Item 5. Market for Registrant’s Common Equity
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Market Information
Our shares of Common Stock are quoted
on the OTCQB under the symbol “JMDA”. Prior to March 3, 2016, our shares of Common Stock were quoted on the OTCQB
under the symbol “GTPH”. The OTCQB is a quotation service that displays real-time quotes, last-sale prices, and volume
information in over-the-counter (“OTC”) equity securities. An OTCQB equity security is not listed or traded on a national
securities exchange.
(b) Holders of Common Equity
As of April 1, 2019, there were approximately
266 stockholders of record. An additional number of stockholders are beneficial holders of our Common Stock in “street name”
through banks, brokers and other financial institutions that are the record holders.
(c) Dividend Information
We have not paid any cash dividends to
our holders of common stock. The declaration of any future cash dividends is at the discretion of our board of directors and depends
upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent
conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings,
if any, in our business operations.
(d) Securities Authorized for Issuance
under Equity Compensation Plans
There
are currently 17,649,990 outstanding options to purchase our securities with a weighted exercise price of $0.42 per option. Currently,
the Company has 350,010 available options to issue under its Plan (as defined below).
The Company has accrued 500,000 options to be issued either under the 2015 Stock Incentive and Award Plan
if and when the authorized shares under such plan are increased, or upon the approval of a new Stock Incentive and Award Plan,
in both instances to be approved by the shareholders.
Option Plan
Pursuant to the Merger, on February 5,
2016, the Company assumed Jerrick’s 2015 Stock Incentive and Award Plan (the “Plan”) which provides for the
issuance of up to 18,000,000 shares of the Company’s common stock.
The purpose of the Plan is to provide
additional incentive to those officers, employees, consultants and non-employee directors of the Company and its parents, subsidiaries
and affiliates whose contributions are essential to the growth and success of the Company’s business.
Eligible recipients of option awards are
employees, officers, consultants or directors (including non-employee directors) of the Company or of any parent, subsidiary or
affiliate of the Company. Upon recommendation from the board or the Compensation Committee, the board has the authority to grant
to any eligible recipient any options, restricted stock or other awards valued in whole or in part by reference to, or otherwise
based on, our common stock.
The provisions of each option granted
need not be the same with respect to each option recipient. Option recipients shall enter into award agreements with us, in such
form as the board shall determine.
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The Plan shall be administered by the
Compensation Committee consisting of two or more independent, non-employee and outside directors. In the absence of such a Committee,
the board of the Company shall administer the Plan.
Each Option shall contain the following
material terms:
(i) the
purchase price of each share of Common Stock with respect to Incentive Options shall
be determined by the Committee at the time of grant, shall not be less than 100% of the
Fair Market Value (defined as the closing price on the final trading day immediately
prior to the grant on the principal exchange or quotation system on which the Common
Stock is listed or quoted, as applicable) of the Common Stock of the Company, provided
that if the recipient of the Option owns more than ten percent (10%) of the total
combined voting power of the Company, the exercise price shall be at least 110% of the
Fair Market Value;
(ii) The
purchase price of each share of Common Stock purchasable under a Non-qualified Option
shall be at least 100% of the Fair Market Value of such share of Common Stock on the
date the Non-qualified Option is granted, unless the Committee, in its sole and
absolute discretion, determines to set the purchase price of such Non-qualified Option
below Fair Market Value.
(iii) the
term of each Option shall be fixed by the Committee, provided that such Option
shall not be exercisable more than five (5) years after the date such Option is granted,
and provided further that with respect to an Incentive Option, if the recipient
owns more than ten percent (10%) of the total combined voting power of the Company, the
Incentive Option shall not be exercisable more than five (5) years after the date such
Incentive Option is granted;
(iv) subject
to acceleration in the event of a Change of Control of the Company (as further described
in the Plan), the period during which the Options vest shall be designated by the Committee
or, in the absence of any Option vesting periods designated by the Committee at the time
of grant, shall vest and become exercisable in equal amounts on each fiscal quarter of
the Company through the four (4) year anniversary of the date on which the Option was
granted;
(vi) no
Option is transferable and each is exercisable only by the recipient of such Option except
in the event of the death of the recipient; and
(vii) with
respect to Incentive Options, the aggregate Fair Market Value of Common Stock exercisable
for the first time during any calendar year shall not exceed $100,000.
Each award of Restricted Stock is subject
to the following material terms:
(i) no
rights to an award of Restricted Stock are granted to the intended recipient of Restricted
Stock unless and until the grant of Restricted Stock is accepted within the period prescribed
by the Compensation Committee;
(ii) Restricted
Stock shall not be delivered until they are free of any restrictions specified by the
Compensation Committee at the time of grant;
(iii) recipients
of Restricted Stock have the rights of a stockholder of the Company as of the date of
the grant of the Restricted Stock;
(iv) shares
of Restricted Stock are forfeitable until the terms of the Restricted Stock grant have
been satisfied or the employment with the Company is terminated; and
(v) the
Restricted Stock is not transferable until the date on which the Compensation Committee
has specified such restrictions have lapsed.
