As filed with the Securities and Exchange Commission on July 21, 2020.May 26, 2022
Registration Statement No. 333-238514333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
AMENDMENT NO. 2 TO:
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
JERRICK MEDIA HOLDINGS,CREATD, INC.
(Exact name of Registrantregistrant as specified in its charter)
Nevada | 7819 | 87-0645394 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification |
2050 Center Avenue Suite 640419 Lafayette Street
Fort Lee, NJ 070246th Floor
Telephone: New York, NY 10003
(201) 258-3770
(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)
Jeremy FrommerLaurie Weisberg
Chief Executive Officer
2050 Center Avenue Suite 640419 Lafayette Street, 6th Floor
Fort Lee, NJ 07024New York, NY 10003
Telephone: (201) 258-3770
(Name, address, including zip code and telephone number, including area code, of agent for service)
Copies of all communications, including communications sent to agent for service, should be sent to:
| Joseph M. Lucosky, Esq.
Scott E. Linsky, Esq. Lucosky Brookman LLP 101 Wood Avenue South, 5th Floor
(732) 395-4400 | Spencer G. Feldman, Esq. Olshan Frome Wolosky LLP 1325 Avenue of the Americas, 15th Floor New York, NY 10019 (212) 451-2300 |
Approximate Datedate of Commencementcommencement of Proposed Saleproposed sale to the Public:public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☐☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer | ☐ | ||
Non-accelerated filer ☒ | Smaller reporting company | ☒ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities ActAct. ☐
Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price (1)(2) | Amount of Registration Fee | ||||||
Units, consisting of one share of common stock, par value $0.001 per share, and one warrant to purchase one share of common stock, par value $0.001 per share | ||||||||
Common stock included as part of the Units | $ | 10,350,000 | $ | 1,343.43 | ||||
Warrants included as part of the Units (3) | ||||||||
Shares of common stock issuable upon exercise of the Warrants | $ | 10,350,000 | $ | 1,343.43 | ||||
Total | $ | 20,700,000 | $ | 2,686.86 | * |
The Registrantregistrant hereby amends this Registration Statementregistration statement on such date or dates as may be necessary to delay its effective date until the Registrantregistrant shall file a further amendment which specifically states that this Registration Statementregistration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statementthis registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determinedetermine..
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it iswe are not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 21, 2020MAY 26, 2022
PRELIMINARY PROSPECTUS
JERRICK MEDIA HOLDINGS, INC.
Subscription Rights to Purchase Up to 20,000,000 Units
Consisting of Up to 20,000,000 Shares of Common Stock
Series A Warrants to Purchase Up to 20,000,000 Shares of Common Stock and
Series B Warrants
This prospectus relates to Purchase Up to 20,000,000 Shares of Common Stock
at a Subscription Price of $2.00 Per Unit
We are distributing, at no charge, non-transferable subscription rights entitling holders of common stock as of the sale by Jerrick Media Holdings, Inc. (the “Company” or “Jerrick”)record date of $9,000,0005:00 p.m. (Eastern time) on , 2022 and holders of certain shares of Series E Preferred Stock, common stock warrants and options, to purchase units at a subscription price of securities (the “Units”). The offering price is $$2.00 per Unit.
unit. Each Unit consistsunit will consist of (a) one share of our common stock, and (b) onea Series A warrant exercisable to purchaseacquire one share of our common stock at an exercise price equalof $3.00, and a Series B warrant exercisable to $ untilacquire one share of common stock at an exercise price of $6.00. Shares of common stock, Series A warrants and Series B warrants comprising the fifth anniversaryunits may only be purchased as a unit, but will be issued separately. We may redeem the outstanding warrants subject to the terms and conditions described in this prospectus. You will receive two subscription rights for every share of the issuance date. The shares of our common stock and warrants are immediately separable and will be issued separately but will be purchased together in this offering.
We have applied to list ourevery share of common stock issuable upon conversion or exercise of the Preferred Shares, Eligible Warrants and Eligible Options you hold as of the warrantsrecord date.
Pursuant to your subscription rights, you will have the right, which we refer to as your basic right, to purchase a number of units equal to (i) the number of shares of common stock you held as of the record date and (ii) the number of shares of common stock issuable upon conversion or exercise of the Preferred Shares, Eligible Warrants and/or Eligible Options (all as defined below) you held as of the record date. If you exercise your basic right in full, you will also have the right, or over-subscription privilege, to purchase additional units for which other rights holders do not subscribe. Once made, all exercises of rights are irrevocable.
Your basic rights and over-subscription privilege will expire if not exercised by 5:00 p.m. (Eastern time) on , 2022, unless we extend or terminate this offering. We may extend this offering for one or more additional periods in our sole discretion not to exceed 45 days from the initial expiration date. We will announce any extension in a press release issued no later than 9:00 a.m. (Eastern time) on the Nasdaq Capital Market upon our satisfactionbusiness day after the most recently announced expiration date. If this offering is not fully subscribed following the expiration date of the exchange’s initial listing criteria. If our common stock and warrants are not approvedoffering, the dealer-manager for listing onthis offering has agreed to use its commercially reasonable efforts to place any unsubscribed units at the Nasdaq Capital Market, wesubscription price for an additional period of up to 45 days. The number of units that may be sold by us during this period will not consummate this offering. No assurance can be given that our application will be approved. Upon approval to list our common stock and the warrants on the Nasdaq Capital Market, we will change our name to “Creatd, Inc.” Additionally,depend upon the securities comprisingnumber of units that are subscribed for pursuant to the Units becoming separately traded, we expect that our common stockexercise of subscription rights by shareholders and warrants will be listed on the Nasdaq Capital Market under the symbols “CRTD” and “CRTDW,” respectively.other rights holders.
Our common stock is currently quotedtraded on The OTCQB VentureNasdaq Capital Market, (the “OTCQB”), operated by OTC Markets Group,or the Nasdaq, under the symbol “JMDA”. We have assumed a public offering“CRTD.” The closing price of $ per Unit, the last reported sale price for our common stock as reported on May 26, 2022 was $1.28 per share. We are applying to list the OTCQBSeries A warrants and Series B warrants for trading on , 2020. The actual public offering price per UnitNasdaq Capital Market, but we cannot assure you that we will be determined between us and the underwriters at the time of pricing and may be at a discount to the current market price. Therefore, the assumed public offering price used throughout this prospectus may not be indicativemeet all of the final offering price.required listing standards. If we do not meet such required listing standards, we will use our commercially reasonable efforts to list the Series A warrants and Series B warrants on another suitable securities exchange or recognized trading system. Neither the subscription rights nor the units are transferable.
Quotes of our common stock trading prices on the OTCQB may not be indicative of the market price of our common stock or warrants if listed on the Nasdaq Capital Market.
Investing in our common stock is highly speculative andsecurities involves a high degree of risk. You should carefully consider the risks and uncertainties described under the headingrisks. See “Risk Factors” beginning on page 614 of this prospectus beforeprospectus. We and our board of directors are not making any recommendation regarding the exercise of your rights.
We have engaged RHK Capital, LLC doing business as RHK Noble and transacting all broker-dealer services through Noble Capital Markets, Inc., or RHK Noble, to act as dealer-manager for this offering and placement agent for any unsubscribed units. This offering is being conducted on a decisionbest-efforts basis, and we do not need to receive any minimum amount of proceeds in order to complete the offering. We have currently not entered into any standby purchase our securities.agreement, backstop commitment or similar arrangement in connection with this offering.
Continental Stock Transfer & Trust will serve as the subscription agent for this offering and an escrow agent retained by the subscription agent will hold in escrow funds received from subscribers until we complete or terminate the offering.
Per Unit | Total(1) | |||||||
Subscription price | $ | 2.00 | $ | 40,000,000 | ||||
Dealer-manager fee (2) | $ | 0.16 | $ | 3,200,000 | ||||
Proceeds to us, before expenses | $ | 0.32 | $ | 36,800,000 |
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(1) |
(2) | We have agreed to |
The CompanyNeither the Securities and Exchange Commission nor any state securities commission has granted a 45 day optionapproved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the representative ofcontrary is a criminal offense.
If you have any questions or need further information about this offering, please call D.F. King & Co., Inc., the underwriters to purchase up to an additional shares of common stock to cover over-allotments, if any.
The underwriters expect to deliver the shares to purchasers ininformation agent for the offering, onat (212) 269-5550 (bankers and brokers) or about , 2020.(877) 283-0323 (all others) or by email at creatd@dfking.com.
Book-Running ManagerDealer-Manager
THE BENCHMARK COMPANY
The date of this prospectus is , 2020.2022.
TABLE OF CONTENTS
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ABOUT THIS PROSPECTUS
InUnless the context requires otherwise, references in this prospectus to “Creatd,” “our company,” “we,” “our” “us” and similar terms refer to Creatd, Inc., a Nevada corporation, and its subsidiaries, unless the context suggests otherwise references to “the Company,” “Jerrick,” “JMDA,” “we,” “us,” and “our” refer to Jerrick Media Holdings, Inc. and its consolidated subsidiaries.requires.
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This prospectus describes
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this prospectus. Because the specific details regarding this offering, the terms and conditionsfollowing is only a summary, it does not contain all of the common stock being offered hereby and the risks of investing in the Company’s common stock. You should read this prospectus, any free writing prospectus and the additional information about the Company described in the section entitled “Where You Can Find More Information’’ before making your investment decision.
Neither the Company, nor any of its officers, directors, agents, representatives or underwriters, make any representation to you about the legality of an investment in the Company’s common stock. You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in the Company’s common stock.
ADDITIONAL INFORMATION
Youour securities. Before making an investment decision, you should rely only oncarefully read all of the information contained in this prospectus, including the risks described under “Risk Factors” and in any accompanying prospectus supplement. No one has been authorizedour consolidated financial statements and the related notes from our 2021 Annual Report and most recent Form 10-Q, before making an investment decision.
Overview
Creatd, Inc. is a company whose mission is to provide you with differenteconomic opportunities to creators and brands by multiplying the impact of platforms, people, and technology.
We operate four main business segments, or additional information. The shares‘pillars’: Creatd Labs, Creatd Partners, Creatd Ventures, and Creatd Studios. Together, Creatd’s pillars work together to create a flywheel effect, supporting our core vision of common stock are not being offeredcreating a viable ecosystem for all stakeholders in any jurisdiction where the offercreator economy.
Creator-Centric Strategy
Our purpose is not permitted. You should not assumeto empower creators to prosper through exceptional tools, built-in communities, and opportunities for monetization and audience expansion. This creator-first approach is the foundation of our culture and mission, and how we choose to allocate our resources. It governs our business model and shapes the value we provide for each of our stakeholders across Creatd’s four pillars.
Creatd Labs
Creatd Labs is dedicated to the development of technology products that support the informationcreator economy. This pillar houses Creatd’s proprietary technology platforms, including Creatd’s flagship product, Vocal.
Vocal
Vocal was built to serve as a home base for digital creators. This robust, proprietary technology platform provides best-in-class tools, safe and curated communities, and monetization opportunities that enable creators to find a receptive audience and get rewarded. Creators of all types call Vocal their home, from bloggers to social media influencers, to podcasters, founders, musicians, photographers, and more.
Since its initial launch in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of such documents.
TRADEMARKS AND TRADE NAMES
This prospectus includes trademarks that are protected under applicable intellectual property laws and are the Company’s property or the property of2016, Vocal has grown to be one of the Company’s subsidiaries. This prospectus also contains trademarks, service marks, trade names and/fastest-growing communities for content creators of all shapes and sizes. Creators can opt to use Vocal for free, or copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that the Company will not assert,upgrade to the fullest extent under applicable law, its rightspremium membership tier, Vocal+. Upon joining Vocal, either as a freemium or the right of the applicable licensorpremium member, creators can immediately begin to these trademarksutilize Vocal’s storytelling tools to create and trade names.
INDUSTRY AND MARKET DATA
Unless otherwise indicated, information contained in this prospectus concerning the Company’s industry and the markets in which it operates, including market position and market opportunity, is based on information from management’s estimates,publish their stories, as well as benefit from industry publications and research, surveys and studies conductedVocal’s monetization features. Creatd facilitates creators’ monetization on Vocal in numerous different ways, including i) by third parties. The third-party sources fromrewarding creators for each ‘read’ their story receives; ii) via Vocal Challenges, or writing contests through which the Company has obtained information generally state that the information contained therein has been obtained from sources believed to be reliable, but the Company cannot assure you that this information is accurate or complete. The Company has not independently verified any of the data from third-party sources nor has it verified the underlying economic assumptions relied upon by those third parties. Similarly, internal company surveys, industry forecasts and market research, which the Company believes to be reliable, based upon management’s knowledge of the industry, have not been verified by any independent sources. The Company’s internal surveys are based on data it has collected over the past several years, which it believes to be reliable. Management estimates are derived from publicly available information, its knowledge of the industry, and assumptions based on such information and knowledge, which management believes to be reasonable and appropriate. However, assumptions and estimates of the Company’s future performance, and the future performance of its industry, are subject to numerous known and unknown risks and uncertainties, including those described under the heading “Risk Factors” in this prospectus and those described elsewhere in this prospectus, and the other documents the Company files with the Securities and Exchange Commission, or SEC, from time to time. Thesecreators can win cash and other important factors could resultrewards; iii) by awarding Bonuses; iv) by connecting creators with brands for opportunities to collaborate on Vocal for Brands branded content campaigns; v) through ‘Subscribe,’ which enables creators to receive payment directly from their audience via monthly subscriptions and one-off microtransactions; vi) via Vocal’s Ambassador Program, which enables creators to receive additional rewards whenever they refer a new Vocal+ member creators can immediately begin to access the numerous monetization opportunities that Vocal facilitates. Specifically, Vocal creators can earn money i) every time their story is read, ii) by competing in its estimatesChallenges, iii) by receiving Bonuses, iv) by collaborating on branded content campaigns through the company’s in-house agency, Vocal for Brands, v) through ‘Subscribe,’ which enables creators to receive payment directly from their audience via monthly subscriptions and assumptions being materially different from future results. You should readone-off microtransactions. vi) through the information contained in this prospectus completely and with the understanding that future results may be materially different and worse from what the Company expects. See the information included under the heading “Forward-Looking Statements.”Vocal Ambassador Program, which enables creators to receive additional rewards whenever they refer a new Vocal+ member.
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Vocal+
Vocal+ is Vocal’s premium membership program. Subscribers pay a membership fee to access additional premium features on the platform, including: a higher rate of earnings per read, reduced platform processing fees on tips received, eligibility to participate in exclusive Vocal+ Challenges, access to Vocal’s ‘Quick Edit’ feature for published stories, and more. The following summary highlights information contained elsewhere in this prospectus. This summary may not contain allcurrent cost of a Vocal+ membership is either $9.99 per month or $99 annually.
Moderation and Compliance
One of the key differentiating factors between Vocal and most other user-generated content platforms is the fact that each story submitted to Vocal is run through the Company’s proprietary moderation process before it goes live on the platform. The decision to implement moderation into the submission process was in direct response to the rise of misinformation and bad actors on many social platforms. In response to these inherent pitfalls within the content landscape, Vocal’s proprietary moderation system combines the algorithmic detection of copyrighted material, hate speech, graphic violence, and nudity, and human-led curation to ensure the quality and safety of each story published on Vocal, thus fostering a safe and trustworthy environment for creators, audiences, and brands. In May 2022, Creatd announced Vocal’s new integration partnership with Two Hat, a Microsoft acquiree and a leading provider of AI-assisted content moderation and protection solutions for digital communities. Through the partnership, the Company further updated its proprietary moderation technology, with the aim of ensuring that the Vocal platform remains a safe place for its creators, brand partners, and audiences.
Trust and safety are paramount to the Vocal ecosystem. We follow best practices when handling personally identifiable information, that may be important to you. You should read this entire prospectus carefully, includingwith guidance from the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”European Union’s General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and the Company’s historical financial statementsDigital Millennium Copyright Act (DMCA).
Platform Compliance Policies include:
● | Human-led, technology-assisted moderation of every story submitted; |
● | Algorithmic detection of hate speech, nudity, and copyright infringement; |
● | Brand, creator, and audience safety enforced through community watch; and |
● | The rejection of what we consider toxic content, with the understanding that diverse opinions are encouraged. |
Technology Development
Vocal’s proprietary technology is built on Keystone, the same underlying open-source framework used by industry leaders such as Atlassian, a $43-billion Australian technology company. Some of the key differentiating elements of Vocal’s technology are speed, sustainability, and related notes included elsewherescalability. The Company continues to invest heavily in this prospectus. In this prospectus, unless otherwise noted,research and development to continuously improve and innovate its platform, with the terms “the Company,” “Jerrick,” “we,” “us,” and “our” refer to Jerrick Media Holdings, Inc.goal of optimizing the user experience for creators.
Additionally, the Vocal platform and its consolidated subsidiaries.
Overview
Jerrick Media Holdings, Inc. (“JMDA” or “the Company”) is the parent company and creator of the Vocal platform. The Company develops technology-based solutionsunderlying technology allows us to solve problems for the creator community, connecting creators with their ideal audiences and with the brands that want to access those audiences. Through a combination of data analysis, design, and development, the Company conceptualizes, creates, and maintains a suite of technology products and provides services that influence a global audience.
Jerrick is committed to identifying and leveraging opportunities within the digital platform and content monetization space. Our proprietary flagship technology platform is Vocal, which provides creators with storytelling tools, engaged communities, and opportunities to monetize their content. Vocal’s architecture was engineered to support a scalable and easy-to-update platform that could adapt its capacity to meet the current and growing demand for digital resources and technologies that foster virtual connection and community.
We maintain aan advantageous capital-light infrastructure by, among other things,infrastructure. By using third party cloud based service providers. As a result,providers, we are able to focus on platform and revenue growth rather than building and maintaining athe costly internal infrastructure. Similarly, whileinfrastructures that have materially affected so many legacy media platforms.
Vocal’s technology has been specifically designed and built to scale without a material corresponding increase in operational costs. While our users can embed rich media, such as video, audio, and product links, into their Vocal stories, the rich media content is hosted elsewhere (such as YouTube, Instagram, Vimeo, Shopify, Spotify, etc.). As a result,Thus, our platform can accommodate rich media content of all kinds without bearing the financial or operational costs associated with hosting the rich media itself. In addition to the benefits this framework affords to the Company, it provides the additional benefit to our content creators, in that a creator can increase their monetization; for example, a creator can embed their YouTube video into a Vocal story and thus derive earnings from both platforms when their video is viewed.
