and ScreenPlay.
|
Convertible
debentures – related party $3,000,000
Original
terms
On
December 12, 2018, the Company issued $3,000,000 in convertible debentures, which have a maturity date of December 1, 2023 (the
“Maturity Date”). The debentures accrue interest monthly at a rate of 10% per annum, simple interest. Accrued unpaid
interest became payable monthly beginning February 1, 2019 through May 1, 2020. Any accrued unpaid interest outstanding at May
1, 2020 could be converted into shares or added to the face amount of the loan. Beginning June 1, 2020 through January 1, 2021
the Company will make monthly installment of interest only payments. Beginning January 1, 2021, the Company will make monthly
installment of principal and interest through December 1, 2023. At the option of the debenture holders, the debentures are convertible
at any time prior to the Maturity Date in whole or in parts into common shares of the Company at a price of $0.60 per common share.
The
convertible debentures also provide that should the Company receive not less than $6,000,000 from the sale of its securities,
it must either, at the discretion of the holders, make a $750,000 principal payment plus the balance of any accrued unpaid interest
or convert that amount into the Company’s common stock. If the Company receives not less than $12,000,000 from the sale
of its securities, the entire outstanding principal balance plus any accrued and unpaid interest must be either paid or converted
in common stock.
In
connection with the issuance of the convertible debentures, the Company issued 27,032,208 common share purchase warrants, with
each warrant exercisable at $0.001 for a period of 10 years. The Company evaluated the warrants in accordance with ASC Topic No.
815 – 40, Derivatives and Hedging – Contracts in Entity’s Own Stock and determined that the underlying common
stock is indexed to the Company’s common stock. The Company determined that the warrants did not meet the definition of
a liability and therefore did not account for them as a separate derivative liability.
The
allocation of the $3,000,000 in gross proceeds from issuance of convertible debentures based on the relative fair values resulted
in an allocation of $2,387,687 to the warrants and $612,313 to the convertible debentures. The relative fair value of the warrants
above was determined on the date of grant using the Black Scholes option-pricing model with the following parameters: (1) risk
free interest rate of 2.00%; (2) expected life in years of 10.0; (3) expected stock volatility of 45.0%; and (4) expected dividend
yield of 0%. In addition, because the effective conversion rate based on the $612,313 allocated to the convertible debentures
was $0.08 per share which was less than the fair value of the Company’s stock price on the date of issuance, a beneficial
conversion feature was present at the issuance date. The beneficial conversion feature totaled $612,313 and was recorded as a
debt discount. The Company also recorded the allocated fair value of the warrants $2,387,687 as additional debt discount. The
total initial unamortized debt discount was $3,000,000 and is amortized to interest expense using effective interest method over
the life of the convertible debentures.
As
of March 31, 2020 and 2019, the amortized debt discount recorded as interest expenses was $149,507 and $147,864, respectively.
Settlement
– October 31, 2019
The
Company was not able to make the payments required under the terms of the convertible debentures and the holders filed suit on
July 11, 2019. The convertible debenture holders and the Company entered into a settlement agreement on October 31, 2019, and
the lawsuit was dismissed as of October 31, 2019.
Pursuant
to the settlement agreement the payment terms for the convertible debentures were amended to provide for interest to be accrued
from November 1, 2019 through April 2020 and at the sole discretion of the note holder to be paid either by common stock of the
Company or added to the balance of the loan. The note holders elected to add the accrued interest to the balance of the loan.
It further provided that beginning June 1, 2020, monthly payments of unpaid accrued interest will be made through December 2020
and beginning January 1, 2021, the Company will pay equal monthly installments of principal and interest through December 1, 2023
and any unpaid principal and interest outstanding will be immediately due and payable on December 1, 2023.
Also
as part of the settlement agreement, the Company (i) issued 67,690 shares of Class B common stock to the convertible debenture
holders for $30,000 cash; and (ii) issued 56,408 Class B common shares valued at $25,000 to the convertible debenture holders
for the forgiveness of $5,221 in liabilities owed by the Company, which resulted in a loss on settlement of obligations of $19,779
during the year ended December 31, 2019.