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(e) Unregistered Sales of Equity Securities
During the year ended December 31, 2018,
we issued securities that were not registered under the Securities Act, and were not previously disclosed in a Current Report
on Form 8-K or Quarterly Report on Form 10-Q as listed below. All of the securities discussed in this Item 5(e) were issued in
reliance on the exemption under Section 4(a)(2) of the Securities Act.
The January 2018 Rosen Loan Agreement
On January 16, 2018, the Company entered
into a loan agreement (the “January 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory
note in the principal amount of $60,000 (the “January 2018 Rosen Note”). The January 2018 Rosen Note is secured by
Jeremy Frommer, whereas upon default Mr. Frommer would owe his own personal default shares of the Company’s common stock
to Rosen equal to the amount of principal outstanding divided by 0.20. Pursuant to the January 2018 Rosen Loan Agreement, the
January 2018 Rosen Note bears interest at a rate of 6% per annum and is payable on the maturity date of January 31, 2018 (the
“January 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other
amounts due under the secured term loan in the principal amount of $1,000,000 issued by Mr. Rosen are due. During the year ended
December 31, 2018, the Company repaid $60,000 in principal and $200 in interest and the loan is no longer outstanding.
The January 2018 Gordon Loan Agreement
On January 16, 2018, the Company entered
into a loan agreement (the “January 2018 Gordon Loan Agreement”) with Mr. Christopher Gordon (“Gordon”),
whereby the Company issued Gordon a promissory note in the principal amount of $40,000 (the “January 2018 Gordon Note”).
The January 2018 Gordon Note is secured by Jeremy Frommer, whereas upon default Mr. Frommer would owe his own personal default
shares of the Company’s common stock to Gordon equal to the amount of principal outstanding divided by 0.20. Pursuant to
the January 2018 Gordon Loan Agreement, the January 2018 Gordon Note bears interest at a rate of 6% per annum and payable on the
maturity date of January 31, 2018 (the “January 2018 Gordon Maturity Date”) at which time all outstanding principal,
accrued and unpaid interest and other amounts due under the January 2018 Gordon Note are due. During the year ended December 31,
2018, the Company repaid $40,000 in principal and $105 in interest and the loan is no longer outstanding.
The February 2018 Note
On February 8, 2018, the Company
issued a convertible note to a third-party lender totaling $40,750 (the “February 2018 Note”). The February 2018
Note accrues interest at 18% per annum and matures with interest and principal both due on February 8, 2020. In addition, the
Company issued a warrant to purchase 81,500 shares of Company common stock. The warrant entitles the holder to purchase the
Company’s common stock at a purchase price of $0.20 per share for a period of five years from the issue date. The
Company recorded a $7,963 debt discount relating to the warrants issued to the investor based on the relative fair value of
each equity instrument on the dates of issuance and an original issue discount of $5,298. The debt discount is being accreted
over the life of the note. The February 2018 Note and accrued interest is convertible at a conversion price of $0.20 per
share, subject to adjustment. During the year ended December 31, 2018 the Company repaid $40,750 of principal and $3,548 of
unpaid interest and the loan is no longer outstanding.
The First March 2018 Rosen Loan
Agreement
On March 4, 2018, the Company entered into
a loan agreement (the “First March 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory
note in the principal amount of $10,000 (the “First March 2018 Rosen Note”). As additional consideration for entering
in the First March 2018 Rosen Note Loan Agreement, the Company issued Rosen a five-year warrant to purchase 10,000 shares of the
Company’s common stock at a purchase price of $0.20 per share. Pursuant to the First March 2018 Rosen Loan Agreement, the
First March 2018 Rosen Note bears interest at a rate of 12% per annum and is payable on the maturity date of March 19, 2018 (the
“First March 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other
amounts due under the First March 2018 Rosen Note was due. During the year ended December 31, 2018, the Company repaid $10,000
in principal and $260 in interest and the loan is no longer outstanding.
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The Second March 2018 Rosen Loan
Agreement
On
March 9, 2018, the Company entered into a loan agreement (the “Second March 2018 Rosen Loan Agreement”) with Rosen,
whereby the Company issued Rosen a promissory note in the principal amount of $15,000 (the “Second March 2018 Rosen Note”).
As additional consideration for entering in the Second March 2018 Rosen Loan Agreement, the Company issued Rosen a five-year warrant
to purchase 15,000 shares of the Company’s common stock at a purchase price of $0.20 per share. Pursuant to the Second March
2018 Rosen Loan Agreement, the Second March 2018 Rosen Note bears interest at a rate of 12% per annum and is payable on the maturity
date of March 24, 2018 (the “Second March 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued
and unpaid interest and other amounts due under the Second March 2018 Rosen Note was due. During the year ended December 31, 2018,
the Company repaid $15,000 in principal and $365 in interest and the loan is no longer outstanding.
The Third March 2018 Rosen Loan
Agreement
On
March 13, 2018, the Company entered into a loan agreement (the “Third March 2018 Rosen Loan Agreement”) with Rosen,
whereby the Company issued Rosen a promissory note in the principal amount of $10,000 (the “Third March 2018 Rosen Note”).