Creatd Partners
Creatd Partners houses the Company’s agency businesses, with the goal of fostering partnerships between creators and brands. Creatd Partners’ offerings include: Vocal for Brands (content marketing), WHE Agency (influencer marketing), and Seller’s Choice (performance marketing).
Vocal for Brands
All brands have a story to tell, and we leverage Vocal’s creator community to help them tell it. Vocal for Brands, Creatd’s content marketing studio, specializes in pairing leading brands with Vocal creators and influencers to produce marketing campaigns that are non-interruptive, engaging, and direct-response driven. Further, Vocal for Brands campaigns leverage Vocal’s first-party data and technology, which enables the creation of highly targeted and segmented audiences and optimized campaign results. In addition to branded story campaigns Additionally, brands can opt to collaborate with Vocal on a sponsored Challenge, prompting the creation of high-quality stories that are centered around the brand’s mission and further disseminated through creators’ respective social channels and promotional outlets.
WHE Agency
The WHE Agency (“WHE”), acquired by Creatd in 2021, was built to organically sustainfounded by Tracy Willis with the goal of supporting top creators and scale multiple lines of revenue,influencers, by connecting them with leading brands and global audiences. s. Today, WHE manages a talent roster comprising over 100 creators across numerous verticals, including family and lifestyle, music, entertainment, and celebrity categories. Since acquiring WHE, the Company has helped WHE expand into new verticals, as well as to assimilate externalfacilitated partnerships on influencers’ behalf with leading brands including CBS, Amazon, Target, Disney, Warby Parker, CVS, Kay Jewelers, Walmart, Gerber, Masterclass, Procter & Gamble, Nike, and NFL, among others.
Seller’s Choice
Seller’s Choice is Creatd Partners’ performance marketing agency specializing in DTC (direct-to-consumer) and e-commerce clientele. Seller’s Choice provides direct-to-consumer brands with design, development, strategy, and sales optimization services.
Creatd Ventures
Creatd Ventures houses Creatd’s portfolio of e-commerce businesses, both majority and minority-owned as well as associated e-commerce technology platforms and media assets into its existing infrastructure. The Company anticipates continuingsupports founders by providing capital, as well as a host of services including design and development, marketing and distribution, and go-to-market strategy.
Currently, the Creatd Ventures portfolio includes:
● | Camp, a direct-to-consumer (DTC) food brand which creates healthy upgrades to classic comfort food favorites. Each of Camp’s products are created with hidden servings of vegetables and contain Vitamins A, C, D, E, B1 + B6. In the fourth quarter of 2021, Camp added two new products to its expanding line of healthy, veggie-based, family-friendly foods. Currently, Camp has four flavors available for purchase: Classic Cheddar Mac ‘N’ Cheese, White Cheddar Mac ‘N’ Cheese, Vegan Cheezy Mac, and Twist Veggie Pasta. Camp, which first launched in 2020, represents the first investment within the Creatd Ventures portfolio. |
● | Dune Glow Remedy (“Dune”), which the Company purchased and brought to market in 2021. Dune is a beverage brand focused on promoting wellness and beauty from within. Each beverage in Dune’s product line is meticulously crafted with functional ingredients that nourish skin from the inside out and enhance one’s natural glow. In 2022, Dune announced that it continues to advance its distribution with numerous partnerships in place with retailers including lifestyle retailer Urban Outfitters and the Los Angeles-based Erewhon Market. Beyond the benefits for Dune, Creatd Ventures is leveraging these successful retail launches to create similar opportunities for Camp and Basis in brick-and-mortar retail locations. |
● | Basis, a hydrating electrolyte drink mix formulated using rehydration therapies developed by the World Health Organization. Acquired by the Company in first quarter 2022, Basis has a history of strong sales volume both on the brand’s website as well as through third-party distribution channels such as Amazon. Creatd’s acquisition of 100% ownership in Basis marks its third majority ownership acquisition for Creatd Ventures. |
Creatd Studios
The goal of Creatd Studios is to elevate creators’ stories to TV, film, books, podcasts, video, and more.
● | Transmedia Assets: With millions of compelling stories in its midst, Creatd’s technology surfaces the best candidates for transmedia adaptations, through community and creator data insights. Then, Creatd Studios helps creators tell their existing stories in new ways, by partnering them with entertainment and publishing studios to create unique content experiences that accelerate earnings, discoverability, and foster new opportunities. In 2022, Creatd Studios announced numerous upcoming production projects, including the upcoming publication of a print book featuring stories sourced from Vocal, the launch of a new podcast, with two miniseries currently in production, as well as the establishment of a graphic novel development initiative which will release its first title in Fall 2022 —Steam Wars, created by artist and independent filmmaker Larry Blamire. |
● | OG Gallery: The OG Collection is an extensive library of original artwork and imagery from the archives of some of the most iconic magazines of the 20th century. OG Gallery is an exploratory initiative aimed at identifying opportunities to propel the OG Collection into a new technological sphere: the NFT marketplace. |
Application of First-Party Data
Creatd’s business intelligence and marketing teams identify and target individual creators, communities, and brands, utilizing empirical data harnessed from the Vocal platform. The team’s ability to apply its proprietary first-party data works to reduce acquisition costs for new creators and to help provide brands with conversions and an ideal targeted audience. In this way, our ability to apply first-party data is one of the value-drivers for the Company across its four business pillars.
Importantly, we do not sell the collected data, that being a common monetization opportunity for many other businesses. Instead, we use our collected first party data for the purposes of bettering the platform. Specifically, our data helps us understand the behaviors and attributes that are common among the creators, brands, and audiences within our ecosystem. We then pair our first-party Vocal data with third-party data from distribution platforms such as Facebook and Snapchat to provide a more granular profile of our creators, brands, and audiences.
It is through generating this valuable first-party data that we can continually enrich and refine our targeting capabilities for branded content promotion and creator acquisition, and specifically, to reduce our creator acquisition costs (CAC) and subscriber acquisition costs (SAC).
Competition
The idea for Vocal came as a response to what Creatd’s founders recognized as systemic flaws inherent to the digital media industry and its operational infrastructures. The depreciating value of digital media business models built on legacy technology platforms created a unique opportunity for the development of a creator-centric platform that could appeal to a global community and, at the same time, be capable of acquiring undervalued complimentary technology assets.
Creatd’s founders built the Vocal platform upon the general thesis that a closed and safe ecosystem utilizing first-party data to increase efficiencies could create a sustainable and defensible business model. Vocal was strategically developed to provide value for content creators, readers, and brands, and to serve as a home for the ever-increasing amount of digital content being produced and the libraries of digital assets lying dormant.
Vocal is most commonly discussed as a combination of:
● | Medium, a platform for writers built by former Twitter founder Ev Williams; |
● | Reddit, a social news aggregation, web content rating, and discussion website; and |
● | Patreon, a membership platform that provides business tools for content creators to run a subscription service. |
Creatd does not view Vocal as a substitute or competitor to segment-specific content platforms, such as Vimeo, YouTube, Instagram, Pinterest, TikTok, Spotify, or SoundCloud. We don’t want to replace anyone; we built Vocal to be accretive to the entire digital ecosystem. In fact, one of the most powerful components of our technology is the fact that Vocal makes it easy for creators to embed their existing published content, including videos, songs, podcasts, photographs, and more, directly into Vocal. We see this as a growth opportunity by building partnerships with the world’s greatest technology companies and to further spread our roots deeper into the digital landscape
Acquisition Strategy
Creatd’s hybrid finance and design culture is key to its acquisition strategy. Acquisition targets are companies that meet a set of opportunistic or financial standards or that are part of specific digital environments that are accretive and can seamlessly integrate into Creatd’s existing revenue lines. Creatd will continue to make targetedstrategic acquisitions when presented with opportunities that are in the interest of technologiesshareholder value.
Recent Developments
Nasdaq Notice of Delisting
On January 4, 2021, the Company received a letter from the staff of The Nasdaq Capital Market (the “Exchange”) notifying the Company that the Exchange had determined to delist the Company’s common stock and warrants from the Exchange based on the Company’s non-compliance with the Exchange’s (i) $5 million stockholders’ equity requirement for initial listing pursuant to Nasdaq Listing Rule 5505(b), (ii) the $2.5 million stockholders’ equity requirement or any of the alternatives for continued listing pursuant to Nasdaq Listing Rule 5550(b), and (iii) the Company’s failure to provide material information to the Exchange pursuant to Nasdaq Listing Rule 5250(a)(1).
On February 11, 2021, the Company met with the Exchange’s Hearings Panel (the “Panel”) with respect to such determination, in accordance with the Exchange’s rules and, pursuant to such request by the Company to appeal, the delisting of the Company’s securities and the Form 25 Notification of Delisting filing was stayed pending the Panel’s decision.
On March 9, 2021, the Exchange notified the Company that the Panel had determined to continue the listing of the Company on the Exchange. Notwithstanding the Panel’s determination to continue the listing of the Company’s securities on the Exchange, the Panel issued a public reprimand letter to the Company, pursuant to Listing Rule 5815(c)(1)(D), based on its finding “that the Company failed to meet the initial listing criteria with respect to stockholders’ equity and failed to provide Nasdaq with material information with respect to that deficiency.” Specifically, the Panel found that the Company failed to comply with Listing Rule 5250(a)(1), requiring it to notify Nasdaq of certain significant developments that led to the Company’s prior representations about its ability to satisfy the initial listing requirements being inaccurate. In reaching its determination to continue the listing of the Company on Nasdaq, the Panel acknowledged that the Company has since demonstrated compliance with the initial listing requirement for stockholders’ equity and all other applicable initial listing requirements. The Panel also determined that the violations were inadvertent and that the Company had relied on advice of counsel at the time in its interactions with the Nasdaq staff (“Staff”). The Panel also acknowledged the Company’s efforts to implement structural changes within the Company to avoid similar misstatements in the future and that would allow for proper accounting and disclosure on an ongoing basis.
On March 1, 2022, the Company received a letter (the “Letter”) from the staff of The Exchange notifying the Company that the Exchange has determined to delist the Company’s common stock from the Exchange based on the Company’s Market Value of Listed Securities for the 30-consecutive day period between January 15, 2022 and February 25, 2022 falling short of the requirements under Listing Rule 5550(b)(2) (the “Rule”). Although a 180-day period is typically allowed for an issuer to regain compliance, the Company is not eligible to use such compliance period, as the Exchange had instituted a Panel Monitor through March 9, 2022.
The Company pursued an appeal to the Panel of such determination, in accordance with the Exchange’s rules and, pursuant to such request by the Company to appeal, the delisting of the Company’s securities and the Form 25 Notification of Delisting filing was stayed pending the Panel’s decision.
On April 22, 2022, the Exchange notified the Company that the Panel has determined to continue the listing of the Company on the Exchange, subject to the following conditions: (i) on or before May 16, 2022, the Company will file its Quarterly Report on Form 10-Q for the period ended March 31, 2022 demonstrating compliance with Nasdaq Listing Rule 550(b)(1) requiring shareholders’ equity of $2.5 million and (ii) on or before August 29, 2022, the Company will file a Form 8-K documenting the successful completion of any fund-raising activity that has taken place since April 14, 2022 and the Company’s long-term compliance with the continued listing requirements of The Nasdaq Capital Market.
The Panel has advised that August 29, 2022 represents the full extent of the Panel’s discretion to grant continued listing during the time the Company is non-compliant and should the Company fail to demonstrate compliance by such date, the Panel will issue a final delist determination and the Company will be suspended from trading on the Exchange.
Registered Direct Offering
On March 7, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with thirteen accredited investors resulting in the raise of $2,659,750 in gross proceeds to the Company. Pursuant to the terms of the Purchase Agreement, the Company agreed to sell in a registered direct offering an aggregate of 1,519,857 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) together with warrants to purchase an aggregate of 1,519,857 shares of Common Stock (the “Warrants”) at an exercise price of $1.75 per share (collectively, the “Registered Direct Offering”). The warrants are immediately exercisable and will expire on March 9, 2027.
The Registered Direct Offering closed on March 9, 2022. Gross proceeds to the Company from the Registered Direct Offering were $2,659,750, before deducting offering expenses, which will be used for general corporate purposes, including working capital.
The shares of Common Stock were offered and sold by the Company pursuant to a prospectus supplement filed with the SEC, in connection with a takedown from the Company’s effective shelf registration statement on Form S-3, which was filed with the SEC on November 25, 2020 and subsequently declared effective on April 23, 2021 (File No. 333-250982).
Private Placement Financing
On March 1, 2022, the Company entered into securities purchase agreements with twenty-eight (28) accredited investors whereby, at the closing, such investors purchased from the Company an aggregate of (i) 1,401,457 shares of the Company’s common stock, par value $0.001 per share and (ii) 1,401,457 warrants to purchase shares of common stock, for an aggregate purchase price of $2,452,550 (the “Private Placement Financing”). Such warrants are exercisable for a term of five-years from the date of issuance, at an exercise price of $1.75 per share, and provide for cashless exercise to the extent that there is no registration statement available for the underlying shares of common stock. The Benchmark Company, LLC acted as exclusive financial advisor for the Company in connection with the Private Placement Financing and is entitled to receive 125,000 shares of common stock as compensation for its services. The closing of the Private Placement Financing occurred on March 1, 2022.
Board of Directors and Management
Appointment of New Directors
On February 17, 2022, the Board of Directors (the “Board”) of the Company appointed Joanna Bloor, Brad Justus, and Lorraine Hendrickson to serve as members of the Board. Ms. Bloor has been nominated to, and will serve as, chair of the Compensation Committee, and to be a member of the Audit Committee and Nominating & Corporate Governance Committee. Mr. Justus has been nominated, and will serve as, chair of the Nominating & Corporate Governance Committee, and to be a member of the Compensation Committee and Audit Committee. Ms. Hendrickson has been nominated to, and will serve as, chair of the Audit Committee and to be a member of the Compensation and Nominating & Corporate Governance Committee.
Departure of Directors
On July 16, 2021, Mark Patterson notified the Board of the Company of his resignation from the Board, effective July 31, 2021. Such resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
February 17, 2022, the Board received notice that effective immediately, Mark Standish resigned as Chair of the Board, Chair of the Audit Committee and as a member of the Compensation Committee and Nominating & Corporate Governance Committee; Leonard Schiller resigned as member of the Board, Chair of the Compensation Committee and as a member of the Audit Committee and Nominating & Corporate Governance Committee; and LaBrena Martin resigned as a member of the Board, Chair of the Nominating & Corporate Governance Committee and as a member of the Audit Committee and Compensation Committee. Such resignations are not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
Management Restructuring
On August 13, 2021, the Board approved the restructuring of the Company’s senior management team to be comprised of two Co-Chief Executive Officers and appointed Jeremy Frommer and Laurie Weisberg to such positions (the “First Restructuring”). Additionally, Justin Maury was appointed Chief Operating Officer and retains his position as President. Prior to the First Restructuring, Mr. Frommer served as the Company’s Chief Executive Officer and Ms. Weisberg served as the Company’s Chief Operating Officer. Mr. Frommer and Ms. Weisberg continue to serve as members of the Board. The Restructuring did not impact the role or functions of the Company’s Chief Financial Officer, Chelsea Pullano.
On February 17, 2022, the Board of the Company approved the restructuring of the Company’s senior management team to eliminate the Co-Chief Executive Officer role, appointing Jeremy Frommer as Executive Chairman and Founder, and appointing Laurie Weisberg as Chief Executive Officer (the “Second Restructuring”). Prior to the Second Restructuring, Mr. Frommer and Ms. Weisberg served as the Company’s co-Chief Executive Officers and Ms. Weisberg served as the Company’s Chief Operating Officer. The Second Restructuring does not impact the role or functions of the Company’s Chief Financial Officer, Chelsea Pullano, or the role or functions of the Company’s President and Chief Operating Officer, Justin Maury.
Plant Camp LLC Purchase
On June 4, 2021, the Company, through its wholly owned subsidiary, Creatd Partners, LLC, a Delaware limited liability company (the “Purchaser”), entered into a Membership Interest Purchase Agreement (the “MIPA”) with Angela Hein and Heidi Brown (the “Sellers”), pursuant to which the Purchaser acquired 841,005 common units of Plant Camp LLC, a Delaware limited liability company (“Plant Camp”) from the Sellers, resulting in the Purchaser owning 89% of the issued and outstanding equity of Plant Camp.
Simultaneous with the execution of the MIPA, and having met all conditions precedent in the MIPA, the parties to the MIPA consummated the closing of the transactions contemplated by the MIPA (the “Closing”). At the Closing, the Purchaser acquired a majority interest in Plant Camp in exchange for a cash payment to the Sellers of $300,000. The MIPA contains customary representations, warranties, covenants, indemnification and other terms for transactions of a similar nature.
On the Closing Date, the Amended and Restated Liability Company Operating Agreement of Plant Camp was amended and restated (the “Second A&R Operating Agreement”) to reflect the purchase and sale of the Membership Interests pursuant to the MIPA.
Underwritten Public Offering
On June 17, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with The Benchmark Company LLC (“Benchmark” or the “Underwriter”), pursuant to which we agreed to sell to the Underwriter in a firm commitment underwritten public offering (the “Offering”) an aggregate of 750,000 shares of the Company’s common stock, par value $0.001 per share, at a public offering price of $3.40 per share. The Company also granted the Underwriter a 30-day option to purchase up to an additional 112,500 shares of common stock to cover over-allotments, if any. The Offering closed on June 21, 2021.
Benchmark acted as sole bookrunner for the Offering. The Offering was made pursuant to a prospectus supplement dated June 17, 2021, and a base prospectus dated April 23, 2021, which is part of a registration statement on Form S-3 (File No. 333-250982) that was filed with the SEC on November 25, 2020, as amended on April 9, 2021, and declared effective by the Commission on April 23, 2021. The Underwriter received a discount in the amount of 7% of the aggregate gross proceeds received by the Company in connection with the Offering, warrants equal to 5% of the total of all shares issued in the Public Offering, including overallotment shares, exercisable six months from the date of issuance, at the price of $4.08, for a period of five years (the “Underwriter Warrants”), and reimbursement of certain expenses.
The Underwriting Agreement included customary representations, warranties and covenants, and customary conditions to closing, expense and reimbursement obligations and termination provisions. Additionally, under the terms of the Underwriting Agreement, we have agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the Underwriter may be required to make in respect of these liabilities.