In
addition, the settlement agreement further provided that the Company would be released from any liability for accrued unpaid interest
and other convertible debentures costs from the date of the convertible debentures to the date of the settlement agreement. The
Company was relieved of $192,557 of accrued interest as of October 31, 2019 and recorded a gain on settlement of obligations during
the year ended December 31, 2019.
Additionally,
the settlement agreement provided that the Company would merge the Class A common stock and Class B common stock into one class
of common stock. On December 5, 2019, the Company merged Class A and Class B common stock.
On
October 31, 2019, as part of the above mentioned settlement agreement, the Company issued 27,032,208 Class B common shares upon
the exercise of warrants, with an exercise price of $0.001 per share, for a total value of $27,032. The exercise price was applied
against the balance of accrued interest on the convertible debentures.
Second
Amendment of terms
Subsequent
to March 31, 2020, the Company did not make all of the payments due under the convertible loan agreement with the related party
and entered into a second amendment of this convertible loan on October 23, 2020. The second amendment provides for payment to
be made for the unpaid interest accrued at 18% per annum (default rate) through October 23, 2020 amounting to $179,803 by making
a cash payment of $97,979 and increasing the principal amount of the convertible note by $81,824. The second amendment further
provides that interest will accrue from October 23, 2020 to March 31, 2021 at 12.5% per annum and will be paid monthly in arrears
beginning November 1, 2020. Beginning April 1, 2021, the Company will pay equal monthly installments of principal and interest
computed at 10% per annum through December 1, 2023. The Company will preliminarily account for this amendment to the Note under
ASC 470-50-40-10 as a debt extinguishment due to the present value of the cash flows under the new amendment terms is at least
10% different from the present value of the remaining cash flows of the current terms.
The
following table presents the components of the convertible debenture as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Short term portion
|
|
$
|
—
|
|
|
$
|
—
|
|
Long term portion
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Less: unamortized debt discount
|
|
|
(2,211,391
|
)
|
|
|
(2,360,898
|
)
|
Balance, net
|
|
$
|
788,609
|
|
|
$
|
639,102
|
|
Convertible
debentures - $287,000
Original
terms
On
December 1, 2018, the Company entered into a redemption agreement with one of the former officers to repurchase 20,000,000 shares
of Class A common stock. The terms of this agreement required that the Company issue a convertible debenture to this shareholder
in the amount of $287,000 and pay the amount of accrued expenses owed to him of $134,000 in four quarterly payments beginning
October 1, 2019. The first two quarterly payments totaled $67,000 were paid in January 2020 but the remaining $67,000 has not
been paid. The convertible debenture originally provided for interest at 10% per annum, interest to accrue through September 1,
2019, beginning October 1, 2019 monthly payments of unpaid accrued interest will be made through May 1, 2020, beginning June 1,
2020, the Company will pay equal monthly installments of principal and interest through December 1, 2023.
At
the option of the debenture holder, the debenture shall be convertible at any time prior to December 1, 2023 in whole or in parts
into common shares of the Company at a price of $0.60 per common share. As the effective conversion rate based on the principal
$287,000 was $0.60 per share which was less than the fair value of the Company’s stock price on the date of issuance, a
beneficial conversion feature was present at the issuance date. The beneficial conversion feature totaled $30,996 and was recorded
as a debt discount.
The
discount is amortized to interest expense using effective interest method over the life of the convertible debentures. As of March
31, 2020 and 2019, the amortized debt discount recorded as interest expenses was $1,545 and $1,528, respectively.