As additional consideration for entering in the Third March 2018 Rosen Loan Agreement, the Company issued Rosen a five-year warrant
to purchase 10,000 shares of the Company’s common stock at a purchase price of $0.20 per share. Pursuant to the Third March
2018 Rosen Loan Agreement, the Third March 2018 Rosen Note bears interest at a rate of 12% per annum and is payable on the maturity
date of March 28, 2018 (the “Third March 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued
and unpaid interest and other amounts due under the Third March 2018 Rosen Note was due. During the year ended December 31, 2018,
the Company repaid $10,000 in principal and $230 in interest and the loan is no longer outstanding.
The May 2018 Schiller Loan Agreement
On May 2, 2018, the Company entered
into a loan agreement (the “May 2018 Schiller Loan Agreement”) with Schiller, a member of the Board, whereby the
Company issued Schiller a promissory note in the principal amount of $100,000 (the “May 2018 Schiller Note”). As
additional consideration for entering in the May 2018 Schiller Loan Agreement, the Company issued Schiller a four-year
warrant to purchase 300,000 shares of the Company’s common stock at a purchase price of $0.20 per share. Pursuant to
the May 2018 Schiller Loan Agreement, the May 2018 Schiller Note bears interest at a rate of 13% per annum and is payable on
the maturity date of February 02, 2019 (the “May 2018 Schiller Maturity Date”). During the year ended December
31, 2018, the Company converted $100,000 of principal and $4,369 of unpaid interest into the August 2018 Equity Raise (as
defined below) and the loan is no longer outstanding.
The June 2018 Frommer Loan Agreement
On June 29, 2018, the Company entered
into a loan agreement (the “June 2018 Frommer Loan Agreement”) with Jeremy Frommer, an officer of the Company,
whereby the Company issued Frommer a promissory note in the principal amount of $10,000 (the “June 2018 Frommer
Note”). As additional consideration for entering in the June 2018 Frommer Note Loan Agreement, the Company issued
Frommer a four-year warrant to purchase 30,000 shares of the Company’s common stock at a purchase price of $0.20 per
share. Pursuant to the June 2018 Frommer Loan Agreement, the June 2018 Frommer Note bears interest at a rate of 6% per annum
and payable on the maturity date of August 17, 2018 (the “June 2018 Frommer Maturity Date”). On November 8, 2018
the Company executed an agreement that extended the maturity date of the June 2018 Frommer Loan Agreement to March 7, 2019.
As part of the extension agreement, the Company issued Frommer an additional 40,854 warrants to purchase common stock of the
Company at an exercise price of $0.30. On March 29, 2019, the Company executed an agreement to further extend the maturity date of the
June 2018 Frommer Loan Agreement to May 15, 2019.
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The First July 2018 Schiller Loan
Agreement
On July 3, 2018, the Company entered into
a loan agreement (the “First July 2018 Schiller Loan Agreement”) with Schiller, a member of the Board, whereby the
Company issued Schiller a promissory note in the principal aggregate amount of $35,000 (the “First July 2018 Schiller Note”).
As additional consideration for entering in the First July 2018 Schiller Loan Agreement, the Company issued Schiller a four-year
warrant to purchase 75,000 shares of the Company’s common stock at a purchase price of $0.20 per share. Pursuant to the agreement,
the note bears interest at a rate of 6% per annum and payable on the maturity date of August 17, 2018. Subsequent to the
balance sheet date, on November 8, 2018 the Company executed upon an agreement that extended the maturity date of this loan to
March 7, 2019. As part of the extension agreement, the Company issued Schiller warrants to purchase 142,987 shares of common stock
of the Company at an exercise price of $0.30. On March 29, the Company executed an agreement to further extend the maturity date of this loan to May
15, 2019.
The Second July 2018 Schiller Loan
Agreement
On July 17, 2018, the Company entered into
a loan agreement (the “Second July 2018 Schiller Loan Agreement”) with Schiller, a member of the Board, whereby the
Company issued Schiller a promissory note in the principal aggregate amount of $25,000 (the “Second July 2018 Schiller Note”).
As additional consideration for entering in the Second July 2018 Schiller Loan Agreement, the Company issued Schiller a four-year
warrant to purchase 75,000 shares of the Company’s common stock at a purchase price of $0.20 per share. Pursuant to the Second
July 2018 Schiller Loan Agreement, the Second July 2018 Schiller Note bears interest at a rate of 6% per annum and payable on the
maturity date of August 17, 2018. On November 8, 2018 the Company executed upon an agreement that extended the maturity date of
this loan to March 7, 2019. As part of the extension agreement, the Company issued Schiller warrants to purchase 101,900 shares
of common stock of the Company at an exercise price of $0.30. On March 29, the Company executed an agreement to further extend the maturity date of this loan to May
15, 2019.
The First July 2018 Rosen Loan Agreements
On July 12, 2018, the Company entered into
a loan agreement (the “First July 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory
note in the principal aggregate amount of $10,000 (the “First July 2018 Rosen Note”). Pursuant to the First July 2018
Rosen Loan Agreement, the note bears interest at a rate of 6% per annum and payable on the maturity date of August 17, 2018. Subsequent
to the On November 8, 2018 the Company executed upon an agreement that extended the maturity date of this loan to March 7, 2019.