WHE Agency Transaction
On July 20, 2021, the Company entered into, through its wholly owned subsidiary, Creatd Partners, LLC (“Creatd Partners”), a Stock Purchase Agreement (the “Purchase Agreement”) with individuals named therein (collectively, the “Sellers”), pursuant to which Creatd Partners acquired from the Sellers, subject to the terms and conditions of the Purchase Agreement and other related agreements (the “Transaction Documents”) 1,158,000 shares of common stock of WHE Agency, Inc. (“WHE Agency”), a talent management and public relations agency that primarily focuses on representation and private companies.management of family and lifestyle-focused influencers and digital creators. The Vocal technology platform, trademark,equity interest acquired in the Transaction (as defined below) along with the Voting Agreements described below equals fifty-five (55%) of the voting power and related intellectual property are wholly ownedforty-four (44%) of the ownership of WHE Agency’s issued and operated by Jerrick. outstanding shares, determined on a fully diluted basis post-transaction.
Risks Associated with Our BusinessPursuant to the Purchase Agreement, the Sellers sold, transferred, assigned, conveyed and delivered to Creatd Partners their respective issued and outstanding shares of common stock in WHE Agency (the “Transaction”). The aggregate closing consideration of the Transaction is $1,038,271, which consists of a combination of cash, in the amount of $144,750 (“Cash Consideration”), and the remaining $893,521 issued to the Sellers in the form of 224,503 shares of the Company’s restricted common stock (“Closing Share Consideration”).
Our business isThe Transaction closed on July 23, 2021 (the “Closing”). At the Closing, Sellers received their respective portion of the aggregate closing consideration in the form of a combination of Cash Consideration and Closing Share Consideration, except for 5% of the total Closing Share Consideration that will be subject to a numbertwelve (12) month Indemnification Holdback Period.
The 224,503 shares of risksthe Company’s common stock, par value $0.001 per share, were issued as part of which you shouldthe Closing Share Consideration (the “Shares”) to the Sellers are “restricted securities,” as defined in Rule 144(a)(3) under the Securities Act of 1933, as amended (the “Act”), and accordingly the Shares may not be aware before makingresold by the Sellers without registration under the Act or an available exemption from registration. Under the Purchase Agreement, the Company will be obligated to file with the SEC within ten business days after the Closing, a decisionregistration statement on Form S-1 or Form S-3 registering the resale of the Shares by the Sellers under the Act to investcover the resale of the Shares issued to the Sellers.
The Purchase Agreement contain representations and warranties made by and to the parties thereto as of specific dates. The Purchase Agreement includes customary representations, warranties and covenants of the Company, Sellers and WHE Agency. The representations and warranties made by each party were made solely for the benefit of the other parties and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk between the parties to the Purchase Agreement if those statements prove to be inaccurate; (ii) may have been qualified in ourthe Purchase Agreement by disclosures that were made to the other party in disclosure schedules to the Purchase Agreement, and (iii) were made only as of the date of the Purchase Agreement or such other date or dates as may be specified in the Purchase Agreement.
In connection with entering into the Purchase Agreement, Creatd Partners entered into a certain Voting Agreement and Proxy (the “Voting Agreement”) with certain beneficial owners that collectively own 11% percent of WHE Agency’s issued and outstanding restricted common shares.stock (“Restricted Stockholders”). Through the Voting Agreements entered into with the Restricted Stockholders, Creatd Partners effectively controls 55% of the total voting power of the Company in the aggregate. The following,Voting Agreements generally require that the stockholders who are party to the Voting Agreements vote or cause to be voted their WHE Agency shares, and execute and deliver written consents and otherwise exercise all voting and other risks, are discussed more fullyrights with respect to the WHE Agency shares at the direction of Creatd Partners. In addition, in connection with the “Risk Factors” sectionVoting Agreements, the Restricted Stockholders delivered irrevocable proxies to Creatd Partners. The Voting Agreements terminate upon the twenty-year anniversary of this prospectus.executing the Voting Agreements.
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Corporate HistoryMay 2021 Financing
On May 14, 2021 (the “Effective Date”), the Company entered into a securities purchase agreement (the “Purchase Agreement”) with three accredited investors (the “Investors”), whereby, at the closing, the Investors have agreed to purchase from the Company (i) convertible notes in the aggregate principal amount of $4,666,668 (the “Notes”), inclusive of original issuance discount, and Information(ii) 1,090,908 warrants (the “Warrants”) to purchase shares of the Company’s common stock. The Notes have a maturity date of November 14, 2022, with monthly installment payments due beginning six months from the date of issuance of the Notes. The Notes do not bear interest except in connection with a default, as described in the Notes. The Notes are convertible into shares of Common Stock at a fixed price of $5.00 per share, subject to adjustment as set forth in the Notes. The Company received $4.0 million of gross proceeds from the sale of the Notes and the Warrants, reflecting an original issuance discount on the Notes of $666,669.
We wereThe Warrants are exercisable for a term of five years from the date of issuance, at an exercise price of $4.50 per share.
Pursuant to the Purchase Agreement, on May 12, 2022, the Company filed with the SEC a registration statement covering the resale of the shares of Common Stock underlying the Notes and Warrants.
In connection with the Purchase Agreement, the Company entered into that certain Security Agreement, granting a security interest in favor of Lind Global Macro Fund, LP as agent for the Investors (“Security Agreement”); and that certain Trademark Security Agreement, granting a security interest in certain trademark collateral in favor of Lind Global Macro Fund, LP as agent for the Investors (the “Trademark Security Agreement”).
The closing of the Purchase Agreement occurred on May 17, 2021.
Our Corporate History
Creatd, Inc., formerly Jerrick Media Holdings, Inc. (“we,” “us,” the “Company,” or “Creatd”), is a technology company focused on the development of digital communities, marketing branded digital content, and e-commerce opportunities. Creatd’s content distribution platform, Vocal, delivers a robust long-form, digital publishing platform organized into highly engaged niche-communities capable of hosting all forms of rich media content. Through Creatd’s proprietary algorithm dynamics, Vocal enhances the visibility of content and maximizes viewership, providing advertisers access to target markets that most closely match their interests.
The Company was originally incorporated under the laws of the State of Nevada on December 30, 1999 under the name LILM, Inc. The Company changed its name on December 3, 2013 to Great Plains Holdings, Inc. (“GTPH”) as part of its plan to diversify its business.
On February 5, 2016 (the “Merger Closing“Closing Date”), we entered into an Agreement and Plan of Merger (the “Merger Agreement”) withGTPH, GPH Merger Sub, Inc., a Nevada corporation and our wholly-owned subsidiary of GTPH (“Merger Sub”), and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), entered into an Agreement and Plan of Merger (the “Merger”) pursuant to which the Merger Sub was merged with and into Jerrick, with Jerrick surviving as oura wholly-owned subsidiary of GTPH (the “Merger”). PursuantGTPH acquired, pursuant to the terms of the Merger, Agreement, we acquired, through a reverse triangular merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 28,500,000475,000 shares of ourGTPH’s common stock. Additionally, we assumedIn connection therewith, GTPH acquired 33,415 shares of Jerrick’s Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred Stock (the “Jerrick Series B Preferred”).
Upon closing of the Merger on February 5, 2016, the Company changed its business plan to our current plan.
In connection with the Merger, on the Merger Closing Date, weGTPH and Kent Campbell entered into a Spin-Off Agreement with Kent Campbell (the “Spin-Off Agreement”), pursuant to which Mr. Campbell purchased from GTPH (i) all of ourGTPH’s interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all of ourGTPH’s interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 781,81813,030 shares of our common stockGTPH’s Common Stock held by Mr. Campbell. In addition, Mr. Campbell assumed all of our debts, obligations and liabilities of GTPH, including any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.
Upon closing of the Merger on February 5, 2016, the Company changed its business plan to that of Jerrick.
Effective February 28, 2016, weGTPH entered into an Agreement and Plan of Merger (the “Statutory Merger Agreement”), with Jerrick, pursuant to which weGTPH became the parent company of Jerrick Ventures, LLC, oura wholly-owned operating subsidiary of Jerrick (the “Statutory Merger”).
On February 28, 2016, we and GTPH changed ourits name to Jerrick Media Holdings, Inc. to better reflect ourits new business strategy.
On July 25,September 11, 2019, wethe Company acquired 100% of the membership interests of Seller’s Choice, LLC, a New Jersey limited liability company (“Seller’s Choice”). Seller’s Choice is digital e-commerce agency based in New Jersey (see Note 4).
On September 9, 2020, the Company filed a certificate of amendment to our articles of incorporation, as amended (the “Amendment”), with the Secretary of State of the State of Nevada to effectuate a one-for-twenty (1:20) reverse stock split (the “Reverse Stock Split”) of our common stock without any change to its par value. The Amendment became effective on July 30, 2019. The number of shares of authorized common stock was proportionately reduced as a result of the Reverse Stock Split. The number of shares of authorized preferred stock was not affected by the Reverse Stock Split. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share.
All share and per share amounts for the common stock indicated in this prospectus have been retroactively restated to give effect to the Reverse Stock Split.
On July 13, 2020, upon approval from our board of directors and stockholders, we filed Second Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada.
Upon approval to list our common stock and the warrants on the Nasdaq Capital Market, we will change our name to “Creatd, Inc.”, which became effective on September 10, 2020.
The Company’s address is 2050 Center Avenue Suite 640 Fort Lee, NJ 07024. The Company’s telephone number is (201) 258-3770. Our website is: https://jerrick.media/. The information on, or that can be accessed through, this website is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase the Company’s common stock.
Employees
As of July 21, 2020, we had 21 full-time employees. None of our employees are subject to a collective bargaining agreement, and we believe that relationship with our employees to be good.
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SUMMARY OF THE OFFERING
Subscription Rights
We are distributing, at no charge, non-transferable subscription rights to (i) holders of common stock as of the record date of 5:00 p.m. (Eastern time) on [●], 2022; (ii) holders of Series E Preferred Stock convertible into a total of 121,359 shares of common stock (the “Preferred Shares”); (iii) holders of warrants to purchase a total of 8,610,115 shares of common stock (the “Eligible Warrants”); and (iv) holders of options to purchase a total of 3,164,778 shares of common stock (the “Eligible Options”), who we refer to collectively as “rights holders” or “you.” Rights holders will receive two subscription rights for every share of common stock and every share of common stock issuable upon conversion or exercise of the Preferred Shares, Eligible Warrants and Eligible Options held as of the record date.
The Eligible Warrants include:
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● | warrants issued between October 12, 2017, and November 8, 2018, to | |
● | ||
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● | warrants issued on March 14, 2018, purchase 1,667 shares of common stock at an exercise price of $12.00 per share; |
● | warrants issued between June 11, 2018, and July 3, 2018, to purchase a total of 3,500 shares of common stock at an exercise price of $12.00 per share; |
● | warrants |
● | warrants issued between August 31, 2018, and January 25, 2019, to purchase a total of 223,371 shares of common stock at an exercise price of $1.75 per share; |
● | warrants issued between February 20, 2019, and May 15, 2019, to purchase a total of 44,468 shares of common stock at an exercise price of $18.00 per share; |
● | warrants issued between April 12, 2019 and September 26, 2019, to purchase a total of 11,241 shares of common stock at an exercise price of $18.00 per share; |
● | warrants issued between July 26, 2019, to July 30, 2020, to purchase a total of 597 shares of common stock at an exercise price of $18.00 per share; |
● | warrants issued on February 11, 2020, to purchase a total of 6,667 shares of common stock at an exercise price of $1.75 per share; |
● | warrants issued on June 19, 2020, to purchase a total of 49,603 shares of common stock at an exercise price of $12.00 per share; |
● | warrants issued between July 29, 2020, to September 9, 2020, to purchase a total of 26,669 shares of common stock at an exercise price of $4.50 per share; |
● | warrants issued on December 31, 2020, to purchase a total of 471,953 shares of common stock at an exercise price of $5.15 per share; |
● | warrants issued on December 31, 2020, to purchase a total of 1,103,397 shares of common stock at an exercise price of $4.50 per share; |
● | warrants issued on May 14, 2021, to purchase a total of 970,908 shares of common stock at an exercise price of $4.50 per share; |
● | warrants issued on June 16, 2021, to purchase a total of 46,667 shares of common stock at an exercise price of $4.08 per share; |
● | warrants issued on June 21, 2021, to purchase a total of 37,500 shares of common stock at an exercise price of $5.40 per share; |
● | warrants issued on October 27, 2021, to purchase a total of 42,500 shares of common stock at an exercise price of $5.40 per share; |
● | warrants issued on March 1, 2022, to purchase a total of 1,401,457 shares of common stock at an exercise price of $1.75 per share; |
● | warrants issued on March 9, 2022, to purchase a total of 1,519,857 shares of common stock at an exercise price of $1.75 per share; |
● | warrants issued on February 25, 2020, to purchase a total of 41,665 shares of common stock at an exercise price of $15.00 per share; |
● | warrants issued on May 31, 2019, to purchase a total of 50 shares of common stock at an exercise price of $12.00 per share; |
● | warrants issued on September 15, 2020, to purchase a total of 2,542,500 shares of common stock at an exercise price of $4.50 per share; |
The Eligible Options include:
● | options issued between June 28, 2017 and August 28, 2017, to purchase 2,499 shares of common stock at exercise prices from $9.60 to $18.00 per share; |
● | options issued on October 21, 2019, to purchase 9,664 shares of common stock at exercise prices from $7.20 to $13.20 per share; |
● | options issued on July 29, 2020, to purchase 391,853 shares of common stock at an exercise price of $8.55 per share; |
● | options issued between February 4, 2021 and December 31, 2021, to purchase 347,762 shares of common stock at exercise prices from $2.09 to $14.20 per share; |
● | options issued on February 19, 2021 to purchase 1,473,000 shares of common stock at an exercise price of $5.65 per share; |
● | options issued on October 28, 2021 to purchase 540,000 shares of common stock at an exercise price of $5.00 per share; |
● | options issued on April 5, 2022 to purchase 400,000 shares of common stock at an exercise price of $1.75 per share. |
Your subscription rights will consist of:
● | your basic right, which will entitle you to purchase a number of units equal to (i) the |
● | your over-subscription privilege, which will be |
All units are being offered and sold at a subscription price of $2.00 per unit.
Units
Each unit will consist of:
● | one share of common stock; |
● | a Series A redeemable warrant exercisable to acquire one share of common stock at an exercise price of $3; and |
● | a Series B warrant exercisable to acquire one share of common stock at an exercise price of $6. |
The shares of common stock, Series A warrant and Series B warrant comprising a unit may only be purchased as a unit, but will be issued separately.
The Series A warrants and Series B warrants will be exercisable commencing on their date of issuance and expiring on [●], 2027, or are redeemed. They will be exercisable for cash or, solely during any period when a registration statement covering the issuance of the shares of common stock subject to the Series A warrants and Series B warrants is not in effect, on a cashless basis.
Exercise of Subscription Rights
Subscription rights, consisting of basic rights and over-subscription privileges, may be exercised at any time during the subscription period, which commences on [●], 2022 and expires at 5:00 p.m. (Eastern time) on [●], 2022, or the expiration date, unless we extend or terminate this offering. Once made, all exercises of subscription rights are irrevocable.
We may extend this offering for one or more additional periods in our sole discretion not to exceed 45 days from the initial expiration date. We will announce any extension in a press release issued no later than 9:00 a.m. (Eastern time) on the business day after the most recently announced expiration date.
Subscription rights may only be exercised in aggregate for whole numbers of units. Only whole numbers of shares of common stock, Series A warrants and Series B warrants exercisable for whole numbers of shares will be issuable to you in this offering; any right to a fractional share to which you would otherwise be entitled will be terminated, without consideration to you.
Transferability
Subscription Rights. The subscription rights are evidenced by a subscription certificate and are non-transferable.
Units. Shares of common stock, Series A warrants and Series B warrants comprising the units will be issued separately. Units will not be issued as a separate security and will not be transferable.
Common Stock. Shares of common stock included in units will be separately transferable following their issuance. All of the shares issued in this offering are expected to be listed on The Nasdaq Capital Market.
Series A warrants and Series B warrants (together, the “redeemable warrants”). The redeemable warrants will be separately transferable following their issuance and through [●], 2027. We are applying to list the redeemable warrants for trading on The Nasdaq Capital Market. We may not be able to meet the listing standards of The Nasdaq Capital Market with respect to the redeemable warrants. If we do not meet such required listing standards, we will use our commercially reasonable efforts to list the redeemable warrants on another suitable securities exchange or recognized trading system.
Use of Proceeds
Assuming this offering is fully subscribed, we estimate our net proceeds from the offering will total approximately $36.5 million, after deducting the dealer-manager fee of RHK Noble, as dealer-manager, and our other estimated offering expenses. We intend to use the net proceeds for sales and marketing and general working capital purposes. See “Use of Proceeds.”
Subscription Information
In order to obtain subscription information, you should contact:
● | D.F. King & Co., Inc. which will act as the information agent in connection with this offering, by telephone at (212) 269-5550 (bankers and brokers) or (877) 283-0323 (all others) or by email at creatd@dfking.com; or |
● | your broker-dealer, trust company or other nominee (including any mobile investment platform) where your subscription rights are held. |
Subscription Procedures
In order to exercise your subscription rights, including your over-subscription privilege, you should:
● | deliver a completed subscription certificate and the required payment to Continental Stock Transfer & Trust, the subscription agent for this offering, by the expiration date, or |
● | if your shares of common stock are held in an account with a broker-dealer, trust company, bank or other nominee (including any mobile investment platform) that qualifies as an Eligible Guarantor Institution under Rule 17Ad-15 under the |
If you cannot deliver your completed subscription certificate to the subscription agent prior to the expiration for the rights offering, you may follow the guaranteed delivery procedures described under “The Rights Offering—Methods for Exercising Subscription Rights—Guaranteed Delivery Procedures.”
Placement Period
If this offering is not fully subscribed following the expiration date of the offering, the dealer-manager has agreed to use its commercially reasonable efforts to place any unsubscribed units at the subscription price for an additional period of up to 45 days. The number of units that may be sold by us during this period will depend upon the number of units that are subscribed for pursuant to the exercise of subscription rights by our shareholders and other rights holders. No assurance can be given that any unsubscribed units will be sold during this period.