First
Amendment
The
Company did not make all of the payments due under the convertible loan agreement entered into with a founder and former officer
of the Company and entered into a second agreement to modify the payment terms on October 22, 2020. At the date of this amendment,
the Company owed unpaid accrued interest through May 31, 2020 amounting to $43,011 and unpaid principal and interest payments
from June 1, 2020 to October 1, 2020 in the amount of $40,814 for a total of $83,825. In an effort to remove the default, the
Company amended the terms of the convertible note on October 22, 2020 to provide for the unpaid interest accrued through May 31,
2020 plus the unpaid principal and interest payments from June 1, 2020 to October 1, 2020 amounting to $83,825 to be paid on the
date of this agreement. In addition, the amendment required that the Company pay on October 22, 2020, $28,587of the outstanding
balance of accrued expenses due to the founder and former officer in the amount of $67,000 for a total payment of $112,412. The
amendment further provides that the remaining balance of the $67,000 owed or $38,412 would be paid on March 31, 2021. Additionally,
the amendment provides that the November 1, 2020 payment will be deferred to December 1, 2020 while the terms of the conversion
are discussed further. If the convertible note is not converted into the Company’s common stock by November 30, 2020, then
the terms of the original note will resume on December 1, 2020. If the convertible note of the founder and former officer is converted
by November 30, 2020, the balance of $257,676 will convert into 429,460 shares of the Company’s stock based upon an exercise
price of $0.60.
The
following table presents the components of the convertible debenture as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Short term portion
|
|
$
|
287,000
|
|
|
$
|
—
|
|
Long term portion
|
|
|
—
|
|
|
|
287,000
|
|
Less: unamortized debt discount
|
|
|
(22,746
|
)
|
|
|
(24,291
|
)
|
Balance, net
|
|
$
|
264,254
|
|
|
$
|
262,709
|
|
Convertible
debentures - $326,143
Original
terms
On
July 12, 2019, the Company entered into a loan agreement with a lender for a loan amount up to $200,000. The loan provided an
interest rate of 10% accrued monthly with principal and accrued unpaid interest due on January 8, 2021. The loan required the
Company to pay a loan fee of 2% ($4,000) upon execution. The loan provides for a prepayment penalty of 4% of the amount prepaid
plus all interest accrued to the date of the prepayment. The loan was secured by a primary interest in all assets of both Loop
and ScreenPlay.
Amendment
1
By
August 20, 2019, the amount borrowed under the $200,000 loan agreement amounted to $252,473 and the loan agreement was amended
to provide for an increase in the maximum loan amount to $400,000.
In
addition, the loan was restructured as a convertible debenture. At the option of the debenture holder, the debenture is convertible
at any time prior to the maturity date in whole or in parts into Class A common shares of the Company. The conversion price was
deemed to be the lesser of $0.40 per common share or the offering price paid by unaffiliated investors for one share of the current
merger target’s common stock, no par value under a planned private offering of such securities by the current merger target
in connection with the proposed merger transaction with the Company. The proposed merger with merger target failed to close so
the conversion price was deemed to be $0.40 per common share.
The
Company evaluated the embedded conversion feature in accordance with ASC Topic No. 815 – 40, Derivatives and Hedging
– Contracts in Entity’s Own Stock and determined that the underlying common stock is indexed to the Company’s
common stock. The Company determined that the embedded conversion feature did not meet the definition of a liability and therefore
did not account for it as a separate derivative liability. The embedded conversion feature was fair valued at $146,678 using the
Black Scholes Method and recorded as loss on extinguishment of debt and offset to additional paid-in capital. The Company also
charged the additional loan fees of $6,473 to loss on extinguishment of debt.
The
Company evaluated the embedded conversion feature as the effective conversion rate based on the principal $252,473 was $0.40 per
share which was less than the fair value of the Company’s stock price on the date of issuance and determined that a beneficial
conversion feature was present at the issuance date. The beneficial conversion feature totaled $29,967 and was recorded as a debt
discount and offset to additional paid-in capital.
The
amendment also provided that at the lender’s request, the Company will issue one share of its Class A common stock for every
dollar loaned. The total amount borrowed under this loan as of December 31, 2019 is $326,143, the Company recorded the obligation
to issue 326,143 Class A common shares with a value of $135,144 as Class A common stock subscribed but not yet issued and debt
discount.