As part of the extension agreement, the Company issued Rosen warrants to purchase 27,534 shares of common stock of the Company
at an exercise price of $0.30. On March 29, the Company executed an agreement to further extend the maturity date of this loan
to May 15, 2019.
The Second July 2018 Rosen Loan
Agreements
On July 18, 2018, the Company entered into a loan agreement (the “Second July 2018 Rosen Loan Agreement”)
with Rosen, whereby the Company issued Rosen a promissory note in the principal aggregate amount of $50,000 (the “Second
July 2018 Rosen Note”) resulting from the conversion of a demand note (as described below). As additional consideration for
entering into the Second July 2018 Rosen Loan Agreement, the Company issued Rosen a four-year warrant to purchase 150,000 shares
of the Company’s common stock at a purchase price of $0.20 per share. The Second July 2018 Rosen Note bears interest at a
rate of 6% per annum and payable on the maturity date of August 17, 2018. On November 8, 2018 the Company executed upon an agreement
that extended the maturity date of this loan to March 7, 2019. As part of the extension agreement, the Company issued Rosen warrants
to purchase 203,967 shares of common stock of the Company at an exercise price of $0.30. On March 29, the Company executed an agreement
to further extend the maturity date of this loan to May 15, 2019.
The November 2018 Rosen Loan Agreement
On November 29, 2018, the Company
entered into a loan agreement (the “November 2018 Rosen Loan Agreement”) with Rosen, whereby the Company issued
Rosen a promissory note in the principal amount of $25,000 (the “November 2018 Rosen Note”). As additional
consideration for entering in the November 2018 Rosen Note Loan Agreement, the Company issued Rosen a four-year warrant to
purchase 25,000 shares of the Company’s common stock at a purchase price of $0.30 per share. The November 2018 Rosen
Note bears interest at a rate of 6% per annum and is payable on the maturity date of December 23, 2018. During the year ended
December 31, 2018, the Company repaid $25,000 of principal and $33 of unpaid interest and the loan is no longer outstanding.
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The December 2018 Rosen Loan Agreement
On
December 27, 2018, the Company entered into a loan agreement (the “December 2018 Rosen Loan Agreement”) with Rosen,
whereby the Company issued Rosen a promissory note in the principal amount of $75,000 (the “December 2018 Rosen Note”).
As additional consideration for entering in the December 2018 Rosen Note Loan Agreement, the Company issued Rosen a four-year
warrant to purchase 75,000 shares of the Company’s common stock at a purchase price of $0.30 per share. The December 2018
Rosen Note bears interest at a rate of 6% per annum and is payable on the maturity date of January 26, 2019. On March 29, the Company executed an agreement to further extend the maturity date of this loan
to May 15, 2019.
The December 2018 Gravitas Capital
Loan Agreement
On
December 27, 2018, the Company entered into a loan agreement (the “December 2018 Gravitas Capital Loan Agreement”)
with Gravitas Capital, whereby the Company issued Gravitas Capital a promissory note in the principal amount of $50,000 (the “December
2018 Gravitas Capital Note”). As additional consideration for entering in the December 2018 Gravitas Capital Note Loan Agreement,
the Company issued Gravitas Capital a four-year warrant to purchase 50,000 shares of the Company’s common stock at a purchase
price of $0.30 per share. The December 2018 Gravitas Capital Note bears interest at a rate of 6% per annum and is payable on the
maturity date of January 27, 2019. In January 2019, the Company repaid $50,000 in principal and $250 in interest, and the loan is no longer
outstanding.
Item 6. Selected Financial Data.
As a Smaller Reporting Company, the Company is not required
to include the disclosure under this Item 6 Selected Financial Data.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
THE FOLLOWING DISCUSSION OF OUR PLAN OF
OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL
STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS
OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY
CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER
FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND
THOSE INCLUDED ELSEWHERE IN THIS REPORT.
Overview
We intend for this discussion to provide
information that will assist in understanding our financial statements, the changes in certain key items in those financial statements,
and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.
This discussion should be read in conjunction with our financial statements and accompanying notes for the years ended December
31, 2018 and 2017, included elsewhere in this report.
The Company develops technology-based
solutions designed to solve for challenges that have resulted from disruption within the broad digital media and content generation
business environment. Jerrick’s flagship product Vocal is a long-form, digital publishing platform focused on supporting
content creators with content management tools that are embedded within digital communities. Vocal is architected to enable targeted
marketing of branded content and e-commerce opportunities in long-form content.
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Vocal serves as a versatile home for content
creators and brands. The platform supports multiple forms of content such as: short videos, podcasts, music, and written word.
We partner with content creators and brands
that recognize difficulties inherent in the digital advertising space and can benefit from branded content marketing opportunities
available on publishing platforms like Vocal.
During the first half of Fiscal Year 2019,
Jerrick plans to launch additional revenue lines, including brand subscriptions to access the platform and its community of creators
as well as a subscription model for content creator upgrade tools. The Company also intends to release further enhancements to
the Vocal editor and introduce additional social and user analytics features. Further, in 2019 the Company plans to introduce Software
as a Service (SaaS) subscriptions to the Vocal platform.