Important Dates
Set forth below are important dates for this offering, which generally are subject to extension:
Record date | [●] ,2022 | |
Expiration date | [●] ,2022 | |
Deadline for delivery of notices of guaranteed delivery | [●] ,2022 | |
Deadline for delivery of subscription certificates and | [●] ,2022 |
RISK FACTORS
(1)Investing in our securities involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information contained in this prospectus, before making an investment decision with respect to our securities. The occurrence of any of the following risks or those incorporated by reference, or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, results of operations or cash flows. In any such case, the trading price of common stock, the trading price of Series A warrants and the trading price of Series B warrants, if any, could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below and those incorporated by reference.
This offering may cause the price of common stock to decline, and the price may not recover for a substantial period of time, or at all.
The subscription price of units in this offering, together with the number of shares of common stock outstanding is based on 10,147,420we propose to issue and ultimately will issue in the offering (including the number of additional shares of common stock issuedwe propose to issue and outstanding asultimately will issue upon exercise of July 21, 2020Series A warrants and/or Series B warrants), may result in an immediate decrease in the market value of the common stock. We cannot predict the effect, if any, that the availability of shares for future sale represented by the Series A warrants and excludes the following:
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Except as otherwise indicated herein, all information in this prospectus reflects or assumes:
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The following summary financial and operating data set forth below should be read in conjunction withoffering at an effective price per share greater than the Company’s financial statements, the notes theretoprevailing market price. Further, if a substantial number of subscription rights are exercised and the other information contained in this prospectus. The summary statement of operations data for the years ended December 31, 2019 and 2018 have been derived from the Company’s audited financial statements appearing elsewhere in this prospectus. The historical results presented below are not necessarily indicative of financial resultsexercising rights holders choose to be achieved in future periods. The financial data as of March 31, 2020 and 2019 has been derived from our unaudited financial statements and the related notes thereto, which are included elsewhere in this prospectus.
Statement of Operations Data:
The following information should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our consolidated financial statements and related notes included elsewhere in this prospectus.
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
Statement of operations data: | 2019 | 2018 | 2020 | 2019 | ||||||||||||
Revenue | $ | 453,006 | $ | 80,898 | $ | 293,142 | $ | 34,334 | ||||||||
Operating expenses | $ | (7,669,984 | ) | $ | (5,767,153 | ) | $ | (2,119,091 | ) | $ | (1,739,328 | ) | ||||
(Loss) income from operations | $ | (7,216,978 | ) | $ | (5,686,255 | ) | $ | (1,825,949 | ) | $ | (1,704,994 | ) | ||||
Other expenses | $ | (818,394 | ) | $ | (6,327,287 | ) | $ | (1,160,048 | ) | $ | (1,884,441 | ) | ||||
Net income (loss) | $ | (8,035,372 | ) | $ | (12,013,542 | ) | $ | (2,985,997 | ) | $ | (1,884,441 | ) | ||||
Income (loss) per common share – basic and diluted(1) | $ | (0.98 | ) | $ | (4.16 | ) | $ | (0.32 | ) | $ | (0.28 | ) |
December 31, | March 31, | |||||||||||||||
Balance sheet data: | 2019 | 2018 | 2020 | 2019 | ||||||||||||
Cash | $ | 11,637 | $ | - | $ | 118,361 | $ | 262,707 | ||||||||
Total assets | $ | 2,572,046 | $ | 208,925 | $ | 2,836,270 | $ | 583,974 | ||||||||
Current liabilities | $ | 10,928,830 | $ | 2,569,584 | $ | 12,809,118 | $ | 3,869,128 | ||||||||
Total liabilities | $ | 11,130,774 | $ | 2,699,529 | $ | 13,027,333 | $ | 4,135,603 |
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
Cash flows from operating activities data: | 2019 | 2018 | 2020 | 2019 | ||||||||||||
Net cash used in operating activities | $ | (5,957,027 | ) | $ | (4,972,814 | ) | $ | (1,314,863 | ) | $ | (1,461,053 | ) | ||||
Net cash used in investing activities | $ | (363,288 | ) | $ | (27,605 | ) | $ | - | $ | (2,801 | ) | |||||
Net cash provided by financing activities | $ | 6,337,947 | $ | 4,889,368 | $ | 1,430,826 | $ | 1,726,561 | ||||||||
Net change in cash and cash equivalents | $ | 11,637 | $(111,051 | ) | $ | 106,724 | $ | 262,707 |
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
Other financial data (unaudited): | 2019 | 2018 | 2020 | 2019 | ||||||||||||
Adjusted EBITDA(2) | $ | (6,927,944 | ) | $ | (10,701,362 | ) | $ | (2,180,078 | ) | $ | (1,508,103 | ) |
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Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
Reconciliation of Adjusted EBITDA: | 2019 | 2018 | 2020 | 2019 | ||||||||||||
Net loss: | $ | (8,035,372 | ) | $ | (12,013,542 | ) | $ | (2,985,997 | ) | $ | (1,884,441 | ) | ||||
Add (deduct): | ||||||||||||||||
Interest expense | $ | 612,830 | $ | 923,008 | $ | 375,530 | $ | 54,569 | ||||||||
Depreciation | $ | 57,492 | $ | 42,218 | $ | 38,246 | $ | 3,133 | ||||||||
Stock-based compensation | $ | 437,106 | $ | 346,954 | $ | 392,143 | $ | 318,636 | ||||||||
Adjusted EBITDA | $ | (6,927,944 | ) | $ | (10,701,362 | ) | $ | (2,180,078 | ) | $ | (1,508.103 | ) |
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Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information includedshares purchased either directly or referredupon Series A warrant or Series B warrant exercises, the resulting sales could depress the market price of common stock. We cannot assure you that the market price of common stock will not decline prior to inthe expiration of this prospectus, before purchasingoffering or that, after shares of ourcommon stock are issued upon exercise of subscription rights, you will be able to sell shares of common stock purchased in the offering at a price greater than or equal to the effective price paid in the offering.
The subscription price determined for this offering may not be indicative of the fair value of common stock. There are numerous
The subscription price was set by the pricing committee of our board of directors, and varied risks that may preventyou should not consider the Company from achieving its goals. Ifsubscription price as an indication of the fair value of common stock. The subscription price does not necessarily bear any relationship to the book value of these risks actually occurs, the Company’s business,our assets, net worth, past operations, cash flows, earnings/losses, financial condition or results of operations may be materially adversely affected. In such case, the tradingany other established criteria for fair value. The market price of our common stock could decline and investors could lose allduring or part of their investment.
Risks Related to our Business
The Company is a development stage business and subject to the many risks associated with new businesses.
Our current line of business has a limited operating history and our business is subject to all of the risks inherent in the establishment of a new business enterprise. Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with development and expansion of a new business enterprise. We have incurred losses and may continue to operate at a net loss for at least the next several years as we execute our business plan. We had a net loss of approximately $8.0 million for the year ended December 31, 2019, and a working capital deficit and accumulated deficit of approximately $10.7 million and approximately $44.6 million, respectively. Our net loss for the three months ended March 31, 2020 and 2019 was $2,985,997 and $1,884,441, respectively, and our accumulated deficit as of March 31, 2020 was $47,566,434.
Our financial situation creates doubt whether we will continue as a going concern.
There can be no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain funding fromafter this offering, or additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital and no assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working capital is not available, we may be forced to discontinue operations, which would cause investors to lose their entire investment.
Based on the report from our independent auditors dated March 30, 2020, management stated that our financial statements for the year ended December 31, 2019, were prepared assuming that we would continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
We are not profitable and may never be profitable.
Since inception through the present, we have been dependent on raising capital to support our working capital needs. During this same period, we have recorded net accumulated losses and are yet to achieve profitability. Our ability to achieve profitability depends upon many factors, including our ability to develop and commercialize our websites. There can be no assurance that we will ever achieve any significant revenues or profitable operations.
Our operating expenses exceed our revenues and will likely continue to do so for the foreseeable future.
We are in an early stage of our development and we have not generated sufficient revenues to offset our operating expenses. Our operating expenses will likely continue to exceed our operating income for the foreseeable future, until such time as we are able to monetize our brands and generate substantial revenues, particularly as we undertake payment of the increased costs of operating as a public company.
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We have assumed a significant amount of debt and our operationsyou may not be able to generate sufficient cash flowssell shares of common stock purchased in the offering, including shares of common stock issuable upon the exercise of Series A warrants and Series B warrants, at a price equal to meetor greater than the effective price paid in the offering, or at all.
Your interest in our debt obligations, which could reduce our financial flexibility and adversely impact our operations.
Currently the Company has considerable obligations under notes, related party notes and lines of credit outstanding with various debtors. Our ability to make payments on such indebtedness will depend on our ability to generate cash flow. The Company may not generate sufficient cash flow from operations to enable us to repay this indebtedness and to fund other liquidity needs, including capital expenditure requirements. Such indebtedness could affect our operations in several ways, including the following:
A high level of indebtedness increases the risk that we may default on our debt obligations. We may not be able to generate sufficient cash flows to pay the principal or interest on our debt. If we cannot service or refinance our indebtedness, we may have to take actions such as selling significant assets, seeking additional equity financing (which will result in additional dilution to stockholders) or reducing or delaying capital expenditures, any of which could have a material adverse effect on our operations and financial condition. If we do not have sufficient funds and are otherwise unable to arrange financing, our assetscompany may be foreclosed upon which could have a material adverse effect on our business, financial condition and results of operations.
We will need additional capital, which may be difficult to raisediluted as a result of this offering.
If you do not fully exercise your basic rights, you will, at the completion of this offering, own a smaller proportional interest in our limited operating history or any numbercompany on a fully diluted basis than would have been the case if you had fully exercised your basic rights. Based on shares outstanding as of other reasons.[●], 2022, after giving effect to this offering (assuming the offering is fully subscribed and the redeemable warrants issued in the offering are exercised in full), we would have 80,094,433 shares of common stock outstanding, representing an increase in outstanding shares of 299%.
The subscription rights are non-transferable.
You cannot transfer or sell your subscription rights to anyone else. We expect that wetherefore do not intend to list the subscription rights on any securities exchange or include them in any automated quotation system and there will be no market for the subscription rights.
Holders of Series A warrants and Series B warrants issued in this offering will have adequate financingno rights as holders of common stock until they exercise their Series A warrants and/or Series B warrants and acquire common stock.
Until holders of Series A warrants and Series B warrants issued in this offering acquire shares of common stock upon exercise of such redeemable warrants, they will have no rights with respect to the shares of common stock underlying such redeemable warrants. Upon exercise of the redeemable warrants, the holders thereof will be entitled to exercise the rights of holders of common stock only as to matters for which the next 6 months. However, inrecord date occurs after the event that we exceed our expected growth, wewarrant exercise date.
We may be unable to list the Series A warrants and/or Series B warrants on Nasdaq, which would needsignificantly limit your ability to raise additional capital. resell your Series A warrants and Series B warrants.
There is no assurance that additional equity or debt financing willestablished trading market for the Series A warrants and Series B warrants to be availableissued pursuant to us when needed, on acceptable terms, or even at all. Our limited operating history makes investor evaluationthis offering, and an estimation of our future performance substantially more difficult. As a result, investorssuch Series A warrants and Series B warrants may not be unwilling to invest in us or such investment may be offered on terms or conditions that are not acceptable. In the event thatwidely distributed. Although we are not ableapplying to secure financing, we may have to scale back our growth plans or cease operations.
We face intense competition. If we do not provide digital content that is useful to users, we may not remain competitive,list the Series A warrants and our potential revenues and operating results could be adversely affected.
Our business is rapidly evolving and intensely competitive, and is subject to changing technologies, shifting user needs, and frequent introductions of new products and services. Our ability to compete successfully depends heavilySeries B warrants for trading on providing digital content that is useful and enjoyable for our users and delivering our content through innovative technologies in the marketplace.
We face competition from others in the digital content creation industry and media companies. Our current and potential competitors range from large and established companies to emerging start-ups. Established companies have longer operating histories and more established relationships with customers and users, and they can use their experience and resources in ways that could affect our competitive position, including by making acquisitions, investing aggressively in research and development, aggressively initiating intellectual property claims (whether or not meritorious) and competing aggressively for advertisers and websites. Emerging start-ups may be able to innovate and provide products and services faster than we can.
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Additionally, our operating results would suffer if our digital content is not appropriately timed with market opportunities, or if our digital content is not effectively brought to market. As technology continues to develop, our competitors may be able to offer user experiences that are, or that are seen to be, substantially similar to or better than, ours. This may force us to compete in different ways and expend significant resources in order to remain competitive. If our competitors are more successful than we are in developing compelling content or in attracting and retaining users and advertisers, our revenues and operating results could be adversely affected.
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our user’s level of engagement are critical to our success. Our financial performance will be significantly determined by our success in adding, retaining, and engaging active users of our products, particularly Vocal. We anticipate that our active user growth rate will generally decline over time as the size of our active user base increases, and it is possible that the size of our active user base may fluctuate or decline in one or more markets, particularly in markets where we have achieved higher penetration rates. If people do not perceive Vocal to be useful, reliable, and trustworthy,Nasdaq Capital Market, we may not be able to attract or retain users or otherwise maintain or increasemeet the frequency and duration of their engagement. A number of other content management systems and publishing platformsapplicable listing standards for reasons that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosionare outside of our active user base or engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficultcontrol. Satisfaction of those listing requirements depends upon the extent to measure, particularly as we introduce new and different products and services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:
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If we are unable to maintain or increase our user base and user engagement, our revenue and financial results may be adversely affected. Any decreasepurchase units in user retention, growth, or engagement could render our products less attractive to users, marketers, and developers, which is likely to have a material and adverse impact on our revenue, business, financial condition, and results of operations. If our active user growth rate continues to slow, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive revenue growth.
We face competition from traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our operating results.
In addition to internet companies, we face competition from companies that offer traditional media advertising opportunities. Most large advertisers have set advertising budgets, a very small portion of which is allocated to Internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our operating results would be harmed.
Acquisitions may disrupt growth.
We may pursue strategic acquisitions in the future. Risks in acquisition transactions include difficulties in the integration of acquired businesses into our operations and control environment, difficulties in assimilating and retaining employees and intermediaries, difficulties in retaining the existing clients of the acquired entities, assumed or unforeseen liabilities that arise in connection with the acquired businesses, the failure of counterparties to satisfy any obligations to indemnify us against liabilities arising from the acquired businesses, and unfavorable market conditions that could negatively impact our growth expectations for the acquired businesses. Fully integrating an acquired company or business into our operations may take a significant amount of time.this offering. We cannot assure you that we will meet these, or other, listing standards of The Nasdaq Capital Market with respect to the Series A warrants and Series B warrants. If we do not meet such required listing standards, we will use our commercially reasonable efforts to list the Series A warrants and Series B warrants on another suitable securities exchange or recognized trading system.
Even if a market for the Series A warrants and Series B warrants does develop, the price of the Series A warrants and Series B warrants may fluctuate and liquidity may be successful in overcoming these riskslimited. Holders of Series A warrants and Series B warrants may be unable to resell their Series A warrants and Series B warrants at a favorable price, or any other problems encountered with acquisitions and other strategic transactions. These risks may prevent us from realizing the expected benefits from acquisitions and could result in the failure to realize the full economic value of a strategic transaction or the impairment of goodwill and/or intangible assets recognized at the time of an acquisition. These risks could be heightened if we complete a large acquisition or multiple acquisitions within a short period of time. all.
Our business depends on strong brands and relationships, and if we are not able to maintain our relationships and enhance our brands, our ability to expand our base of users, advertisers and affiliates will be impaired and our business and operating results could be harmed.
MaintainingThe market price of common stock may never exceed the exercise price of the Series A warrants and enhancing our brands’ profilesSeries B warrants.
The Series A warrants and Series B warrants will be exercisable commencing on their date of issuance and expiring on , 2027, or upon redemption. The market price of common stock may require usnever exceed the exercise price of the Series A warrants and/or Series B warrants prior to make substantial investments and these investmentstheir date of expiration. Any Series A warrants and/or Series B warrants not exercised by their date of expiration will expire without residual value to holders.
During the period immediately following the expiration of this offering, you may not be successful. able to resell any shares of common stock that you purchase in the offering or upon exercise of your Series A warrants and Series B warrants.
If we fail to promote and maintain the brands’ profiles, or if we incur excessive expenses in this effort, our business and operating results could be harmed. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands’ profiles may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to be a technology leader and to continue to provide attractive products and services, which weyou exercise your subscription rights, you may not do successfully.
We depend on our key management personnelbe able to resell shares of common stock purchased by exercising your subscription rights, or shares of common stock issued to you upon exercise of your Series A warrants and Series B warrants, until you (or your broker or other nominee) have received a stock certificate or book-entry representing those shares. Although we will endeavor to issue the appropriate certificates and book entries promptly, there may be some delay between the expiration date of this offering, or the exercise date of your Series A warrants and Series B warrants, and the loss of their services could adversely affect our business.
We place substantial reliance upontime that we issue the effortsnew stock certificates and abilities of Jeremy Frommer, our Chief Executive Officer, and our other executive officers and directors. Though no individual is indispensable, the loss of the services of these executive officers could have a material adverse effect on our business, operations, revenues or prospects. We do not currently maintain key man life insurance on the lives of these individuals.book entries.
We have not adopted various corporate governance measures, and, as a result, stockholders may have limited protections against interested director transactions, conflicts of interest and similar matters.
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of corporate management and the securities markets. Because our securities are not yet listed on a national securities exchange, we are not required to adopt these corporate governance measures and have not done so voluntarily in order to avoid incurring the additional costs associated with such measures. Among these measures is the establishment of independent committees of the Board of Directors. However,In addition, to the extent you are an affiliate, as defined in Rule 144 under the Securities Act, the resale of shares of common stock, Series A warrants, or Series B warrants by you will be subject to certain restrictions, including volume limitations.
We may have broad discretion in the use of a public market develops for our securities, such legislation will require us to make changes to our current corporate governance practices. Those changes may be costly and time-consuming. Furthermore, the absencesignificant portion of the governance measures referrednet proceeds from this offering and may not use those net proceeds effectively.
We intend to aboveuse the net proceeds for sales and marketing and general working capital purposes. We cannot specify with respect to our Company may leave our shareholders with more limited protectionany certainty the particular uses of the net proceeds, if any, that we receive from this offering. Our management will have broad discretion in connection with interested director transactions, conflictsthe application of interest and similar matters.