Amendment
2 – November 26, 2019
The
Company changed its merger target to Interlink Plus, Inc. (Interlink). On November 26, 2019, the $400,000 convertible loan agreement
was amended again to change the conversion price to the lesser of $0.25 per common share or the offering price paid by unaffiliated
investors for one share of Interlink common stock.
As
of November 26, 2019, the amortized debt discount recorded as interest expense was $23,448, and upon execution of Amendment 2,
the Company wrote off the remaining unamortized debt discount of $141,663 as loss on extinguishment of debt.
Upon
execution of Amendment 2, a new embedded conversion feature was re-calculated as $110,281 which was charged to additional paid-in
capital. The difference of $36,397 was offset against loss on extinguishment of debt.
The
following table presents the components of the convertible debenture as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Short term portion
|
|
$
|
326,143
|
|
|
$
|
—
|
|
Long term portion
|
|
|
—
|
|
|
|
326,143
|
|
Total
|
|
$
|
326,143
|
|
|
$
|
326,143
|
|
NOTE
10 – COMMITMENTS AND CONTINGENCIES
The
Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters
are subject to many uncertainties, and outcomes are not predictable with assurance. There are no such loss contingencies that
are included in the financial statements as of March 31, 2020.
NOTE
11 – RELATED PARTY TRANSACTIONS
Related
parties are natural persons or other entities that have the ability, directly or indirectly, to control another party or exercise
significant influence over the party making financial and operating decisions. Related parties include other parties that are
subject to common control or that are subject to common significant influences.
The
Company has borrowed funds for business operations from certain stockholders through convertible debt agreements that have remaining
balances, including accrued interest amounting to $3,124,932 and $3,050,137 as of March 31, 2020 and December 31, 2019, respectively.
The Company incurred interest expense for these convertible notes in the amounts of $74,795 and $73,973 for the three months ended
March 31, 2020 and 2019, respectively.
One
of the above stockholders and convertible note holders also assumed the Company’s corporate apartment lease at the beginning
of 2020 for their own personal use. The Company wrote off the remaining balance of the right of use asset and lease liability,
both amounting to $20,825.
As
part of the reverse merger with Interlink Plus, Inc. on February 5, 2020, the Company assumed a $180,000 debt to Interlink’s
controlling stockholder who the Company was also indebted to in the amount of $1,000,000. The $1,000,000 was exchanged as part
of his purchase of 200,000 shares of Series B preferred stock. The $180,000 debt was retired as part of the issuance to him of
2,666,667 warrants to purchase the Company’s common stock. The warrants were recorded at their fair value (see Note 13).
Due to the transaction being with a related party the gain/loss is charged to additional paid in capital and not to the statement
of operations.
NOTE
12 – STOCKHOLDERS’ EQUITY
Convertible
Preferred Stock
The
Company is authorized to issue 16,666,667 shares of its $0.0001 par value preferred stock. As of March 31, 2020, and December
31, 2019, the Company had 30,667 and 0 shares of Series A convertible preferred stock issued and outstanding, respectively. As
of March 31, 2020, and December 31, 2019, the Company had 200,000 and 0 shares of Series B convertible preferred stock issued
and outstanding, respectively.
The
Series A convertible preferred stock have a liquidation preference of $0.10 per share, have super voting rights of 100 votes per
share, and each share of Series A may be converted into 100 shares of common stock.
On
January 31, 2020, the Company filed a certificate of designation with the Nevada Secretary of State and designated 3,333,334 shares
of Series B Convertible Preferred Stock. The terms of the Series B Convertible Preferred Stock are substantially similar to those
of the Series A Convertible Preferred Stock, except that in the event of the liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, the holders of the Series B Convertible Preferred Stock then outstanding shall
be entitled to receive, out of the assets of the Company available for distribution to its stockholders, an amount equal to $1.00
per share of Series B Convertible Preferred Stock before any payment shall be made or any assets distributed to the holders of
common stock or Series A Convertible Preferred Stock.