Results of Operations
Liquidity and Capital Resources
The following table summarizes total current
assets, liabilities and working capital at December 31, 2018 compared to December 31, 2017:
December 31,
2018
December 31,
2017
Increase /
(Decrease)
Current Assets
$ 6,500
$ 112,376
$ (105,876 )
Current Liabilities
$ 2,569,584
$ 3,687,200
$ (1,117,616 )
Working Capital Deficit
$ (2,563,084 )
$ (3,574,824 )
$ 1,011,740
At December 31, 2018, we had a working
capital deficit of $2,563,084 as compared to a working capital deficit of $3,574,824 at December 31, 2017, a decrease of $1,011,740.
The decrease is primarily attributable to the decrease in accounts payable and other accrued expenses, demand loan, line of credit
and notes payable. These were offset by a decrease in cash.
Net Cash
Net cash used in operating activities for
the years ended December 31, 2018 and 2017, was $4,972,814 and $3,852,552, respectively. The net loss for the years ended December
31, 2018 and 2017 was $12,013,542 and $8,751,586, respectively. This change is primarily attributable to the net loss for the current
period offset by share-based payments in the amount of $346,954 to employees and consultants for services rendered, the accretion
of debt discount and debt issuance costs of $2,090,286 due to the incentives given with debentures, and a loss on extinguishment
of debt of 3,610,049, and a gain on settlement of debt of $16,257 for the incentives given to amend or convert debt in addition
to a change in accounts payable and accrued expenses of $1,039,690. These increases were offset by gain on settlement of vendor
liabilities of $122,886 and a change in accounts receivable of $5,175 during the year ended December 31, 2018.
Net cash used in investing activities
for the years ended December 31, 2018 and 2017 was $27,605 and $14,662, respectively. This change is attributable to the cash
paid for leasehold improvements.
Net cash provided by financing activities
for the years ended December 31, 2018 and 2017 was $4,889,368 and $3,803,771. During the 2018 period, the Company was predominantly
financed by issuance of common stock, debt and related party notes of $2,787,462, $2,366,987 and $764,852, respectively to fund
operations. These increases were offset by repayment of line of credit, notes and related party notes of $44,996, $491,189 and
$205,000, respectively. The Company also paid $166,761 and $35,115 for debt issuance and stock issuance costs during the year ended
December 31, 2018.
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Summary of Statements of Operations
for the Years Ended December 31, 2018 and 2017:
Year Ended
December 31,
2018
December 31,
2017
Revenue
$ 80,898
$ 95,653
Gross Margin
$ 80,898
$ 95,653
Operating Expenses
$ (5,767,153 )
$ (5,657,981 )
Loss from operations
$ (5,686,255 )
$ (5,562,328 )
Other Expenses
$ (6,327,287 )
$ (3,189,258 )
Net loss
$ (12,013,542 )
$ (8,751,586 )
Loss per common share – basic and diluted
$ (0.21 )
$ (0.23 )
Revenue
Revenue was $80,898 for the year ended
December 31, 2018, as compared to $95,653 for the comparable year ended December 31, 2017, a decrease of $14,755. The decrease
in revenue is primarily attributable to the Company’s transitioning from legacy businesses to generating revenue through
native advertising, branded marketing, and affiliate sales, resulting from the creation of genre specific, user generated content
community websites. As part of that transition, the Company focused its efforts throughout 2018 on the development of its proprietary
Vocal software platform to support the scalability of its business model.
Operating Expenses
Operating expenses for the year ended December
31, 2018 were $5,767,153 as compared to $5,657,981 for the year ended December 31, 2017. The increase of $109,172 in operating
expenses is the result of an increase in consulting fees, offset by a reduction in employee compensation.
Loss from Operations
Loss
from operations for the year ended December 31, 2018 was $5,686,255 as compared to loss of $5,562,328 for the year
ended December 31, 2017. The increase in the loss from operations is primarily due to increased expenses due to the
continued development of the Vocal platform and relocation expenses, offset by a Company-wide effort to reduce operating
expenses while creating efficiencies in the revenue generating process.
Other Income (Expenses)
Other income (expenses) for the year ended
December 31, 2018 was $(6,327,287) as compared to $(3,189,258) for the year ended December 31, 2017. Other expenses during the
year ended December 31, 2018 was comprised of interest expense of $(923,008) on notes and related party notes, accretion of debt
discount and issuance cost of $(2,090,286) due to the incentives given with debentures, loss on extinguishment of debt of $(3,453,137),
and a gain on settlement of liabilities of $139,144 for the incentives given to amend or convert debt. During the year ended December
31, 2017, other expenses were comprised of interest expense of $(477,005) on notes and related party notes and accretion of debt
discount and issuance cost of $(1,828,027) due to the incentives given with debentures, gain on extinguishment of liabilities of
$169,984 for the incentives given to amend or convert debt.
Net Loss
Net loss attributable to common shareholder
for year ended December 31, 2018, was $14,204,408, or loss per share of $0.21, as compared to a net loss of $9,048,909, or loss
per share of $0.23, for the year ended December 31, 2017.