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If we are unable to protect our intellectual property, the value of our brands and other intangible assets may be diminished, and our business may be adversely affected.
We rely and expect to continue to rely on a combination of confidentiality, assignment, and license agreements with our employees, consultants, and third parties with whom we have relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, to protect our proprietary rights. In the United States and internationally, we have filed various applications for protection of certain aspects of our intellectual property,those additional net proceeds, and we currently holdmay spend or invest those net proceeds in a number of registered trademarks and issued patents in multiple jurisdictions and have acquired patents and patent applications from third parties. Third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights heldway with which shareholders disagree. The failure by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intendmanagement to operate our business. In any or all ofapply these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we have generally taken measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to ours and compete with our business. In addition, we regularly contribute software source code under open source licenses and have made other technology we developed available under other open licenses, and we include open source software in our products. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brands and other intangible assets may be diminished and competitors may be able to morefunds effectively mimic our products, services, and methods of operations. Any of these events could have an adverse effect onharm our business and financial results. condition. Pending their use, we may invest the net proceeds in a manner that does not produce income or that loses value.
If we terminate this offering, neither we nor the subscription agent will have any obligation to you except to promptly return your subscription payments.
We may terminate this offering at any time. If we do, neither we nor the subscription agent will have any obligation to you with respect to subscription rights that you have exercised, other than to promptly return, without interest or deduction, the subscription payment you delivered to the subscription agent.
If you do not act on a timely basis and follow subscription instructions, your exercise of subscription rights may be rejected.
Holders of common stock and holders of Preferred Shares, Eligible Warrants and/or Eligible Options who desire to purchase units in this offering must act on a timely basis to ensure that all required forms and payments are actually received by the subscription agent prior to 5:00 p.m. (Eastern time) on the expiration date, unless this offering is extended. If you are a beneficial owner of shares of common stock and you wish to exercise your subscription rights, you must act promptly to ensure that your broker, custodian bank or other nominee (including any mobile investment platform) acts for you and that all required forms and payments are actually received by your broker, custodian bank or other nominee (including any mobile investment platform) in sufficient time to deliver such forms and payments to the subscription agent in order to exercise your subscription rights by 5:00 p.m. (Eastern time) on the expiration date, unless extended. We will not be responsible if your broker, custodian or nominee (including any mobile investment platform) fails to ensure that all required forms and payments are subjectactually received by the subscription agent in a timely manner.
If you fail to complete and sign the required subscription forms, send an incorrect payment processing risk.
Weamount, or otherwise fail to follow the subscription procedures that apply to your exercise of rights, the subscription agent may, depending on the circumstances, reject your subscription or accept payments using a variety of different payment methods, including credit and debit cards and direct debit. We rely on third partiesit only to process payments. Acceptance and processing of these payment methods are subject to certain certifications, rules and regulations. To the extent there are disruptions in our or third-party payment processing systems, material changes inof the payment ecosystem, failurereceived. Neither we nor the subscription agent undertakes to recertify and/contact you concerning an incomplete or changesincorrect subscription form or payment, nor are we or the subscription agent under any obligation to rulescorrect such forms or regulations concerning payment processing, we could be subjectpayment. We have the sole discretion to fines and/or civil liability, or lose our ability to accept credit and debit card payments, which would harm our reputation and adversely impact our results of operations. determine whether a subscription exercise properly follows the subscription procedures.
We are subject to risk as it relates to software that we license from third parties.
We license software from third parties, muchIf you pay the subscription price by uncertified check, your check may not clear in sufficient time to enable you to exercise your subscription rights.
Any uncertified check used to pay for the subscription price in this offering must clear prior to the expiration date of this offering. The clearing process may require five or more business days. If you choose to pay the subscription price, in whole or in part, by uncertified check and your check does not clear prior to the expiration date of this offering, you will not have satisfied the conditions to exercise your rights and you will not receive the units you wish to purchase.
You may not receive all of the units for which is integral to our systems and our business. The licenses are generally terminable if we breach our obligationsyou subscribe under the license agreements. If any of these relationships were terminated or if any of these parties were to cease doing business or cease to support the applications we currently utilize, we may be forced to spend significant time and money to replace the licensed software.
Failures or reduced accessibility of third-party software on which we rely could impair the availability of our platform and applications and adversely affect our business.over-subscription privilege.
We license software from third parties for integration into our Vocal platform, including open source software. These licenses might not continue to be available to us on acceptable terms, or at all. While we are not substantially dependent upon any third-party software, the loss ofRights holders who fully exercise their basic rights will have the right, pursuant to usetheir over-subscription privileges, to purchase additional units to the extent other rights holders do not exercise their basic rights in full. Over-subscription privileges will be allocated pro rata among rights holders who over-subscribe, based on the number of over-subscription units for which the rights holders have subscribed. We cannot guarantee that you will receive all, or a significant portion, of our third-party software requiredthe units for which you subscribe pursuant to your over-subscription privilege.
If the development, maintenancenumber of units allocated to you is less than your subscription request, the excess funds held by the subscription agent on your behalf will be promptly returned to you, without interest or deduction, after this offering has expired, and deliverywe will have no further obligations to you.
Your receipt of subscription rights may be treated as a taxable dividend to you.
The distribution of subscription rights in this offering should be a non-taxable stock dividend under Section 305(a) of the Internal Revenue Code of 1986. This position is not binding on the Internal Revenue Service or the courts, however. If this offering is part of a “disproportionate distribution” under Section 305 of the Internal Revenue Code, your receipt of subscription rights may be treated as the receipt of a distribution equal to the fair market value of the rights. Any such distribution treated as a disproportionate distribution would be treated as dividend income to the extent of our applicationscurrent and accumulated earnings and profits, with any excess being treated as a return of basis to the extent thereof and then as capital gain. See “Material U.S. Federal Income Tax Considerations.”
The dealer-manager is not underwriting this offering, but may act as a placement agent of the units underlying the subscription rights.
If this offering is not fully subscribed following the expiration date of the offering, RHK Noble, as the dealer-manager for this offering, has agreed to use its commercially reasonable efforts to place any unsubscribed units at the subscription price for an additional period of up to 45 days. The number of units that may be sold by us during this period will depend upon the number of units that are subscribed for pursuant to the exercise of subscription rights by our shareholders and other rights holders. No assurance can be given that any unsubscribed units will be sold during this period. RHK Noble is not an underwriter of the subscription rights or the units issuable upon exercise of the basic rights or over-subscription privilege. Under our agreement with the dealer-manager, RHK Noble is providing marketing assistance and advice to us in connection with this offering. Its services to us in this connection cannot be construed as any assurance that this offering will be successful.
Because we do not have a standby purchase agreement, backstop commitment or similar arrangement in connection with this offering, the net proceeds we receive from the offering may be less than we intend.
We have currently not entered into any standby purchase agreement, backstop commitment or similar arrangement in connection with this offering. We therefore cannot assure you that any of our shareholders will exercise all or any part of their subscription rights. If rights holders subscribe for fewer units than anticipated, the net proceeds we receive from this offering could result in delaysbe significantly reduced. Regardless of whether this offering is fully subscribed or we do enter into a standby purchase agreement, backstop commitment or similar arrangement, we may need to raise additional capital in the provision of our applications until we develop or identify, obtain and integrate equivalent technology, which could harm our business.future.
Any errors or defectsWe may in the hardwarefuture enter into a standby purchase agreement, backstop commitment or softwaresimilar arrangement in connection with this offering if we use could result in errors, interruptions, cyber incidentsare able to negotiate commercially reasonable terms with a standby purchaser or a failure of our applications. Any significant interruption in the availability of all or a significant portion ofbackstop purchaser. We cannot assure you that such software could have an adverse impact on our business unless and until we can replace the functionality provided by these applications at a similar cost. Furthermore, this software may notarrangement will be available on commercially reasonable terms or at all. The loss of the right to use all or a significant portion of this software could limit access to our platform and applications. Additionally, we rely upon third parties’ abilities to enhance their current applications, develop new applications on a timely and cost-effective basis and respond to emerging industry standards and other technological changes. We may be unable to effect changes to such third-party technologies, which may prevent us from rapidly responding to evolving customer requirements. We also may be unable to replace the functionality provided by the third-party software currently offered in conjunction with our applications in the event that such software becomes obsolete or incompatible with future versions of our platform and applications or is otherwise not adequately maintained or updated.
We need to manage growth in operations to maximize our potential growth and achieve our expected revenues and our failure to manage growth will cause a disruption of our operations, resulting in the failure to generate revenue.
In order to maximize potential growth in our current and potential markets, we believe that we must expand our marketing operations. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.
In order to achieve the general strategies of our company we need to maintain and search for hard-working employees who have innovative initiatives, while at the same time, keep a close eye on any and all expanding opportunities in our marketplace.
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We plan to generate a significant portion of our revenues from advertising and affiliate sales relationships, and a reduction in spending by or loss of advertisers and general decrease in online spending could adversely harm our business.
We plan to generate a substantial portion of our revenues from advertisers. Our advertisers may be able to terminate prospective contracts with us at any time. Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to our advertisers, they may stop placing adsnegotiate commercially reasonable terms for a standby purchase agreement, backstop commitment or similar arrangement in connection with us, whichthis offering we would adversely affect our revenues and business. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Adverse macroeconomic conditions can also have a material negative impact on the demand for advertising and cause our advertisers to reduce the amounts they spend on advertising, which could adversely affect our revenues and business.
Security breaches could harm our business.
Security breaches have become more prevalent in the technology industry. We believe that we take reasonable steps to protect the security, integrity and confidentiality of the information we collect, use, store and disclose, but there is no guarantee that inadvertent (e.g., software bugs or other technical malfunctions, employee error or malfeasance, or other factors) or unauthorized data access or use will not occur despite our efforts. Although we have not experienced any material security breaches to date, we may in the future experience attempts to disable our systems or to breach the security of our systems. Techniques used to obtain unauthorized access to personal information, confidential information and/or the systems on whichenter into such information are stored and/or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.
If an actual or perceived security breach occurs, the market perception of our security measures could be harmed, and we could lose sales and customers and/or suffer other negative consequences to our business. A security breach could adversely affect the digital content experience and cause the loss or corruption of data, which could harm our business, financial condition and operating results. Any failure to maintain the security of our infrastructure could result in loss of personal information and/or other confidential information, damage to our reputation and customer relationships, early termination of our contracts and other business losses, indemnification of our customers, financial penalties, litigation, regulatory investigations and other significant liabilities.arrangement. In the event ofwe enter into a major third-party security incident, we may incur losses in excess of their insurance coverage.
Moreover, if a high profile security breach occurs with respect to usstandby purchase agreement, backstop commitment or another digital entertainment company, our customers and potential customers may lose trust in the security of our business model generally, which could adversely impact our ability to retain existing customers or attract new ones.
The laws and regulations concerning data privacy and data security are continually evolving; our or our platform providers’ actual or perceived failure to comply with these laws and regulations could harm our business.
Customers view our content online, using third-party platforms and networks and on mobile devices. We collect and store significant amounts of information about our customers—both personally identifying and non-personally identifying information. We are subject to laws from a variety of jurisdictions regarding privacy and the protection of this player information. For example, the European Union (EU) has traditionally taken a broader view than the United States and certain other jurisdictions as to what is considered personal information and has imposed greater obligations under data privacy regulations. The U.S. Children’s Online Privacy Protection Act (COPPA) also regulates the collection, use and disclosure of personal information from children under 13 years of age. While none of our content is directed at children under 13 years of age, if COPPA were to apply to us, failure to comply with COPPA may increase our costs, subject us to expensive and distracting government investigations and could result in substantial fines.
Data privacy protection laws are rapidly changing and likely will continue to do so for the foreseeable future. The U.S. government, including the Federal Trade Commission and the Department of Commerce, is continuing to review the need for greater regulation over the collection of personal information and information about consumer behavior on the Internet and on mobile devices and the EU has proposed reforms to its existing data protection legal framework. Various government and consumer agencies worldwide have also called for new regulation and changes in industry practices. In addition, in some cases, we are dependent upon our platform providers to solicit, collect and provide us with information regarding our players that is necessary for compliance with these various types of regulations.
Customer interaction with our content is subject to our privacy policy and terms of service. If we fail to comply with our posted privacy policy or terms of service or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation against us by governmental authorities or others, which could result in fines or judgments against us, damage our reputation, impact our financial condition and harm our business. If regulators, the media or consumers raise any concerns about our privacy and data protection or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, and negatively impact our financial condition and damage our business.
In the area of information security and data protection, many jurisdictions have passed laws requiring notification when there is a security breach for personal data or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to implement. Our security measures and standards may not be sufficient to protect personal information and we cannot guarantee that our security measures will prevent security breaches. A security breach that compromises personal information could harm our reputation and result in a loss of confidence in our products and ultimately in a loss of customers, which could adversely affect our business and impact our financial condition. This could also subject us to liability under applicable security breach-related laws and regulations and could result in additional compliance costs, costs related to regulatory inquiries and investigations, and an inability to conduct our business.
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Changes to federal, state or international laws or regulations applicable to our company could adversely affect our business.
Our business is subject to a variety of federal, state and international laws and regulations, including those with respect privacy, data, and other laws. These laws and regulations, and the interpretation or application of these laws and regulations, could change. In addition, new laws or regulations affecting our business could be enacted. These laws and regulations are frequently costly to comply with and may divert a significant portion of management’s attention. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business.
If any of our relationships with internet search websites terminate, if such websites’ methodologies are modified or if we are outbid by competitors, traffic to our websites could decline.
We depend in part on various internet search websites, such as Google.com, Bing.com, Yahoo.com and other websites to direct a significant amount of traffic to our websites. Search websites typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings generally are determined and displayed as a result of a set of unpublished formulas designed by search engine companies in their discretion. Purchased listings generally are displayed if particular word searches are performed on a search engine. We rely on both algorithmic and purchased search results, as well as advertising on other internet websites, to direct a substantial share of visitors to our websites and to direct traffic to the advertiser customers we serve. If these internet search websites modify or terminate their relationship with us or we are outbid by our competitors for purchased listings, meaning that our competitors pay a higher price to be listed above us in a list of search results, traffic to our websites could decline. Such a decline in traffic could affect our ability to generate advertising revenue and could reduce the desirability of advertising on our websites.
Our business involves risks of liability claims arising from our media content, which could adversely affect our ability to generate revenue and could increase our operating expenses.
As a distributor of media content, we face potential liability for defamation, invasion of privacy, negligence, copyright or trademark infringement, obscenity, violation of rights of publicity and/or obscenity laws and other claims based on the nature and content of the materials distributed. These types of claims have been brought, sometimes successfully, against broadcasters, publishers, online services and other disseminators of media content. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could have a material adverse effect on us. In addition, measures to reduce our exposure to liabilitysimilar arrangement in connection with content available through our internet websites could require us to take steps that would substantially limitthis offering we will file a Current Report on Form 8-K with a summary of the attractivenessterms of our internet websites and/or their availability in certain geographic areas, which could adversely affect our ability to generate revenue and could increase our operating expenses.such arrangement.
Intellectual property litigation could expose us to significant costs and liabilities and thus negatively affect our business, financial condition and results of operations.
We do not expect to pay dividends in the future. Any return on investment may be subjectlimited to claims of infringement of third party patents and trademarks and other violations of third party intellectual property rights. Intellectual property disputes are generally time-consuming and expensive to litigate or settle, and the outcome of such disputes is uncertain and difficult to predict. The existence of such disputes may require us to set-aside substantial reserves, and has the potential to significantly affect our overall financial standing. To the extent that claims against us are successful, they may subject us to substantial liability, and we may have to pay substantial monetary damages, change aspects of our business model, and/or discontinue any of our services or practices that are found to be in violation of another party’s rights. Such outcomes may severely restrict or hinder ongoing business operations and impact the value of our business. Successful claims against us could also result in us having to seek a license to continue our practices. Under such conditions, a license may or may not be offered or otherwise made available to us. If a license is made available to us, the cost of the license may significantly increase our operating burden and expenses, potentially resulting in a negative effect on our business, financial condition and results of operations.
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Although we have been and are currently involved in multiple areas of commerce, internet services, and high technology where there is a substantial risk of future patent litigation, we have not obtained insurance for patent infringement losses. If we are unsuccessful at resolving pending and future patent litigation in a reasonable and affordable manner, it could disrupt our business and operations, including by negatively impacting areas of commerce or putting us at a competitive disadvantage.
If we are unable to obtain or maintain key website addresses, our ability to operate and grow our business may be impaired.
Our website addresses, or domain names, are critical to our business. We currently own more than 415 domain names. However, the regulation of domain names is subject to change, and it may be difficult for us to prevent third parties from acquiring domain names that are similar to ours, that infringe our trademarks or that otherwise decrease the value of our brands. If we are unable to obtain or maintain key domain names for the various areas of our business, our ability to operate and grow our business may be impaired.
We may have difficulty scaling and adapting our existing network infrastructure to accommodate increased traffic and technology advances or changing business requirements, which could cause us to incur significant expenses and lead to the loss of users and advertisers.
To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic and the greater the complexity of our products and services, the more computer power we will need. We could incur substantial costs if we need to modify our websites or our infrastructure to adapt to technological changes. If we do not maintain our network infrastructure successfully, or if we experience inefficiencies and operational failures, the quality of our products and services and our users’ experience could decline. Maintaining an efficient and technologically advanced network infrastructure is particularly critical to our business because of the pictorial nature of the products and services provided on our websites. A decline in quality could damage our reputation and lead us to lose current and potential users and advertisers. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our operating results and financial condition.
Operating a network open to all internet users may result in legal consequences.
Our Terms and Conditions clearly state that our network and services are only to be used by users who are over 13 years old. Although we will terminate accounts that are known to be held by persons age 13 or younger, it is impractical to independently verify that all activity occurring on our network fits into this description. As such, we run the risk of federal and state law enforcement prosecution.
Unfavorable global economic, business, or political conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside of our control, including the impact of health and safety concerns, such as those relating to the current COVID-19 coronavirus (“COVID-19”) pandemic.
On January 30, 2020 the World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.
Additionally, the global financial crisis in connection with the COVID-19 pandemic has caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our Vocal platform and our ability to raise additional capital when needed on acceptable terms, if at all. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
Risks Related To Our Common Stock
The price of our common stock may be subject to wide fluctuations.
