NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2021
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 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 second quarter of 2021 on the NASDAQ. In late 2020, LPI was renamed to Advancing Equality Preference,
Inc.
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 $14,858,316 and have negative working capital of $5,238,743 as of March 31, 2021. 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 2021. 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 the Company and our wholly owned subsidiaries,
LGBTQ Loyalty, LLC, and Advancing Equality Preference, 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.
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 March 31, 2021:
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability on convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,715,864
|
|
|
$
|
1,715,864
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,715,864
|
|
|
$
|
1,715,864
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
as of December 31, 2020:
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability on convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,930,235
|
|
|
$
|
1,930,235
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,930,235
|
|
|
$
|
1,930,235
|
|
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.
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 months ended March 31, 2021 and 2020, and the outstanding stock options and warrants are anti-dilutive. For the
three months ended March 31, 2021 and 2020, the following number of potentially dilutive shares have been excluded from diluted
net loss since such inclusion would be anti-dilutive:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Stock options outstanding
|
|
|
1,800,000
|
|
|
|
5,800,000
|
|
|
Warrants
|
|
|
235,833,333
|
|
|
|
7,000,000
|
|
|
Shares to be issued upon conversion of notes
|
|
|
372,689,648
|
|
|
|
190,488,453
|
|
|
|
|
|
610,322,981
|
|
|
|
203,288,453
|
|
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
The
Company capitalizes 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
March 31, 2021 and December 31, 2020, intangible assets, net was $71,837 and $78,285, respectively. Amortization expense was $6,448
for both the three months ended March 31, 2021 and 2020.
Note
4. Notes Payable
As
of March 31, 2021 and December 31, 2020, the Company has a note payable outstanding in the amount of $2,486 and $2,986, respectively.
The note is past due at March 31, 2021 and is therefore in default. The note accrues interest at a rate of 2% per annum. During
the three months ended March 31, 2021, the Company repaid $500 pertaining to this note.
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 matured on June 20, 2020. As of March 31, 2021, the full principal amount was
outstanding and in default.
Note
5. Convertible Notes Payable
On
January 21, 2021, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up January
2021 Note”). Pursuant to the terms of the Power Up January 2021 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 $86,350. The Power Up January 2021 Note matures
and becomes due and payable on March 5, 2022 and accrues interest at a rate of 10% per annum. The Power Up January 2021 Note,
plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.
The
Power Up January 2021 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 5, 2021, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up March
2021 Note”). Pursuant to the terms of the Power Up March 2021 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 $86,350. The Power Up March 2021 Note matures and
becomes due and payable on March 5, 2022 and accrues interest at a rate of 10% per annum. The Power Up March 2021 Note, plus all
accrued but unpaid interest, may be prepaid at any time prior to the maturity date.
The
Power Up March 2021 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.
During
the three months ended March 31, 2021 and 2020, the Company recorded amortization of debt discount and original discount of $217,754
and $202,239, 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 three months ended March
31, 2021:
|
|
|
Convertible
|
|
|
|
|
Debenture
|
|
|
Balance as of December 31, 2020
|
|
$
|
1,661,520
|
|
|
Issuance of convertible debenture - principal amount
|
|
|
172,700
|
|
|
Issuance of convertible debenture - debt discount and original issue discount
|
|
|
(172,700
|
)
|
|
Amortization of debt discount and original issue discount
|
|
|
217,754
|
|
|
Conversion to common stock, net of discount
|
|
|
(97,703
|
)
|
|
Balance as of March 31, 2021
|
|
$
|
1,781,571
|
|
The
following comprises the balance of the convertible debenture outstanding at March 31, 2021 and December 31, 2020:
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Principal amount outstanding
|
|
$
|
2,490,224
|
|
|
$
|
2,458,024
|
|
|
Less: Unamortized original issue discount
|
|
|
(80,684
|
)
|
|
|
(94,857
|
)
|
|
Less: Unamortized debt discount
|
|
|
(627,969
|
)
|
|
|
(701,647
|
)
|
|
|
|
$
|
1,781,571
|
|
|
$
|
1,661,520
|
|
As of March 31, 2021 and December 31,
2020 convertible notes payable includes a balance of $615,134 pertaining to a parity default penalty booked in 2020. The EMA Note
has an original principal of $85,000. The Company is currently settling the remaining note into shares and warrants to be issued
to EMA, and expects the ultimate value to be less than the stated balance included in the consolidated balance sheet.
Note
6. Derivative Liability
We
evaluated the terms of the conversion features of each of the outstanding convertible 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:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Risk-free interest rate
|
|
|
0.09
|
%
|
|
|
1.04
|
%
|
|
Expected term (in years)
|
|
|
1.00
|
|
|
|
0.86
|
|
|
Expected volatility
|
|
|
233.1
|
%
|
|
|
154.3
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Exercise price of underlying common shares
|
|
$
|
0.004
|
|
|
$
|
0.02
|
|
During
the three months ended March 31, 2021, 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 $264,460 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 three months ended March 31, 2021:
|
|
|
Derivative
|
|
|
|
|
Liability
|
|
|
Balance as of December 31, 2020
|
|
$
|
1,930,235
|
|
|
Initial fair value on issuance of convertible debenture
|
|
|
414,421
|
|
|
Conversion of principal amount of debenture to common stock
|
|
|
(215,818
|
)
|
|
Change in fair value of derivative liability
|
|
|
(412,974
|
)
|
|
Balance as of March 31, 2021
|
|
$
|
1,715,864
|
|
Note
7. Stockholders’ Equity (Deficit)
Common
Stock
2021
Transactions
In
March 2021, an aggregate of 140,000,000 shares of common stock were issued to the board members for accrued dividends as well
as current compensation the year ended December 31, 2021. Of these shares issuances, $961,666 is included in personnel costs in
the consolidated statements of operations.