The
Series B Convertible Preferred Stock is convertible at any time at the discretion of the holder thereof into shares of common
stock at a conversion rate of one hundred (100) shares of common stock for every one (1) share of Series B Convertible Preferred
Stock. Furthermore, the holders of Series B Convertible Preferred Stock have the right to cast one hundred (100) votes for each
one (1) share of Series B Convertible Preferred Stock held of record on all matters submitted to a vote of holders of the common
stock, including the election of directors, and all other matters as required by law.
The
Company evaluated the features of Convertible Preferred Stock under ASC 480, and classified them as permanent because the Convertible
Preferred stock is not being mandatorily or contingently redeemable at the shareholder’ option and the liquidation preference
that exist does not fall within the guidance of ASR 268.
Common
stock
The
Company is authorized to issue 316,666,667 shares of its $0.0001 par value common stock. As
of March 31, 2020 and December 31, 2019, there were 112,131,578 and 101,882,647, respectively, shares of common stock
issued and outstanding.
Three
months ended March 31, 2019
During
the three months ended March 31, 2019, the Company issued an aggregate of 2,800,000 Class B Shares with a value of $1,890,000
which were reserved for issuance as a common stock subscribed at December 31, 2018. These were issued for consulting services
received during the year ended December 31, 2018.
During
the three months ended March 31, 2019, the Company issued an aggregate of 37,605 in satisfaction of common stock subscribed of
$25,000.
During
the three months ended March 31, 2019, the Company issued 1,866,667 Class B Shares with a value of $1,240,960 in connection with
a settlement with former employees upon the termination of their employment contracts.
Three
months ended March 31, 2020
During
the three months ended March 31, 2020, the Company issued an aggregate of 1,040,000 shares of its common stock for proceeds of
$390,000.
During
the three months ended March 31, 2020, the Company issued 40,000 shares of its common stock to satisfy common stock subscribed
of $15,000.
During
the three months ended March 31, 2020, the Company issued 4,000,000 shares of its common stock for consulting services valued
at $1,500,000.
During
the three months ended March 31, 2020, the Company issued 5,168,931 shares of its common stock and 30,667 shares of Preferred
A shares as part of the merger with Interlink. The Company also assumed debt to a related party of $180,000 and accrued interest
of $3,842 and charged $80,134 of legal expenses related to reverse merger charged to additional paid in capital.
During
the three months ended March 31, 2020, the Company issued 200,000 shares of its Series B convertible preferred stock in exchange
for (i) $1,000,000 in cash and (ii) loan and accrued interest forgiveness of $1,006,594. The fair value of the common stock into
which the Series B convertible preferred stock is convertible was $9,600,000 on the date of issuance. The Company applied the
guidance in ASC 470-20.
The
allocated fair value of the Series B convertible preferred stock exceeded the $1,000,000 cash proceeds by $3,800,000 which was
recorded by the Company as a deemed dividend.
During
the three months ended March 31, 2020, the Company received $20,000 for common stock subscribed of 53,333 shares.
NOTE
13 – STOCK OPTIONS AND WARRANTS
Options
Option
valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated
using the Black-Scholes option model with a volatility figure derived from using the Company’s historical stock prices.
The Company accounts for the expected life of options based on the contractual life of options for non-employees. For employees,
the Company accounts for the expected life of options in accordance with the “simplified” method, which is used for
“plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined
from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options.
The
following table summarizes the stock option activity for the three months ended March 31, 2020:
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2019
|
|
|
5,812,307
|
|
|
$
|
0.7
|
|
|
|
8.41
|
|
|
$
|
—
|
|
Grants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2020
|
|
|
5,812,307
|
|
|
$
|
0.7
|
|
|
|
8.16
|
|
|
$
|
93,279
|
|
Exercisable at March 31, 2020
|
|
|
5,812,307
|
|
|
$
|
0.7
|
|
|
|
8.16
|
|
|
$
|
93,279
|
|
The aggregate intrinsic value in the preceding
tables represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s stock
price of $0.68 as of March 31, 2020, which would have been received by the option holders had those option holders exercised their
options as of that date.