Even though we have our shares quoted on the OTCQB Venture Market, a consistently active trading market for our common stock may not exist. You may not be able to sell your shares quickly or at the current market price if trading in our stock is not active. You may lose all or a part of your investment. The market price of our Common Stock may be highly volatile and subject to wide fluctuations in response to a variety of factors and risks, many of which are beyond our control. In addition to the risks noted elsewhere in this prospectus, some of the other factors affecting our stock price may include:
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For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on past results as an indication of future performance. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against the public company. Regardless of its outcome, this type of litigation could result in substantial costs to us and a likely diversion of our management’s attention. You may not receive a positive return on your investment when you sell your shares and you may lose the entire amount of your investment.
We may, in the future, issue additional shares of common stock, which would reduce investors’ percent of ownership and dilute our share value
Our Second Amended and Restated Articles of Incorporation authorize the issuance of 100,000,000 shares of common stock, and 20,000,000 shares of preferred stock. Currently the Company has no shares of preferred stock outstanding. Additionally, as of July 21, 2020, there are outstanding (i) warrants to purchase 954,389 shares of our common stock; and (ii) options exercisable into 452,523 shares of our common stock.
In addition, the Company has convertible notes outstanding that are convertible into 1,295,819 shares of the Company’s common stock. Assuming all of the Company’s currently outstanding warrants and options be exercised and all convertible notes be converted, the Company would have to issue an additional 2,702,731 shares of common stock representing 26.6% of our current issued and outstanding common stock. The future issuance of this common stock would result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any Common Stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
Our common shares are subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
SEC Rule 15g-9 establishes the definition of a “penny stock,” in pertinent part, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, the rules require:
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person; and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination, and (b) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our Common shares and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
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Liability of directors for breach of duty is limited under Nevada law.
Nevada law provides that directors must discharge their duties as a director in good faith and with a view to the interests of the corporation. Under Nevada law, directors owe a fiduciary duty to the corporation, which is generally comprised of the duty of care and duty of loyalty to the corporation. Except under limited circumstances set forth in NRS 78.138(7), or unless our Second Amended and Restated Articles of Incorporation or an amendment thereto provide for greater individual liability (which ours does not provide), a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer, and the breach of those duties involved intentional misconduct, fraud or a knowing violation of law.Our stockholders’ ability to recover damages for fiduciary breaches may be reduced by this statute.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future and, as such, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, and any future loan arrangements we enter into may contain, terms prohibiting or limiting the amountThe payment of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
We may issue additional shares of preferred stock in the future that may adversely impact your rightsdepend on earnings, financial condition and other business and economic factors affecting us at such time as holders of our common stock.
Pursuant to our Second Amended and Restated Articles of Incorporation, the aggregate number of shares of capital stock which we are authorized to issue is 120,000,000 shares, of which 100,000,000 shares are common stock, and 20,000,000 shares are “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval, to issue one or more series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. As of the date of this prospectus, we do not have any preferred stock outstanding.
The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our Company. In addition, advanced notice is required prior to stockholder proposals, which might further delay a change of control. Additionally, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to receivemay consider relevant. If we do not pay dividends, before dividends are declared to holders of our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
Because the Series A warrants and Series B warrants are executory contracts, they may have no value in a bankruptcy or reorganization proceeding.
In the rightevent a bankruptcy or reorganization proceeding is commenced by or against us, a bankruptcy court may hold that any then-unexercised Series A warrants and Series B redeemable warrants are executory contracts subject to rejection by us with the redemptionapproval of such preferred shares, together with a premium,bankruptcy court. As a result, even if we have sufficient funds, holders may not be entitled to receive any consideration for their Series A warrants and Series B warrants or may receive an amount less than they would be entitled to if they had exercised their Series A warrants and/or Series B warrants prior to the redemptioncommencement of the common stock. To the extent that we do issueany such additional shares of preferred stock, your rights as holders of common stock could be impaired thereby, including, without limitation, dilution of your ownership interests in us.bankruptcy or reorganization proceeding.
Each of our Second Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide that the Eighth Judicial District Court of Clark County, Nevada will be the sole and exclusive forum for certain disputes which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers, employees or agents.
Each of our Second Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide that unless the Company consents in writing to the selection of an alternative forum, the Eighth Judicial District Court of Clark County, Nevada shall be the sole and exclusive forum for state law claims with respect to: (i) any derivative action or proceeding brought in the name or right of the Company or on its behalf, (ii) any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders, (iii) any action arising or asserting a claim arising pursuant to any provision of Nevada Revised Statutes Chapters 78 or 92A or any provision of the Company’s Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce or determine the validity of the Company’s Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws. This exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. However, each of our Second Amended Articles of Incorporation and our Amended and Restated Bylaws contain a federal forum provision which provides that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company are deemed to have notice of and consented to this provision. As this provision applies to Securities Act claims, there may be uncertainty whether a court would enforce such a provision.
These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or its directors, officers or other employees, which may discourage such lawsuits against the Company and its directors, officers and other employees. Alternatively, if a court were to find our choice of forum provisions contained in either our Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws to be inapplicable or unenforceable in an action, the Company may incur additional costs associated with resolving such action in other jurisdictions, which could harm its business, results of operations, and financial condition.
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Risks Related to this Offering
The Company will have broad discretion in the use of the net proceeds from this offering and may fail to apply these proceeds effectively.
The Company’s management will have broad discretion in the application of the net proceeds of this offering, including using the proceeds to conduct operations, expand the Company’s business lines and for general working capital. The Company may also use the net proceeds of this offering to acquire or invest in complementary businesses, products, or technologies, or to obtain the right to use such complementary technologies. We have no commitments with respect to any acquisition or investment; however, we seek opportunities and transactions that management believes will be advantageous to the Company and its operations or prospects. We cannot specify with certainty the actual uses of the net proceeds of this offering. You may not agree with the manner in which our management chooses to allocate and spend the net proceeds. We may invest the net proceeds from this offering in a manner that does not produce income or that loses value. The failure by our management to apply these funds effectively could harm our business, financial condition and results of operations.
There is no assurance that an active and liquid trading market in our common stock will develop.
This offering will close only if our common stock (and the warrants underlying the Units) are accepted to be listed on the Nasdaq Capital Market. There can be no assurance any broker will be interested in trading our common stock. Therefore, it may be difficult to sell any securities you purchase in this offering if you desire or need to sell them. Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our common stock or the warrants will develop or, if developed, that the market will continue.
There is no guarantee that we will successfully have our common stock listed on the Nasdaq Capital Market. Even if our common stock is accepted for listing on the Nasdaq Capital Market, upon our satisfaction of the exchange’s initial listing criteria, the exchange may subsequently delist our common stock if we fail to comply with ongoing listing standards.
In the event we are able to list our common stock and the warrants on the Nasdaq Capital Market upon our satisfaction of the exchange’s initial listing criteria, the exchange will require us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our common stock. If we fail to meet these continued listing requirements, our common stock may be subject to delisting. If our common stock or warrants are delisted and we are not able to list such common stock or warrants on another national securities exchange, we expect our securities would be quoted on an over-the-counter market; However, if this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. In addition, in the event of such delisting, we could experience a decreased ability to issue additional securities and obtain additional financing in the future. Even if our common stock or warrants are listed on the Nasdaq Capital Market, there can be no assurance that an active trading market for our common stock or warrants will develop or be sustained after our initial listing.
You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.
If you purchase shares of common stock in this offering, the value of your shares based on our actual book value will immediately be less than the price you paid. This reduction in the value of your equity is known as dilution. This dilution occurs in large part because our existing stockholders paid less than the assumed public offering price when they acquired their shares of common stock. Based upon the issuance and sale of shares of common stock by us in this offering at an assumed public offering price of $ per share, you will incur immediate dilution of $ in the net tangible book value per share of common stock. If the underwriters exercise their over-allotment option, or if outstanding options to purchase our common shares are exercised, investors will experience additional dilution. For more information, see “Dilution.”
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CAUTIONARY STATEMENTNOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or the Securities Act, Section 21E of the Securities Exchange Act of 1934 or the Exchange Act, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that reflect our current views with respect to future events and financial performance, and all statements other than statements of historical fact are statements that are, or could be, deemed forward-looking statements. TheseIn some cases, you can identify forward-looking statements contain information about our expectations, beliefsby terms such as “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “believe,” “expect,” “seek,” “anticipate,” “intend,” “estimate,” “plan,” “target,” “project,” “forecast,” “envision” or intentionsthe negative of these terms, and other similar phrases. All statements contained in this prospectus and any prospectus supplement regarding our product development and commercialization efforts, business,future financial condition,position, sales, costs, earnings, losses, cash flows, other measures of results of operations, strategiescapital expenditures or prospects,debt levels and other similar matters. Theseplans, objectives, outlook, targets, guidance or goals are forward-looking statements.
You should not place undue reliance on our forward-looking statements because they are not guarantees of future performance or expectations, and involve risks and uncertainties. Our forward-looking statements are based on management’s currentthe information currently available to us and speak only as of the date on the cover of this prospectus, the date of any prospectus supplement, or, in the case of forward-looking statements incorporated by reference, the date of the filing that includes the statement. Although we believe that the expectations and assumptions about future events, whichreflected in these forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “expects,” “plans,” “projects,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,” and other words of similar meaning.
Thesereasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Except as required by applicable law, we assume no obligation, and disclaim any obligation, to update forward-looking statements whether as a result of new information, events or otherwise.
The forward-looking statements contained in this prospectus are set forth principally in “Risk Factors” above, and in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and other sections in our 2021 Annual Report and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and other sections in our Latest Form 10-Q. In addition, there may be events in the future that we are not able to predict accurately or control which may cause actual results to differ materially from current expectations include, among other things, those listed under the section titled “Risk Factors” and elsewhere in this prospectus, in any related prospectus supplement and in any related free writing prospectus.
Any forward-looking statement in this prospectus, in any related prospectus supplement and in any related free writing prospectus reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our business, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus, any related prospectus supplement and any related free writing prospectus and the documents that we reference herein and therein and have filed as exhibits hereto and thereto completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements. Except as required by law, we assume no obligation to update or revise thesePlease consider our forward-looking statements in light of these risks as you read this prospectus.
QUESTIONS AND ANSWERS RELATING TO THIS OFFERING
The following are examples of what we anticipate will be common questions about this offering. The answers are based on selected information included elsewhere in this prospectus. The following questions and answers do not contain all of the information that may be important to you and may not address all of the questions that you may have about this offering. This prospectus, including the documents we incorporate by reference, contains more detailed descriptions of the terms and conditions of this offering and provides additional information about our company and our business, including potential risks related to our business, the offering and common stock.
What is the rights offering?
We are issuing to each holder of common stock as of the record date and each holder of the Preferred Shares, Eligible Warrants and/or Eligible Options as of the record date, who we refer to as a rights holder or you, two non-transferable subscription rights for any reason, even if new information becomes availableeach share of common stock then owned or issuable upon conversion or exercise by the holder. Each basic right entitles the holder to purchase one unit at a subscription price of $2.00, which we refer to as the subscription price. Holders of fractional shares shall be entitled, in proportion to their fractional holdings, to receive basic rights, provided that such basic rights may only be exercised in aggregate for whole numbers of units.
What securities comprise the units?
Each unit will consist of 1 share of common stock, a Series A warrant exercisable for one share of common stock, and a Series B warrant exercisable for one share of common stock at a price of $2.00 per unit. Shares of common stock, Series A warrants and Series B warrants comprising a unit may only be purchased as a unit, but will be issued separately. Subscription rights will not be transferrable. The subscription rights may only be exercised in aggregate for whole numbers of units.
What are the terms of the redeemable warrants included in the future.units?
This prospectus,For each unit you purchase, you will be entitled to receive a Series A warrant exercisable to acquire one share of common stock at an exercise price of $3, and a Series B warrant exercisable to acquire one share of common stock at an exercise price of $6. Each warrant will expire on , 2027, and will be exercisable for cash or, solely during any related prospectus supplement and any related free writing prospectus also contain or may contain estimates, projections and other information concerning our industry, our business andperiod when a registration statement covering the markets for our products, including data regardingissuance of the estimated sizeshares of those markets and their projected growth rates. Information that is based on estimates, forecasts, projections or similar methodologies is inherentlycommon stock subject to uncertaintiesthe Series A warrants and actual events Series B warrants is not in effect, on a cashless basis. Each redeemable warrant is exercisable commencing upon issuance and expire on , 2027. The Series A warrants and Series B warrants will be issued in registered forms under warrant agreements with Pacific Stock Transfer as warrant agent.
Will the redeemable warrants be listed?
We are applying to list the Series A warrants and Series B warrants for trading on The Nasdaq Capital Market, but we may not be able to meet the applicable listing standards. We cannot assure you that we will meet the listing standards of Nasdaq with respect to the Series A warrants and Series B warrants, in which case we expect the Series A warrants and/or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry and general publications, government data and similar sources. In some cases,Series B warrants will not be listed on any securities exchange or recognized trading system. If we do not expresslymeet such required listing standards, we will use our commercially reasonable efforts to list the Series A warrants and Series B warrants on another suitable securities exchange or recognized trading system.
What are the basic rights?
For each basic right held, each rights holder has the opportunity to purchase two units at a subscription price of $2.00, provided that (a) basic rights may be exercised in aggregate only to purchase whole numbers of units, (b) the total subscription price payable upon any exercise of subscription rights will be rounded to the nearest whole cent and (c) only whole numbers of shares of common stock, Series A warrants and Series B warrants exercisable for whole numbers of shares will be to a holder in this offering, with any right to a fractional share to which a holder would otherwise be entitled being terminated without consideration to the rights holder. Holders of fractional shares shall be entitled, in proportion to their fractional holdings, to receive basic rights, provided that such basic rights may only be exercised in aggregate for whole numbers of units. We have granted to you, as a holder of common stock as of the record date or a holder of the Preferred Shares, Eligible Warrants and/or Eligible Options as of the record date, two basic rights for each whole share of common stock you then owned or you are entitled to upon conversion or exercise of the Preferred Shares, Eligible Warrants and/or Eligible Options. For example, if you owned 1,000 shares of common stock as of the record date, you would receive 2,000 basic rights and would have the right to purchase, for an aggregate subscription price of $4,000, 2,000 units comprised of 2,000 shares of common stock, a Series A warrant to purchase 2,000 shares of common stock at an aggregate purchase price of $6,000, and a Series B warrant to purchase 2,000 shares of common stock at an aggregate purchase price of $20,000. You may exercise all, a portion or none of your basic rights. If you exercise fewer than all of your basic rights, however, you will not be entitled to purchase any additional units pursuant to the over-subscription privilege. See “-What is the over-subscription privilege?” below.
What is the over-subscription privilege?
If you exercise all of your basic rights, you will have the right, which we refer to as the over-subscription privilege, to purchase additional units that remain unsubscribed as a result of any unexercised basic rights. We refer to the sources frombasic rights and over-subscription privilege together as subscription rights. You should indicate on your subscription certificate, or the form provided by your nominee if your shares are held in the name of a nominee, how many additional units you would like to purchase pursuant to your over-subscription privilege. You are entitled to exercise your over-subscription privilege only if you exercise your basic rights in full. If over-subscription requests exceed the number of units available, however, we will allocate the available units pro rata among rights holders who over-subscribe based on the number of over-subscription units for which these datathey have subscribed. See “The Rights Offering-Over-Subscription Privilege.”
To properly exercise your over-subscription privilege, you must deliver the subscription payment related to your over-subscription privilege before this offering expires. Because we will not know the total number of unsubscribed units before this offering expires, if you wish to maximize the number of units you purchase pursuant to your over-subscription privilege, you will need to deliver payment in an amount equal to the aggregate subscription price for the maximum number of units available, assuming that no rights holder other than you has purchased any units pursuant to such rights holder’s basic right and over-subscription privilege.
Subject to the ownership limitation described below, we will seek to honor the over-subscription requests in full. If over-subscription requests exceed the number of units available, however, we will allocate the available units pro rata among the rights holders in proportion to the product (rounded down to the nearest whole number so that the aggregate number of units does not exceed the aggregate number offered) obtained by multiplying the number of units such rights holder subscribed for pursuant to the over-subscription privilege by a fraction (A) the numerator of which is the number of unsubscribed units and (B) the denominator of which is the total number of units sought to be subscribed for pursuant to the over-subscription privilege by all rights holders participating in such over-subscription.. Continental Stock Transfer & Trust, which will act as the subscription agent in connection with this offering and which we refer to as the subscription agent, will determine the over-subscription allocation based on the formula described above and will notify rights holders of the number of units allocated to each holder exercising the over-subscription privilege as promptly as may be practicable after the allocations are derived.
completed..
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To the extent your aggregate subscription payment for the actual number of unsubscribed units available to you pursuant to the over-subscription privilege is less than the amount you actually paid in connection with the exercise of the over-subscription privilege, you will be allocated only the number of unsubscribed units available to you, and any excess subscription payment will be promptly returned to you, without interest or deduction, after the expiration of this offering.
May the subscription rights that I exercise be reduced for any reason?
There are a sufficient number of units available to honor your basic rights in full. As a result, if this offering is completed, you will receive whole units to the full extent you have properly exercised your basic rights in whole or in part for such whole units.
Sufficient units may not be available to honor your exercise of the over-subscription privilege. If exercises of over-subscription privileges exceed the number of units available, we will allocate the available units pro rata among rights holders who over-subscribe based on the number of over-subscription units for which the rights holders have subscribed.
Why are we conducting this offering?
In accordance with our strategic plan, we are conducting this offering primarily to raise funds for sales and marketing and general working capital purposes. Our board of directors has approved this offering, and it appointed a pricing committee to further consider and establish the pricing and other financial terms of the securities in the offering. Based on information available to the board and its pricing committee, as well as subsequent analyses of the board and its pricing committee, the board believes that this offering is in the best interests of our company and shareholders. Neither our board nor its pricing committee is, however, making any recommendation regarding your exercise of the subscription rights.
Our board and its pricing committee considered and evaluated a number of factors relating to this offering, including:
● | our current capital resources and indebtedness, and our future need for additional liquidity and capital; |
● | our need for increased financial flexibility in order to enable us to achieve our business plan; |
● | the size and timing of the offering and alternative securities to be offered; |
Assuming
● | the potential dilution to our current shareholders if they choose not to participate in the offering; |
● | the non-transferability of the subscription rights; |
● | alternatives available for raising capital; |
● | the potential impact of the offering on the public float for the common stock if the Series A warrants and/or Series B warrants are exercised; and |
● | the fact that existing shareholders would have the opportunity to purchase additional units. |
Am I required to exercise the salesubscription rights I receive in this offering?