In
March 2021, an aggregate of 31,834,386 shares of common stock were issued to employees and consultants for accrued and current
consulting services for a total fair value of $236,448.
During
the three months ended March 31, the Company issued 37,538,998 shares of common stock pursuant to conversion of debentures in
the principal amount of $140,500.
2020
Transactions
In
January 2020, we issued 294,994 shares of common stock to a bridge noteholder in connection with promissory notes received.
In
January 2020, we issued 6,662,312 shares to a consultant for 2019 services which were accrued at a fair value of $318,000.
In
March 2020, we issued 1,000,000 shares to Orlando Reece pursuant to his appointment to the Board of Directors.
During
the three months ended March 31, 2020, we issued an aggregate of 4,170,000 shares of common stock to Pride Partners pursuant to
warrant exercises. Refer to Note 8.
Series
B Convertible Preferred Stock
As
of March 31, 2021, we had $13,800 in remaining accrued Series B dividends.
Note
8. Options and Warrants
Options
As
of March 31, 2021 and December 31, 2020, we had 1,800,000 options remaining outstanding pursuant to the 2012 Equity Incentive
Plan.
There
was no stock based compensation expense for options for the three months ended March 31, 2021 and 2020. There will be no additional
compensation expense recognized in future periods.
Warrants
As
of March 31, 2021 and December 31, 2020, we had 235,833,333 warrants outstanding with a weighted average exercise price of $0.02
per share.
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
Notes
payable to related parties at March 31, 2021 and December 31, 2020 totaled $17,885 with a 2% annual interest rate. Currently the
Company has defaulted on all of their related party loan obligations. Forbearance has been granted by the related parties on all
loans.
Accrued
Salaries and Compensation
As
of March 31, 2021 and December 31, 2020, accrued salaries to our company officers and executive director totaled $319,735 and
$299,732, respectively and is included in accrued salaries and consulting fees in our consolidated balance sheets.
In
March 2021, we issued 20,0000,000 shares of common stock to the Chief Operating Officer for a total fair value of $160,000.
Board
of Directors
In
March 2021, we issued 20,000,000 shares of common stock to each of the seven board members, including the Chief Executive Officer,
for an aggregate of 140,000,000 shares. Of these share issuances, $961,666 is included in personnel costs in the consolidated
statements of operations and the remaining $138,334 was converted from accrued salaries and consulting fees.
Total
accrued directors’ compensation of $0 and $94,584 at March 31, 2021 and December 31, 2020, 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 March 31, 2020 and December
31, 2020, 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 May 17, 2021 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
April 2021, we filed a Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock
(the “Series D COD”) with the Delaware Secretary of State to create a new class of preferred stock, $0.001 par value
per share, designated Series D Convertible Preferred Stock and authorized the issuance of up to four hundred (1,000) shares
of Series D Preferred Stock. The Series D Preferred Stock has a stated value of $1,200 per share (“Stated Value”)
and the holder of the Series D Preferred Stock has the right to receive a dividend equal to eight percent (8%) per annum, payable
quarterly, beginning on the issuance date of the Series D Preferred Stock and ending on the date that Series D Preferred Share
has been converted or redeemed. Dividends may be paid in cash or in shares of Series D Preferred Stock at the discretion of the
Company. Further, the holders of the Series D Preferred Stock has the right to receive assets in the event of liquidation, dissolution
or winding up before any distribution or payment shall be made to the holders of any securities junior to the Series D Preferred
Stock.
On
April 8, 2021, the Company issued 400 shares of Series D Preferred Stock to GHS Investments, LLC pursuant to a Securities Purchase
Agreement (“GHS Agreement”) for net proceeds of $427,600. In conjunction with the GHS Agreement, the Company issued
warrants to purchase 40,000,000 shares of common stock at an exercise price of $0.001.
On May 4, 2021, the Company entered into
a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up May 2021 Note”). Pursuant to the terms
of the Power Up 2021 Note, the lender agreed to purchase from the Company, for a purchase price of $150,000, a 10% convertible
note in the principal amount of $169,125. The Power Up 2021 Note matures and becomes due and payable on May 4, 2022 and accrues
interest at a rate of 10% per annum. The Power Up May 2021 Note, plus all accrued but unpaid interest, may be prepaid at any time
prior to the maturity date.
The Power Up May 2021 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 May 12, 2021, the Company issued 150
shares of Series D Preferred Stock to GHS Investments, LLC pursuant to a Securities Purchase Agreement (“GHS Agreement”)
for net proceeds of $146,500. In conjunction with the GHS Agreement, the Company issued warrants to purchase 1,500,000 shares
of common stock at an exercise price of $0.001.
Through the issuance date, the Company
issued an aggregate of 100,448,779 shares of common stock pursuant to conversions of Power Up, EMA and JSJ debentures.
In May 2021, the Company issued an aggregate
of 41,000,000 shares of common stock to Pride Partners pursuant to conversion of 41,000 shares of Series C preferred stock.