Inflation did not have a material impact
on the Company’s operations for the applicable period. Other than the foregoing, management knows of no trends, demands,
or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.
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Off-Balance
Sheet Arrangements
As of December 31, 2018, we have no off-balance
sheet arrangements.
Critical Accounting Policies
We believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and
Analysis of Financial Condition and Results of Operation.”
Use of Estimates
We use estimates and assumptions in preparing
financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Fair Value Measurements
The fair value of a financial instrument
is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked
to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize
the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy
is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined
into the following three categories:
Level 1 – Quoted prices in active
markets for identical assets or liabilities;
Level 2 – Inputs other than quoted
prices included within Level 1 that are either directly or indirectly observable; and
Level 3 – Unobservable inputs that
are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions
that market participants would use in pricing.
The Company recognizes income and expenses
based on the accrual method of accounting.
Income Taxes
The Company utilizes the liability method
of accounting for income taxes. Under the liability method deferred tax assets and liabilities are determined based on the differences
between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect, when the differences are expected to reverse. An allowance against deferred tax assets is recorded when
it is more likely than not that such tax benefits will not be realized.
Derivative Liability
The Company evaluates its debt and equity
issuances to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted
for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of
this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded
as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded
in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative
instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair
value is reclassified to equity.
In circumstances where the embedded conversion
option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the
convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single,
compound derivative instrument.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting
period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to
liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified
in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected
within 12 months of the balance sheet date.
25
The Company adopted Section 815-40-15
of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded
feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach
to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating
the instrument’s contingent exercise and settlement provisions.
The Company utilizes an option pricing
model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet
date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements
of operations.
Adoption of ASU 2017-11
As noted above, in connection with the securities purchase agreement and debt transactions during the
year ended December 31, 2017, the Company issued warrants and convertible notes, to purchase common stock with an exercise price
of $0.20 and a five-year term. Upon issuance of the warrants and convertible notes, the Company evaluated the note agreement to
determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified
certain equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions, requiring the Company to classify the warrants and convertible notes as a derivative
liability. The Company changed its method of accounting for the convertible notes and warrants through the early adoption of ASU
2017-11 during the year ended December 31, 2017 on a retrospective basis. Accordingly, the Company recorded the warrant derivative
and conversion option derivative liabilities to additional paid in capital upon issuance.
Stock Based Compensation
All stock-based payments to employees,
non-employee consultants, and to nonemployee directors for their services as directors, including any grants of restricted stock
and stock options, are measured at fair value on the grant date and recognized in the statements of operations as compensation
or other expense over the relevant service period. Stock-based payments to nonemployees are recognized as an expense over the
period of performance. Such payments are measured at fair value at the earlier of the date a performance commitment is reached
or the date performance is completed. In addition, for awards that vest immediately and are non-forfeitable the measurement date
is the date the award is issued.
Recent Accounting Pronouncements
Management of the Company is responsible
for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application.
Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial
condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the
need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical
accounting policies and practices are disclosed below as required by generally accepted accounting principles.
Basis of Presentation - Interim Financial
Information
The Company’s consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
26
Use of Estimates and Assumptions and Critical
Accounting Estimates and Assumptions
The preparation of financial statements
in conformity with US 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 dates of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
Critical accounting estimates are estimates
for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or
operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements
were:
(i) Assumption as a going concern: Management
assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets,
and liquidation of liabilities in the normal course of business.
(ii) Fair value of long-lived assets:
Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than
originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated
useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review:
(i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii)
significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use
of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic
trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period
of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually
and more frequently upon the occurrence of such events.
(iii) Valuation allowance for deferred
tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating
loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income
was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset
by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general
economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private
offering, among other factors.
(iv) Estimates and assumptions used in
valuation of equity instruments: Management estimates expected term of share options and similar instruments, expected volatility
of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk-free
rate(s) to value share options and similar instruments.
These significant accounting estimates
or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions,
and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical
experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.
Management regularly evaluates the key
factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances,
historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted
accordingly.
Actual results could differ from those
estimates.
Principles of Consolidation
The Company consolidates all majority-owned
subsidiaries, if any, in which the parent’s power to control exists.
27
As of December 31, 2018, the Company’s
consolidated subsidiaries and/or entities are as follows:
Name
of combined affiliate
State
or other jurisdiction of
incorporation or organization
Company interest
Jerrick Ventures
LLC
The State of Delaware
100
%
Jerrick Australia
Pty Ltd
Australia
100
%
All inter-company balances and transactions
have been eliminated.
Jerrick Australia Pty Ltd does not have
any operations.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10
of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37
of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial
instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about
fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph
820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value
into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets
for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy
defined by Paragraph 820-10-35-37 are described below:
Level 1 Quoted market prices available
in active markets for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs other than
quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 Pricing inputs that are
generally observable inputs and not corroborated by market data.
Financial assets are considered Level
3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the
categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amount of the Company’s
financial assets and liabilities, such as cash, prepaid expenses, accounts payable and accrued liabilities and accrued liquidating
damages approximate their fair value because of the short maturity of those instruments. Transactions involving related parties
cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings
may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions
were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can
be substantiated.