No. You may exercise any number of your subscription rights, or you may choose not to exercise any of your subscription rights. If, however, you choose not to exercise your subscription rights or you exercise less than your full amount of subscription rights and other rights holders fully exercise their subscription rights, the percentage of common stock owned by other shareholders will increase relative to your ownership percentage and your voting and other rights in our company will likewise be diluted-see “Description of Securities” for a description of the voting and liquidation rights of our common stock and preference stock.
May I sell, transfer or assign my subscription rights?
No. You may not transfer, sell or assign any of the subscription rights distributed to you, except that subscription rights will be transferable by operation of law (e.g., by death). The subscription rights are non-transferable and will not be listed on any securities exchange or included in any automated quotation system. Therefore, there will be no market for the subscription rights.
The shares of common stock and redeemable warrants comprising the units will be issued separately. Units will not be issued as a separate security and will not be transferable.
Shares of common stock issued upon the exercise of subscription rights, Series A warrants or Series B warrants are expected to be listed on The Nasdaq Capital Market under the symbol “CRTD.” We are applying to list the Series A warrants and Series B warrants for trading on The Nasdaq Capital Market, but we may not be able to meet the applicable listing standards. See “The Rights Offering-Transferability- Series A warrants and Series B warrants” below.
How do I exercise my subscription rights if my shares of common stock are held in my name?
If you hold your shares of common stock in your name and you wish to participate in this offering, you must deliver a properly completed and duly executed subscription certificate and all other required subscription documents, together with payment of the full subscription price, to the subscription agent before 5:00 p.m. (Eastern time) on the expiration date.
If you send an uncertified check, payment will not be deemed to have been delivered to the subscription agent until the check has cleared. In certain cases, you may be required to provide signature guarantees.
Please follow the delivery instructions on the subscription certificate. Do not deliver documents to us. You are solely responsible for completing delivery of your subscription certificate, all other required subscription documents and subscription payment to the subscription agent. You should allow sufficient time for delivery of your subscription materials to the subscription agent so that the subscription agent receives them by 5:00 p.m. (Eastern time) on the expiration date. See “-To whom should I send my forms and payment?” below.
If you send a payment that is insufficient to purchase the number of units you requested, or if the number of units you requested is not specified in the forms, the payment received will be applied to exercise your subscription rights to the fullest extent possible based on the amount of the payment received pursuant to your subscription rights. Any payment that is received but not so applied will be refunded to you without interest (subject to the rounding of the amount so applied to the nearest whole cent).
What form of payment is required to purchase units?
As described in the instructions accompanying the subscription certificate, payments submitted to the subscription agent must be made in U.S. dollars. Checks or bank drafts drawn on U.S. banks should be payable to the order of “Continental Stock Transfer & Trust, as Subscription Agent for Creatd, Inc.” Payments by uncertified check will be deemed to have been received upon clearance. Please note that funds paid by uncertified check may take five or more business days to clear. Accordingly, rights holders who wish to pay the subscription price by means of uncertified check are urged to make payment sufficiently in advance of the expiration time to ensure that such payment is received and clears by such date. If you hold your shares of common stock in the name of a broker, dealer, custodian bank or other nominee (including any mobile investment platform), separate payment instructions may apply. Please contact your nominee, if applicable, for further payment instructions.
How do I exercise my subscription rights if my shares of common stock are held in the name of a broker, dealer, custodian bank or other nominee?
If you hold shares of common stock in the name of a broker, dealer, custodian bank or other nominee (including any mobile investment platform) that uses the services of Depository Trust Company, then Depository Trust Company will credit two subscription rights to your nominee record holder for (i) each share of common stock that you beneficially owned as of the record date or (ii) each share of common stock issuable upon conversion of exercise of the Preferred Shares, Eligible Warrants and/or Eligible Options you held as of the record date. If you are not contacted by your nominee (including any mobile investment platform), you should contact your nominee as soon as possible.
How soon must I act to exercise my subscription rights?
If your shares of common stock are registered in your name and you elect to exercise any of your subscription rights, the subscription agent must receive your properly completed and duly executed subscription certificate, all other required subscription documents and full subscription payment, including final clearance of any uncertified check, before 5:00 p.m. (Eastern time) on the expiration date on , 2022. If you hold shares in the name of a broker, dealer, custodian bank or other nominee (including any mobile investment platform), your nominee may establish an earlier deadline before the expiration of this offering by which time you must provide the nominee with your instructions and payment to exercise your subscription rights.
Although we will make reasonable attempts to provide this prospectus to our shareholders to whom rights are distributed, this offering and all related subscription rights will expire at 5:00 p.m. (Eastern time) on the expiration date, whether or not we have been able to locate and deliver this prospectus to you or any other shareholder.
After I exercise my subscription rights, can I change my mind?
No. Once made, all exercises of subscription rights are irrevocable.
Can this offering be terminated or extended?
Yes. If we terminate this offering, neither we nor the subscription agent will have any obligation with respect to subscription rights that have been exercised except to promptly return, without interest or deduction, any subscription payment the subscription agent received from you. If we were to terminate this offering, any money received from subscribing shareholders would be promptly returned, without interest or deduction, and we would not be obligated to issue units, shares of common stock, Series A warrants, or Series B warrants to rights holders who have exercised their subscription rights prior to termination.
We may extend this offering for one or more additional periods in our sole discretion not to exceed 45 days from the initial expirations date. We will announce any extension in a press release issued no later than 9:00 a.m. (Eastern time) on the business day after the most recently announced expiration date.
How was the subscription price determined?
The subscription price was set by the pricing committee of our board of directors, considering, among other things, input from the dealer-manager for this offering. The factors considered by our board and its pricing committee are discussed in “The Rights Offering-Reasons for this Offering” and “Determination of the Subscription Price.”
Has the board of directors made a recommendation to shareholders regarding the exercise of rights under this offering?
No. Our board of directors has not made, nor will it make, any recommendation to shareholders regarding the exercise of subscription rights in this offering. We cannot predict the price at which shares of our outstanding common stock will trade after this offering. You should make an independent investment decision about whether or not to exercise your subscription rights. Rights holders who exercise subscription rights risk investment loss on new money invested. We cannot assure you that the market price for common stock will remain above the price payable per share of common stock or the warrant exercise price, or that anyone purchasing units or exercising Series A warrants and/or Series B warrants to purchase shares of common stock at the exercise price will be able to sell those shares in the future at the same price or a higher price. If you do not exercise your subscription rights, you will lose any value represented by your subscription rights, and if you do not exercise your rights in full, your percentage ownership interest and related rights in our company will be diluted.
By when must I purchase shares of common stock in order to participate in this offering? May I participate in this offering if I sell my common stock after the record date?
The record date for this offering is 5:00 p.m. (Eastern time) , 2022. If you purchase shares of our common stock and do not settle such purchase by 5:00 p.m. (Eastern time) , 2022, you will not receive subscription rights with respect to such shares. If you own common stock as of the record date, you will receive subscription rights and may participate in this offering even if you subsequently sell your common stock.
Are there any risks associated with this offering?
Yes. The exercise of your subscription rights involves risks. Exercising your subscription rights involves the purchase of common stock, Series A warrants, and Series B warrants and should be considered as carefully as you would consider any other equity investment. Among other things, you should carefully consider the risks described under the heading “Risk Factors” in this prospectus and all other information contained in this prospectus.
Will the directors and executive officers participate in this offering?
To the extent they hold common stock as of the record date or common stock issuable upon conversion or exercise of Preferred Shares, Eligible Warrants and/or Eligible Options, our directors and executive officers are entitled to participate in this offering on the same terms and conditions applicable to all other rights holders. We expect that each of our directors and executive officers will participate in this offering, although they have not committed to do so.
When will I receive my shares of common stock, Series A warrants, and Series B warrants?
Holders whose shares are held of record by Cede & Co., the nominee of Depository Trust Company, or by any other depository or nominee on their or their broker-dealers’ behalf will have any shares of common stock and redeemable comprising units they acquire credited to the account of Cede & Co. or such other depository or nominee. With respect to all other shareholders, certificates for all shares of common stock and all Series A warrants and Series B warrants acquired will be mailed after payment for all the subscribed securities has cleared, which may take up to 15 business days from the expiration date.
What effects will this offering have on our outstanding common stock?
Based on shares of common stock outstanding as of May 25, 2022, if this offering is fully subscribed and the redeemable warrants issued in the offering are exercised in full, we will have 80,094,433 shares of common stock outstanding, representing an increase of 299% in our outstanding shares as of the record date. If you fully exercise your basic rights, your proportional interest in our company will not change. If you exercise only a portion, or none, of your basic rights, your interest in our company will be diluted and your proportional interest in our company will decrease.
The number of shares of common stock outstanding listed in each case above assumes that (a) all of the Units inother shares of common stock issued and outstanding on the record date will remain issued and outstanding and owned by the same persons as of the closing of this offering, at an assumedand (b) we will not issue any shares of common stock in the period between the record date and the closing of this offering.
How much will we receive from this offering, price of $ per Unit,and how will the Company estimates that theproceeds be used?
If this offering is fully subscribed, we estimate our net proceeds from the sale of Units it is offering will betotal approximately $ million. If the underwriters fully exercise the over-allotment option, the net proceeds will be approximately $ million. “Net proceeds” is what the Company expects to receive$36.5 million, after deducting the underwriting discountdealer-manager fee of RHK Noble, as dealer-manager, and commission andour other estimated offering expenses payable by the Company.
The Company intendsexpenses. We intend to use the net proceeds fromfor sales and marketing and general working capital purposes.
If my exercise of subscription rights is not valid or if this offering is not completed, will my subscription payment be refunded to conduct operations, increase marketing efforts,me?
Yes. An escrow agent retained by the subscription agent will hold all funds it receives in escrow until the completion or termination of this offering. If your exercise of subscription rights is deemed not to be valid or this offering is not completed, all subscription payments received by the subscription agent will be promptly returned, without interest or deduction, following the expiration of the offering. If you own shares through a nominee (including any mobile investment platform), it may take longer for you to receive your subscription price repayment because the subscription agent will return payments through your nominee.
What fees or charges apply if I purchase units in this offering?
We are not charging any fee or sales commission to issue rights to you or, if you exercise any of your subscription rights, to issue units to you. If you exercise your subscription rights through a broker, dealer, custodian bank or other nominee (including any mobile investment platform), you are responsible for paying any fees your nominee may charge you.
What are the U.S. federal income tax consequences of exercising my subscription rights?
For U.S. federal income tax purposes, a rights holder should not recognize income or loss in connection with the receipt or exercise of rights in this offering. You should consult your tax advisor as to your particular tax consequences resulting from the offering. For a summary of certain U.S. federal income tax consequences of this offering, see “Material U.S. Federal Income Tax Considerations.”
To whom should I send my forms and investmentspayment?
If your shares of common stock are held in the Company’s existing business initiativesname of a broker, dealer, custodian bank or other nominee (including any mobile investment platform), then you should deliver all required subscription documents and products,subscription payments pursuant to the instructions provided by your nominee. If your shares of common stock are held in your name, then you should send your subscription certificate, all other required subscription documents and your subscription payment by mail to:
Continental Stock Transfer & Trust
Attn: Corporate Actions
1 State Street, 30th Floor
New York, NY 10004
or by hand delivery or overnight courier to:
Continental Stock Transfer & Trust
Attn: Corporate Actions
1 State Street, 30th Floor
New York, NY 10004
You and, if applicable, your nominee are solely responsible for completing delivery to the subscription agent of your subscription certificate, as well as general working capital. The Company anticipates budgeting approximately $6.0 millionfor completing delivery of all other required subscription documents and your subscription payment. You should allow sufficient time for delivery of your subscription materials to the subscription agent and for clearance of payments before the expiration of this offering. If you hold your common stock through a broker, dealer, custodian bank or other nominee (including any mobile investment platform), your nominee may establish an earlier deadline before the expiration date of this offering.
Who is the dealer-manager?
RHK Noble will act as dealer-manager for this offering. Under the terms and subject to the conditions contained in the dealer-manager agreement, RHK Noble will use its commercially reasonable efforts to solicit the exercise of subscription rights. We have agreed to pay RHK Noble certain fees for acting as dealer-manager and to reimburse it for certain expenses incurred in connection with this offering. RHK Noble is not underwriting any of the subscription rights or the shares of common stock or the redeemable warrants being issued in this offering and is not making any recommendation with respect to such subscription rights (including with respect to the exercise or expiration of such subscription rights), shares of common stock, Series A warrants and Series B warrants.
Whom should I contact if I have other questions?
If you have any questions regarding this offering, completion of the subscription certificate or any other subscription documents or submitting payment in the offering, please contact D.F. King & Co., Inc., the information agent, by telephone at (212) 269-5550 (bankers and brokers) or (877) 283-0323 (all others) or by email at creatd@dfking.com.
USE OF PROCEEDS
If this offering is fully subscribed, we estimate our net proceeds from the offering for conducting operationswill total approximately $36.5 million, after deducting the dealer-manager fee of RHK Noble, as dealer-manager, and for working capital. The Company also intendsour estimated offering expenses.
We intend to repay certain outstanding promissory notes and other payables totaling $2.25 million and the related interest thereon that are due or are coming due in the near term.
The Company may also use a portion of the net proceeds of this offering to acquire or invest in complementary businesses, products, or technologies, or to obtain the right to use such complementary technologies. The Company has no commitments with respect to any acquisition or investmentfor sales and is notmarketing and general working capital purposes. Because we cannot currently involved in any negotiations with respect to any such transactions.
As of the date of this prospectus, the Company cannot specify with any certainty all of the particular uses for theof a significant portion of our net proceeds, to be received upon the completion of this offering. The amounts and timing of its actual expenditures will depend on numerous factors, including the status of its product development efforts, sales and marketing activities, technological advances, amount of cash generated or used by its operations and competition. Accordingly, the Company’sour management will have broad discretion in the application of thethose net proceeds and investors will be relying on the judgment of its management regarding the application of the proceeds of this offering.proceeds.
The Company has not declared nor paid any cash dividend on its common stock, and it currently intends to retain future earnings, if any, to finance the expansion of its business, and the Company does not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on its common stock will be made by its board of directors, in their discretion, and will depend on the Company’s financial condition, results of operations, capital requirements and other factors that its board of directors considers significant.
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CAPITALIZATION
The following table below sets forth the Company’sour cash and cash equivalents and capitalization as of March 31, 2020 on:
The information in this table is unauditedoffering and is illustrative onlyour receipt and application of the Company’s capitalization followingproceeds in the completionamount of approximately $36.5 million from this offering, will be adjusted based onafter deducting the actual public offering pricedealer-manager fee of RHK Noble, as dealer-manager, and other terms of thisestimated offering determined at pricing. Youexpenses. This table should be read this table in conjunction with the information contained in “Use“Use of Proceeds” “Summary Financial Information”above and “Management’s Discussionour consolidated audited and Analysis of Financial Condition and Results of Operation,” as well as theunaudited financial statements and the notes included elsewherethereto set forth in this prospectus.
As of March 31, 2020 | ||||||||||||
Actual | Pro Forma | |||||||||||
Cash and cash equivalents | $ | 118,361 | ||||||||||
Stockholders’ Deficit: | ||||||||||||
Common stock | 9,423 | |||||||||||
Additional paid-in capital | 37,748,356 | |||||||||||
Accumulated deficit | (47,566,434 | ) | ||||||||||
Accumulated other comprehensive income | (15,234 | ) | ||||||||||
Treasury stock | (367,174 | ) | ||||||||||
Total Stockholders’ Deficit | $ | (10,191,063 | ) |
March 31, 2022 | ||||||||
Actual | Pro Forma | |||||||
Cash | $ | 3,229,627 | $ | 39,533,656 | ||||
Other current assets | 1,102,426 | 1,102,426 | ||||||
Total indebtedness | 1,186,992 | 988,415 | ||||||
Common stock - par value $0.001; 100,000,000 shares authorized; 19,915,090 issued and 19,909,433 outstanding as of March 31, 2022 | 19,915 | 39,915 | ||||||
Preferred Series E Stock - stated value $1,000 per share; 8,000 shares authorized; 500 shares issued or outstanding as of March 31, 2022 | - | - | ||||||
Additional paid-in capital | 117,949,487 | 154,432,093 | ||||||
Accumulated deficit | (115,977,464 | ) | (115,977,464 | ) | ||||
Treasury Stock | (62,406 | ) | (62,406 | ) | ||||
Stockholders’ equity | 3,109,619 | 39,612,225 | ||||||
Total capitalization | 4,296,611 | 40,600,640 |
Each $1.00 increase (decrease) in the assumed public offering price of $ per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $ , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed public offering price of $ per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $ .
The number of shares of common stock outstanding is based on 9,422,683 shares of common stock issued and outstanding as of March 31, 2020, and excludes the following:table above excludes:
● | 3,164,778 shares of common stock issuable upon the exercise of outstanding stock options having a weighted average exercise price of |
● | ||
| ||
Except as otherwise indicated herein, all information in this prospectus assumes:
● |
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If you invest in the Company’s common stock in this offering, your ownership interest will be diluted to the extent of the difference between the assumed offering price per share of its common stock and the as adjusted net tangible book value per share of its common stock immediately after the offering. Historical net tangible book value per share represents the amount of the Company’s total tangible assets less total liabilities, divided by the number of shares of its common stock outstanding.
The historical net tangible book value (deficit) of the Company’s common stock as of March 31, 2020 was approximately $(12,576,982) or $(1.33) per share based upon shares of common stock outstanding on such date. Historical net tangible book value (deficit) per share represents the amount of its total tangible assets reduced by the amount of its total liabilities, divided by the total number of shares of common stock outstanding. After giving effect to the Company’s sale of all of the Units (and the shares of common stock thereunder) offered in this offering at an assumed public offering price of $ per Unit after deducting estimated underwriting discounts and commissions and the Company’s estimated offering expenses, the Company’s pro forma as adjusted net tangible book value as of March 31, 2020 would have been $ or $ per share. This represents an immediate increase in net tangible book value of $ per share to the Company’s existing stockholders, and an immediate dilution in net tangible book value of $ per share to new investors. The following table illustrates this per share dilution:
The information discussed above is illustrative only, and the dilution information following this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed public offering price of $ per share would increase (decrease) the pro forma as adjusted net tangible book value by $ per share and increase (decrease) the dilution to new investors by $ per share, assuming the number of shares offered by the Company, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by the Company. The Company may also increase or decrease the number of shares it is offering. An increase of 1,000,000 shares offered by it would increase the pro forma as adjusted net tangible book value by $ per share and decrease the dilution to new investors by $ per share, assuming the assumed public offering price of $ per share remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by the Company. Similarly, a decrease of 1,000,000 shares offered by the Company would decrease the pro forma as adjusted net tangible book value by $ per share and increase the dilution to new investors by $ per share, assuming the assumed public offering price of $ per share remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by the Company.