The following table presents information
related to stock options at March 31, 2020:
Options Outstanding
|
|
|
|
|
|
|
Weighted
|
|
|
Options
|
|
|
|
|
|
|
Average
|
|
|
Exercisable
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
Price
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
$
|
0.86
|
|
|
|
1,148,372
|
|
|
|
6.53
|
|
|
1,148,372
|
$
|
0.66
|
|
|
|
4,663,935
|
|
|
|
8.59
|
|
|
4,663,935
|
Total
|
|
|
|
5,812,307
|
|
|
|
8.16
|
|
|
5,812,307
|
The stock-based compensation expense related
to option grants was $0 and $27,898 three months ended March 31, 2020 and 2019, respectively.
Warrants
The following table summarizes the changes
in warrants outstanding and the related prices for the shares of the Company’s common stock:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
$
|
0.86
|
|
|
5,550,709
|
|
|
|
6.76
|
|
|
$
|
0.86
|
|
|
|
5,550,709
|
|
|
|
6.76
|
|
$
|
0.75
|
|
|
2,666,667
|
|
|
|
9.95
|
|
|
|
0.75
|
|
|
|
2,666,667
|
|
|
|
9.95
|
|
The following table summarizes the warrant activity for the
three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Outstanding at December 31, 2019
|
|
|
5,550,709
|
|
|
$
|
0.86
|
|
Issued
|
|
|
2,666,667
|
|
|
|
0.75
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2020
|
|
|
8,217,376
|
|
|
$
|
0.82
|
|
During first quarter 2020, the Company
assumed a related party note of $180,000 and associated accrued interest of $3,842 as part of the reverse merger with Interlink.
On March 11, 2020, the Company issued 2,666,667 warrants valued at $702,219 to retire the $180,000 debt and $5,563 of accrued liabilities.
The Company calculated the fair value of options issued using
the Black-Scholes option pricing model, with the following assumptions:
|
|
March 31, 2020
|
|
Weighted average fair value of options granted
|
|
$
|
0.2633
|
|
Expected life
|
|
|
10 years
|
|
Risk-free interest rate
|
|
|
0.82
|
%
|
Expected volatility
|
|
|
48.46
|
%
|
Expected dividends yield
|
|
|
0
|
%
|
Forfeiture rate
|
|
|
0
|
%
|
NOTE 14 – SUBSEQUENT EVENTS
Change in Number
of Authorized and Outstanding Shares
On June 8, 2020,
the Company filed a Certificate of Change pursuant to NRS 78.209 (the “Certificate of Change”) with the Nevada Secretary
of State to implement a reverse split of the Company’s authorized and outstanding shares of capital stock on a 1 to 1.5 basis
(the “Reverse Split”). In connection with the Reverse Split, the number of shares of capital stock the Company shall
have the authority to issue decreased from 500,000,000 to 333,333,334 shares, and to correspondingly decrease the number of issued
and outstanding shares of each class and series of capital stock. In accordance with and pursuant to the Reverse Split, the total
number of shares of the class of capital stock designated as Common Stock that the Company shall have authority to issue will be
decreased from 475,000,000 to 316,666,667 shares, and all issued and outstanding shares of Common Stock shall be correspondingly
and proportionally decreased. In accordance with and pursuant to the Reverse Split, the total number of shares of the class of
capital stock designated as Preferred Stock that the Company shall have authority to issue will be decreased from 25,000,000 to
16,666,667 shares, and all issued and outstanding shares of Preferred Stock shall be correspondingly and proportionally decreased.
In accordance with and pursuant to the Reverse Split, the total number of shares of the series of Preferred Stock designated as
Series A Convertible Preferred Stock that the Company shall have authority to issue will be decreased from 1,000,000 to 666,667
shares, and all issued and outstanding shares of Series A Convertible Preferred Stock shall be correspondingly and proportionally
decreased. In accordance with and pursuant to the Reverse Split, the total number of shares of the series of Preferred Stock designated
as Series B Convertible Preferred Stock that the Company shall have authority to issue will be decreased from 5,000,000 to 3,333,334
shares, and all issued and outstanding shares of Series B Convertible Preferred Stock shall be correspondingly and proportionally
decreased.