Cash Equivalents
The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash equivalents.
The Company minimizes its credit risk
associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times
may exceed federally insured limits.
28
Property and Equipment
Property and equipment are recorded at
cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred.
Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over
the estimated useful lives of the respective assets as follows:
Estimated
Useful Life
(Years)
Computer equipment and software
3
Furniture and fixture
5
Leasehold improvements
5
Upon sale or retirement of property and
equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the
consolidated statements of operations.
Investments - Cost Method, Equity Method
and Joint Venture
In accordance with sub-topic 323-10 of
the FASB ASC (“Sub-topic 323-10”), the Company accounts for investments in common stock of an investee for which the
Company has significant influence in the operating or financial policies even though the Company holds 50% or less of the common
stock or in-substance common stock.
On January 2, 2013, the Company purchased
a minority interest in a business for proceeds of $83,333. The interest is accounted for under the cost method. The Company tests
the carrying value annually for impairment. The company recorded an impairment of minority investment of $83,333 during the year
ended December 31, 2017.
Commitments and Contingencies
The Company follows subtopic 450-20 of
the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date
the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when
one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature
of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are
generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Derivative Liability
The Company evaluates its debt and equity
issuances to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted
for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of
this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded
as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded
in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative
instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair
value is reclassified to equity.
29
In circumstances where the embedded conversion
option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the
convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single,
compound derivative instrument.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting
period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to
liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified
in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected
within 12 months of the balance sheet date.
The Company adopted Section 815-40-15
of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded
feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach
to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating
the instrument’s contingent exercise and settlement provisions. The Company changed its method of accounting for the debt
and warrants through the early adoption of ASU 2017-11 during the year ended December 31, 2017 on a retrospective basis.
The Company utilizes an option pricing
model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet
date. The Company records the change in the fair value of the derivative as other income or expense in the condensed consolidated
statements of operations.
Revenue Recognition
On January 1, 2018, we adopted Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition
requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (Topic 605), using the modified retrospective
transition method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning
after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported
in accordance with our historic accounting under Topic 605. The impact of adopting the new revenue standard was not material
to our condensed consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.
Under Topic 606, revenue is recognized
when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through
the following steps:
●
identification of the contract, or contracts, with a customer;
●
identification of the performance obligations in the contract;
●
determination of the transaction price;
●
allocation of the transaction price to the performance obligations in the contract; and
●
recognition of revenue when, or as, we satisfy a performance obligation.
Revenue disaggregated by revenue source for the years ended
December 31, 2018 and 2017 consists of the following:
Year Ended December 31,
2018
2017
Branded content
$ 60,485
14,190
Affiliate sales
11,553
10,016
Other revenue
8,860
71,447
$ 80,898
$ 95,653
Branded Content
Branded content represents the revenue
recognized from the Company’s obligation to create and publish branded articles for the Client on the Vocal platform and
promote said stories, tracking engagement for the Client. The performance obligation is satisfied when the Company successfully
publishes the articles on its platform and meets any required promotional milestones as per the contract. The revenue is recognized
over time as the services are performed.
Below are the significant components of
a typical agreement pertaining to branded content revenue:
● The
Company will collect fixed fees ranging from $1,000 to $15,000
● The
articles are created and published within three months of the signed agreement, or as previously negotiated with the Client
30
● The
articles are promoted per the contract and engagement reports are provided to the Client
● The
Client pays 50% at signing and 50% upon completion
● Most
contracts include provisions for Clients to acquire content rights at the end of the campaign for a flat fee
Affiliate sales
Affiliate sales represents the commission
the Company receives when a purchase is made through affiliate links placed within content hosted on the Vocal platform. Affiliate
revenue is earned on a "click through" basis, upon referring visitors, via said links, to an affiliate's site and having
them complete a specific outcome, most commonly a product purchase. The Company uses multiple affiliate platforms, such as Skimlinks,
to form and maintain thousands of vendor relationships. Each vendor establishes their own commission percentage, which typically
range from 2-20%. The revenue is recognized upon receipt as reliable estimates could not be made.
Deferred Revenue
Deferred revenue consists of billings and
payments from clients in advance of revenue recognition. As of December 31, 2018, the Company had deferred revenue of $9,005.
The Company will typically record this as revenue within the next three months as the performance obligations are met.
Accounts Receivable and Allowances
Accounts receivable are recorded and carried
when the Company uploads the articles and reaches the required number of views on the platform. We make estimates for the allowance
for doubtful accounts and allowance for unbilled receivables based upon our assessment of various factors, including historical
experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other
factors that may affect our ability to collect from customers. The Company did not record an allowance during the years ended December
31, 2018 and 2017.
Stock-Based Compensation
The Company recognizes compensation expense
for all equity–based payments granted to employees in accordance with ASC 718 “Compensation – Stock Compensation”.
Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture
rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.
Restricted stock awards are granted at
the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite
service periods, typically over a five-year period (vesting on a straight–line basis). The fair value of a stock award is
equal to the fair market value of a share of Company stock on the grant date.
The fair value of an option award is estimated
on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires
the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is benchmarked against similar companies in a similar industry over the
expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared
any cash dividends on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The
expected forfeiture rate is estimated based on management’s best estimate.
31
Determining the appropriate fair value
model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described
above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best
estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change
and the Company uses different assumptions, our equity–based compensation could be materially different in the future. In
addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected
to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the equity–based compensation
could be significantly different from what the Company has recorded in the current period.
The Company accounts for share–based
payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to Non–Employees”.
The Company determines the fair value of the stock–based payment as either the fair value of the consideration received
or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments
issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date
at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which
the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period
over the requisite service period.
Income Taxes
Income taxes are provided in accordance
with ASC No. 740, “Accounting for Income Taxes”. A deferred tax asset or liability is recorded for all temporary differences
between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net
change during the period of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date
of enactment.
Management makes judgments as to the interpretation
of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition,
the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s
opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies
from estimates, additional allowances or reversals of reserves may be necessary.
Loss Per Share
Basic net loss per common share is computed
by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the
period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during
the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case
for the year ended December 31, 2018 and 2017 presented in these consolidated financial statements, the weighted-average number
of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
32
The Company had the following common stock
equivalents at December 31, 2018 and 2017:
December 31,
December 31,
2018
2017
Series A Preferred stock
-
192,567
Series B Preferred stock
-
40,929
Options
17,649,990
17,749,990
Warrants
110,859,062
46,193,779
Convertible notes - related party
2,889
7,080,128
Convertible notes
839,764
17,749,990
Totals
129,351,705
88,773,887
Reclassifications
Certain prior year amounts in the consolidated
financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation.
These reclassifications did not affect the prior period total assets, total liabilities, stockholders’ deficit, net loss
or net cash used in operating activities.
Recently Adopted Accounting Guidance
In April 2016, the FASB issued ASU No.
2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting
for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several
aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b)
classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance
is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption
of the update is permitted. The adoption of ASU 2016-09 did not have a material effect on its financial position or results of
operations or cash flows.
In April 2016, the FASB issued ASU No.
2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606). In
March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)” (topic 606). These amendments provide additional clarification and implementation guidance
on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide
clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping
and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right
to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in
ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how
it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide
with an entity’s adoption of ASU 2014-09, which we adopted for interim and annual reporting periods beginning after December
15, 2017. The adoption of ASU 2016-10 did not have a material effect on its financial position or results of operations or cash
flows.
In May 2016, the FASB issued ASU No. 2016-12,
“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly
amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition
and is effective during the same period as ASU 2014-09. The adoption of ASU 2016-12 did not have a material effect on its financial
position or results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”).
ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement
of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption
on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively
as of the earliest date practicable. The adoption of ASU 2016-15 did not have a material effect on its financial position or results
of operations or cash flows.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash,
cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective
for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions
of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented.
The adoption of ASU 2016-18 did not have a material effect on its financial position or results of operations or cash flows.
33
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope
of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter
of 2018. The adoption of ASU 2017-09 did not have a material effect on its financial position or results of operations or cash
flows.
In July 2017, the FASB issued ASU 2017-11,
“Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815):
I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with
down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result
in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates
cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the
difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content
in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements
about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling
interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2018. The Company early adopted the ASU 2017-11 in the year
ending December 31, 2017.
Adoption of ASU 2017-11
As noted above, in connection with the securities purchase agreement and debt transactions during the
year ended December 31, 2017, the Company issued warrants and convertible notes, to purchase common stock with an exercise price
of $0.20 and a five-year term. Upon issuance of the warrants and convertible notes, the Company evaluated the note agreement to
determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified
certain equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions, requiring the Company to classify the warrants and convertible notes as a derivative
liability. The Company changed its method of accounting for the convertible notes and warrants through the early adoption of ASU
2017-11 during the year ended December 31, 2017 on a retrospective basis. Accordingly, the Company recorded the warrant derivative
and conversion option derivative liabilities to additional paid in capital upon issuance.
Recent Accounting Guidance Not Yet
Adopted
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).” Under ASU 2016-02, lessees will, among other things, require lessees to recognize a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were
made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts
with Customers.” ASU 2016-02 will be effective for us on January 1, 2019 and initially required transition using a modified
retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements. In July 2018, the FASB issued ASU 2018-11 , “Leases (Topic 842) - Targeted Improvements,”
which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU
2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases
(Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting
for sales and similar taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a
right-of-use asset and lease liability on the balance sheet for its operating leases. We elected to apply certain practical expedients
provided under ASU 2016-02 whereby we will not reassess(i) whether any expired or existing contracts are or contain leases, (ii)
the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also do
not expect to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance).
We expect to account for lease and non-lease components separately because such amounts are readily determinable under our lease
contracts and because we expect this election will result in a lower impact on our balance sheet.
In October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception
that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory
until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December
15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently
evaluating the impact of the new standard.
Management does not believe that any recently
issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated
financial statements.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.
We do not hold any derivative instruments
and do not engage in any hedging activities.
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