In accordance
with and pursuant to Nevada Revised Statutes (“NRS”) 78.207, the Reverse Split was undertaken by a resolution
of the board of directors of the Company without obtaining the approval of the stockholders.
All share and per share amounts for the
common stock have been retroactively restated to give effect to the reverse split.
Name Change
in Connection with Merger
On May 22, 2020, the Company entered into
another Plan of Merger with its wholly owned subsidiary, Loop Media, Inc. Under the Plan of Merger, Loop Media, Inc. merged into
the Company becoming one entity. In connection with the Merger, the Company changed its name to Loop Media, Inc. The Company was
the surviving entity in the Merger, and as such is permitted under NRS 92A.180 to amend its Articles of Incorporation to change
its name if the amendment is set forth in Articles of Merger filed with the Nevada Secretary of State.
Stock Option
Plan
On June 15, 2020, the board of directors
of the Company adopted the Loop Media, Inc. 2020 Equity Incentive Compensation Plan (the Plan). Awards that may be granted under
the Plan include: (a) Incentive Stock Options; (b) Non-qualified Stock Options; (c) Stock Appreciation Rights; (d) Restricted Awards;
(e) Performance Share Awards; (f) Cash Awards; and (g) Other Equity-Based Awards. The Plan allows a total share reserve of no more
than 12,000,000 shares of common stock for the grant of Awards. The Plan further provides that no more than 10,000,000 shares of
Common Stock may be issued in the aggregate pursuant to the exercise of Incentive Stock Options (the “ISO Limit”).
Under the Plan, stock option awards of
1,000,000 and 1,500,000 shares, respectively were granted to two key employees on June 15, 2020. The options are intended to be
Incentive Stock Options up to the point the fair market value of the vested shares determined on the grant date exceed $100,000.
The vested shares or portions of shares thereafter will be treated as Non-Qualified Stock Options. The vesting period for both
awards begin on July 1, 2020. The award of 1,000,000 option shares will vest 500,000 shares on July 1, 2020 and the remaining 500,000
shares will vest on January 1, 2021. The award of 1,500,000 option shares will vest ratably each month over a 36-month period.
Subsequent
Contractual Arrangements
On April 16, 2020, the Company’s
wholly owned subsidiary, Loop Media, Inc. (Loop) entered into a Framework Digital Distribution Agreement with Sony Music Entertainment
(“SME”) to digitally distribute audio-visual musical recordings that it owns or controls in agreed forms to consumers
via certain approved distribution channels. This agreement requires Loop to pay royalties and make minimum guaranteed payments,or
advances, and includes marketing commitments, advertising inventory, and financial and data reporting obligations. Rights to sound
recordings granted pursuant to this agreement are expected to account for a significant part of its streams in the foreseeable
future. This license agreement has a duration of two years, is not automatically renewable, and applies to the United States, Canada,
and certain Latin American countries. The license agreement also allows for the record label to terminate the agreement in certain
circumstances, including, for example, Loop’s failure to timely pay sums due within a certain period, a breach of material
terms, and in some situations which could constitute a “change of control” of Loop. This agreement provides that SME
has the right to audit Loop for compliance with the terms of the agreement. Further, it contains a “most favored nation”
provision, which requires that certain material contract terms be at least as favorable as the terms agreed to or will agree with
any other record label. Future minimum guarantee payments are material and represent a significant portion of Loop’s contractual
obligations and commercial commitments.
Payroll
Protection Program and Economic Injury Disaster Loan Grant
The
Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 and provided
for, among other things, the Payroll Protection Program (“PPP”). The CARES Act temporarily added the PPP Loan program
to the U.S. Small Business Administration’s (“SBA”) 7(a) Loan Program and provides for the forgiveness of up
to the full amount of qualifying loan plus accrued interest guaranteed under the program. Loop applied for and received on April
27, 2020, through a bank, $573,500 under this program. The loan provides for an annual interest rate of 1% and a term of two years
from the date the proceeds were received. Payments of principal and interest are deferred for the period up to the determination
of the forgiveness amount by the SBA. The program further provides that the payment of certain qualified expenses from the proceeds
received can be eligible for loan forgiveness. The qualified payments must consist of at least 60% for payroll costs and the remaining
amount up to a maximum of 40% can be used for certain non-payroll related costs such as mortgage interest, rent and utilities.
The bank that issued the loan will determine how much of the loan will be forgiven based upon the information provided by the Company
along with evidence of such costs. The $573,500 has been accounted for as a liability on Loop’s balance sheet as of June
30, 2020. Any amount that is forgiven will be accounted for as other income at the time the forgiveness is determined. Any amount
that is not forgiven will remain on the balance sheet as a long-term liability and accrued interest. The remaining balance will
be repaid with interest over the remaining term of the loan.
The
CARES Act also provided that businesses affected by the Coronavirus pandemic would be eligible to apply for a loan under the Economic
Injury Disaster Loan (“EIDL”) Program of the SBA. However, a business can only apply for a loan under PPP or EIDL,
not both. Loop applied for an EIDL loan as well but accepted the PPP Loan and therefore was no longer eligible to borrow under
the EIDL Program. However, as part of the EIDL loan application process, Loop was able to request a $10,000 grant from the EIDL
Program. The grant does not have to be repaid as a result of not getting the EIDL. However, the $10,000 grant will be reduced against
the amount of the PPP loan qualifying to be forgiven. The $10,000 EIDL grant has been recognized in Q2 2020.
COVID-19
The spread of a novel strain of coronavirus
(COVID-19) around the world in the first half of 2020 has caused significant volatility in U.S. and international markets. The
Company experienced a 17% decline in revenues in the nine months ended September 30, 2020 as compared to the nine months ended
September 30, 2019, which was directly related to business closures of key customers.
Share Purchase
Agreement
The
Company entered into a Share Purchase Agreement dated August 1, 2020 for the private offer to a limited number of accredited investors
of up to $6,500,000 worth of restricted shares of common stock of the Company at an issue price of $1.25 per share. The offer is
ongoing and will remain open until October 31, 2020, unless earlier terminated or extended for an additional thirty (30) days in
the sole discretion of the Company. The Shares are subject to restriction on resales until that date that is 365 days following
the relevant closing date for any individual investor. As of October 20, 2020, the Company had raised an aggregate of $2,950,000
and issued 2,360,000 shares under the Share Purchase Agreement, with all but 344,000 shares issued prior to October 1.
Acquisition
On
October 13, 2020, the Company acquired from SPKR INC., a Delaware corporation (“Seller”), the Seller’s Website
and Internet Domain Name, Spkr.com (the “Website”) and a mobile application Seller developed (the “App”),
available in the Apple Inc. IOS Store as Spkr: Curated Podcast Radio, and related assets (the Website, the App and all other assets
associated with Seller’s audio network business that were acquired, the “Acquired Assets”) pursuant to an Asset
Acquisition Agreement dated the same date (the “Purchase Agreement”) entered into by and between the Company, Seller
and PTK Investments, LLC, a Delaware limited liability company (dba PTK Capital), in its capacity as the Seller representative
under the Purchase Agreement (the “Acquisition”). The purchase price for the Acquired Assets consisted of consideration
of 1,369,863 shares of the Company’s common stock, par value $0.0001 per share, (the “Shares”) valued at $3,000,000.
The Shares were issued to the Seller on October 13, 2020. The Shares are subject to restriction on resales until that date that
is one year following the closing of the Acquisition, or, if sooner, the date that is 90 days after the Company’s securities
begin trading on the NASDAQ which is binding on any holder receiving any of the Shares from Seller.