If the underwriters’ over-allotment option to purchase additional shares from the Company is exercised in full, and based on the assumed public offering price of $ per share, the pro forma as adjusted net tangible book value per share after this offering would be $ per share, the increase in as adjusted net tangible book value per share to existing stockholders would be $ per share and the dilution to new investors purchasing shares in this offering would be $ per share.
The number of shares of common stock outstanding is based on 9,422,683 shares of common stock issued and outstanding as of March 31, 2020, and excludes the following:
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on The Nasdaq Capital Market under the symbol “CRTD.” As of May 26, 2022, the last reported sale price of the common stock as reported on The Nasdaq Capital Market was $1.28 per share. As of May 26, 2022, there were approximately 367 holders of record of common stock. The actual number of shareholders is greater than this number of record holders and includes shareholders who are beneficial owners but whose shares are held in street name by brokers and other nominees (including any mobile investment platform).
To date, we have not paid cash dividends on our common stock and do not plan to pay such dividends in the foreseeable future. Our board of directors will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business conditions. Dividends, under the Nevada Revised Statutes, may only be paid from our net profits or surplus.
THE RIGHTS OFFERING
Before deciding whether to exercise your subscription rights, you should carefully read this prospectus, including the information set forth under the heading “Risk Factors” and the information set forth in this prospectus.
Reasons for this Offering
In accordance with our strategic plan, we are conducting this offering primarily for sales and marketing and general working capital purposes. Our board of directors has approved this offering, and it appointed a pricing committee to further consider and establish the pricing and other financial terms of the securities in the offering. Based on information available to the board and its pricing committee, as well as subsequent analyses of the board and its pricing committee, the board believes that this offering is in the best interests of our company and shareholders. Neither our board nor its pricing committee is, however, making any recommendation regarding your exercise of the subscription rights.
Our board and its pricing committee considered and evaluated a number of factors relating to this offering, including:
● | our current capital resources and indebtedness, and our future need for additional liquidity and capital; |
● | our need for increased financial flexibility in order to enable us to achieve our business plan; |
● | the size and timing of the offering and alternative securities to be offered; |
● | the potential dilution to our current shareholders if they choose not to participate in the offering; |
● | the non-transferability of the subscription rights; |
● | alternatives available for raising capital; |
● | the potential impact of the offering on the public float for the common stock |
● | the fact that existing shareholders would have the opportunity to purchase additional units. |
Terms of this Offering
We are issuing, at no charge, non-transferable subscription rights entitling holders of common stock as of the record date and holders of the Preferred Shares, Eligible Warrants and/or Eligible Options, whom we refer to as rights holders or you. Your subscription rights will consist of:
● | your basic right, which will entitle you to purchase a |
● | your over-subscription privilege, which will be exercisable only if you exercise your basic right in full and will entitle you to purchase additional units for which other rights holders do not subscribe, subject to the pro rata allocations and ownership limitation described in “-Over-Subscription Privilege.” |
All units are being offered and sold at a subscription price of $2.00 per unit.
Each unit will consist of:
● | one share of common stock; |
● | a Series A warrant exercisable for one share of common stock at an exercise price of |
● | a Series B warrant exercisable for one share of common stock at an exercise price of $6. |
We may redeem the outstanding redeemable warrants:
● | in whole only; |
● | at a price of $0.01 per |
● | the warrant redemption shall be executed by the Company filing a Form 8-K and Form TO if necessary and issuing a press release and upon a minimum of 30 days’ prior written notice of redemption, which we refer to as the 30-day redemption period; and |
● | if, and only if, the last sale price of our common stock equals or exceeds (i) $ 4.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) with respect to Series A warrants, and (ii) $8.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) with respect to Series B warrants, for any 10 trading days, we may redeem and buy the warrants back for a penny ($0.01) per warrant. |
● | We will not redeem the warrants unless a registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants is effective and a current prospectus relating to those shares of common stock is available throughout the 30-day redemption period, except if the warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration under the Securities Act. If and when the warrants become redeemable by us, we may exercise our redemption right on a cashless basis even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Please see the section of this prospectus entitled “Description of Securities — Series A warrants and Series B warrants Included in Units Issuable in this Offering” for additional information. |
The shares of common stock, Series A warrants and Series B warrants comprising a unit may only be purchased as a unit, but will be issued separately. Subscription rights will not be transferrable. The subscription rights may only be exercised in aggregate for whole numbers of units.
Subscription rights may be exercised at any time during the subscription period, which commences on , 2022, and ends at 5:00 p.m. (Eastern time) on , 2022, the expiration date, unless extended by us.
The shares of common stock issued upon the exercise of subscription rights are expected to be listed on The Nasdaq Capital Market under the symbol “CRTD.” We are applying to list the Series A warrants and Series B warrants for trading on The Nasdaq Capital Market, but we cannot assure you will be able to meet the applicable listing standards. The subscription rights will be evidenced by subscription certificates that will be mailed to shareholders, except as discussed below under “Foreign Shareholders.”
For purposes of determining the number of units a rights holder may acquire in this offering, broker-dealers, trust companies, banks or others whose shares are held of record by Cede & Co. or by any other depository or nominee will be deemed to be the holders of the subscription rights that are issued to Cede & Co. or the other depository or nominee on their behalf.
There is no minimum number of subscription rights that must be exercised in order for this offering to close.
Over-Subscription Privilege
If you exercise your basic rights in full, you may also choose to exercise your over-subscription privilege.
Allocation of Units Available for Over-Subscription Privileges
Subject to the ownership limitation described below, we will seek to honor the over-subscription requests in full. If over-subscription requests exceed the number of units available, however, we will allocate the available units pro rata among the rights holders in proportion to the product (rounded down to the nearest whole number so that the aggregate number of units does not exceed the aggregate number offered) obtained by multiplying the number of units such rights holder subscribed for pursuant to the over-subscription privilege by a fraction (A) the numerator of which is the number of unsubscribed units and (B) the denominator of which is the total number of units sought to be subscribed for pursuant to the over-subscription privilege by all rights holders participating in such over-subscription. Continental Stock Transfer & Trust, which will act as the subscription agent in connection with this offering and which we refer to as the subscription agent, will determine the over-subscription allocation based on the formula described above and will notify rights holders of the number of units allocated to each holder exercising the over-subscription privilege as promptly as may be practicable after the allocations are completed.
To the extent your aggregate subscription payment for the actual number of unsubscribed units available to you pursuant to the over-subscription privilege is less than the amount you actually paid in connection with the exercise of the over-subscription privilege, you will be allocated only the number of unsubscribed units available to you, and any excess subscription payment will be promptly returned to you, without interest or deduction, after the expiration of this offering.
To the extent your aggregate subscription payment for the actual number of unsubscribed units available to you pursuant to the over-subscription privilege is less than the amount you actually paid in connection with the exercise of the over-subscription privilege, you will be allocated only the number of unsubscribed units available to you, and any excess subscription payment will be promptly returned to you, without interest or deduction, after the expiration of this offering.
We can provide no assurances that you will actually be entitled to purchase the number of units issuable upon the exercise of your over-subscription privilege in full at the expiration of this offering.
Expiration of Offer
This offering will expire at 5:00 p.m. (Eastern time) on , 2022, unless extended or terminated by us, and subscription rights may not be exercised thereafter.
Our board of directors may determine to extend the subscription period, and thereby postpone the expiration date, not to exceed 45 days from the initial expiration date, to the extent it determines that doing so is in the best interest of our shareholders.
Any extension of this offering will be followed as promptly as practicable by announcement thereof, and in no event later than 9:00 a.m. (Eastern time) on the next business day following the previously scheduled expiration date. Without limiting the manner in which we may choose to make such announcement, we will not, unless otherwise required by law, have any obligation to publish, advertise or otherwise communicate any such announcement other than by issuing a press release or such other means of announcement as we deem appropriate.
Placement Period
If this offering is not fully subscribed following the expiration date of the offering, the dealer-manager has agreed to use its commercially reasonable efforts to place any unsubscribed units at the subscription price for an additional period of up to 45 days. The number of units that may be sold by us during this period will depend upon the number of units that are subscribed for pursuant to the exercise of subscription rights by our shareholders and other rights holders. No assurance can be given that any unsubscribed units will be sold during this period.
Determination of the Subscription Price
The $2.00 subscription price was set by the pricing committee of our board of directors considering, among other things, input from the dealer-manager for this offering. In approving the subscription price, the pricing committee considered, among other things, the following factors:
● | the market price of common stock prior to public announcement of the subscription price; |
● | the fact that the subscription rights will be non-transferable; |
● | the fact that holders of rights will have an over-subscription privilege; |
● | the terms and expenses of this offering relative to other alternatives for raising capital, including fees payable to RHK Noble, and our ability to access capital through such alternatives; |
● | comparable precedent transactions, including the range of discounts to market value represented by the subscription prices in other rights offerings; |
● | the size of this offering; and |
● | the general condition of the securities market. |
No Recombination of Units
The shares of common stock, Series A warrants, and Series B warrants comprising the units will be issued separately upon the exercise of subscription rights, and the units will not trade as a separate security. Rights holders may not recombine shares of common stock, Series A warrants, and Series B warrants to receive a unit.
Subscription Agent
Continental Stock Transfer & Trust, the subscription agent, will receive for its administrative, processing, invoicing and other services a fee estimated to be approximately $30,000, plus reimbursement for all out-of-pocket expenses related to the offering.
A completed subscription certificate, together with full payment of the subscription price, must be sent to the subscription agent for all whole numbers of units subscribed for through the exercise of a basic right and the over-subscription privilege by one of the methods described below. We will accept only properly completed and duly executed subscription certificates actually received at any of the addresses listed below, at or prior to 5:00 p.m. (Eastern time) on the expiration date of this offering or by the close of business on the second business day after the expiration date of the offering following timely receipt of a notice of guaranteed delivery. See “Payment for Securities” below. In this prospectus, close of business means 5:00 p.m. (Eastern time) on the relevant date.
Subscription Certificate Delivery Method | Address/Number | |
By Notice of Guaranteed Delivery: | Contact an Eligible Guarantor Institution, which may include a commercial bank or trust company, a member firm of a domestic stock exchange or a savings bank or credit union, to notify us of your intent to exercise the subscription rights. | |
By Mail: | Attn: Corporate Actions 1 State Street, 30th Floor New York, NY 10004 | |
By Hand or Overnight Courier: | ||
Attn: Corporate Actions 1 State Street, 30th Floor New York, NY 10004 |
Except as otherwise indicated herein, all information inDelivery to an address other than one of the addresses listed above may not constitute valid delivery and, accordingly, may be rejected by us.
Information Agent
Any questions or requests for assistance concerning the method of subscribing for units or for additional copies of this prospectus assumes:or subscription certificates or notices of guaranteed delivery may be directed to D.F. King & Co., Inc., the information agent, by telephone at (212) 269-5550 (bankers and brokers) or (877) 283-0323 (all others) or by email at creatd@dfking.com.
-20-Rights holders may also contact their broker-dealers or nominees (including any mobile investment platform) for information with respect to this offering.
Warrant Agent
The warrant agent for the Series A warrants and Series B warrants is Pacific Stock Transfer.
Methods for Exercising Subscription Rights
Exercise of the Subscription Right
Subscription rights are evidenced by subscription certificates that, except as described below under “Foreign Shareholders,” will be mailed to record date shareholders and record date holders of Preferred Shares, Eligible Warrants and/or Eligible Options or, if a record date shareholder’s shares are held by a depository or nominee (including any mobile investment platform) on his, her or its behalf, to such depository or nominee. Subscription rights may be exercised by completing and signing the subscription certificate that accompanies this prospectus and mailing it in the envelope provided, or otherwise delivering the completed and duly executed subscription certificate to the subscription agent, together with payment in full for the units at the estimated subscription price by the expiration date of this offering. Subscription rights may also be exercised by contacting your broker, trustee or other nominee (including any mobile investment platform), who can arrange, on your behalf, to guarantee delivery of payment and delivery of a properly completed and duly executed subscription certificate pursuant to a notice of guaranteed delivery by the close of business on the second business day after the expiration date. A fee may be charged by your broker, trustee or other nominee (including any mobile investment platform) for this service. Completed subscription certificates and related payments must be received by the subscription agent prior to 5:00 p.m. (Eastern time) on or before the expiration date (unless payment is effected by means of a notice of guaranteed delivery as described below under “Payment for Securities”) at the offices of the subscription agent at the address set forth above.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this prospectus. 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 prospectus.
Overview
Jerrick Media Holdings, Inc. (OTCQB: JMDA) provides technology solutions for content creators, brands and their respective audiences through its flagship digital media platform Vocal.
Jerrick’s agile business framework and Vocal’s design and development capabilities provide a sustainable, capital light operational infrastructure. Vocal’s technology is built to scale, while the rate of growth can be modulated up or down based on available capital and the relative tightnessExercise of the capital markets. A business model that can generate a consistent and scalable return on capital by utilizing data is in a sense invaluable, much like the mythic “unicorn” that Silicon Valley seeks.Over-Subscription Privilege
Vocal is a user-generated long-form digital publishing platform. The platform primarily focuses on providing publishing tools, monetization features and engaged communities for content creators to get discovered and fund their creativity.
There are estimated to be over 4.5 billion internet users; of that, approximately 83% publish some form of content on a monthly basis (photos, writing, reviews), and 3.8 billion of them are active on social media (according to data by GlobalWebIndex and Reddit). In 2020, the internet has become the linchpin of the modern information society, as well as the modern social society. We believe digital platforms, such as Vocal, exist to help the world find order in this vast ocean of opportunity.
A global crisis, like the 2020 COVID-19 pandemic, only further emphasizes how critical a role digital platforms play in society, as government bodies are encouraging social distancing and restricting travel, and employers are widely implementing work-from-home policies. These factors aside, Vocal exists in an environment where the total addressable market (TAM) of the platform is growing exponentially, and will continue to grow rapidly.
The Vocal platform is home to 650,000 content creators and brands of all shapes and sizes, and attracts audiences across a network of the Company’s owned-and-operated communities. The platform’s unique canvas-style editor supports content creation utilizing a wide range of rich-media assets including streaming content, photos, videos, podcasts, product links, written word, and more. Vocal makes it easy for creators to produce well-constructed, search engine optimized, and engaging content. Additionally, creators can upgrade to Vocal+, and pay a premium subscription fee to access a suite of additional features such as an increased rate of CPM monetization, brand collaborations, the ability to enter exclusive members-only “Challenges,” early access to new features, and other rewards.
Given Vocal’s built-in monetization capabilities, topic-specific structure, and adaptability to a wide range of uses and industries, we believe that it is the ideal platform to help users adapt to evolving social, professional, and societal realities of a new digital world. Moderation and compliance are more important in a world where ambiguity can systematically damage value. Vocal’s enforcement of community guidelines and content moderation creates a secure environment for all stakeholders. Creators, audiences, and brands trust Vocal.
In 2018, the Company launched its in-house creative studio, Vocal for Brands. Vocal for Brands partners brands with authentic, like-minded Vocal creators to produce bespoke branded content campaigns, brand-sponsored creator Challenges, and other types of branded experiences on the Vocal platform that build brand engagement and trust, and drive results. With the introduction of Challenges in early first quarter 2020, brands can now tap into Vocal’s network of approximately 650,000 content creators and encourage them to interact with, learn about and promote their brand while benefiting from Vocal’s brand-safe, moderated, and curated environment. Brand-sponsored Challenges effectively yield a collection of crowdsourced branded content for brands and help them reach a wider audience. Weekly Vocal+ Exclusive Challenges currently generate on average 100 submissions, and is growing steadily. Branded Challenges have reached as many as 800 submissions, most recently in a collaboration with ScreenShot Magazine. Typical long-form branded content campaigns within the legacy world of publishing cost as much as $50,000 for a single article, let alone the exponential hundreds of submissions our Challenges can generate. Authentic storytelling from real creators is the common denominator for success.
Vocal’s first-party data enables our team to create highly targeted and segmented audiences for Vocal for Brands campaigns, and help the brand reach their ideal audience. Brands can access story performance data, engagement data, behavioral data, and sentiment data,Rights holders who fully exercise all of which is used to further optimize the campaign’s success.
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Following Jerrick’s acquisition of e-commerce agency Seller’s Choice, LLC (“Seller’s Choice”) in September 2019, the Company successfully integrated Seller’s Choice into its sales team and operations. The acquisition enabled Vocal for Brands to further expand its client base in the direct-to-consumer (DTC) space, while providing an opportunity for the Seller’s Choice team to leverage Vocal for Brand’s unique brand storytelling capabilities as a way to further support its e-commerce clientele. Given the global pandemic and rapid changes in consumer behavior, there is no question that we are going to see a systemic shift towards online purchasing in almost every aspect of our daily lives. Our acquisition of Seller’s Choice has been pivotal in identifying new trends in the DTC market that can scale and partner across Jerrick’s portfolio. The revenue becomes scalable as we are beginning to identify some of the next generation consumer brands to potentially take equity positions in, while driving revenues at Vocal for Brands by establishing a long-term contract with the client and investment opportunity.
Jerrick’s resources and Vocal’s proprietary technology were designed to amplify creator subscriptions as well as convert on direct to consumer brand opportunities. Further, the Vocal platform’s unique underlying framework generates scalable and sustainable revenues, and lends itself well to future acquisitions and white-label opportunities for Jerrick.
Results of Operations
Summary of Statements of Operations for the Years Ended December 31, 2019 and 2018:
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Revenue | $ | 453,006 | $ | 80,898 | ||||
Gross Margin | $ | 453,006 | $ | 80,898 | ||||
Operating Expenses | $ | (7,669,984 | ) | $ | (5,767,153 | ) | ||
Loss from operations | $ | (7,216,978 | ) | $ | (5,686,255 | ) | ||
Other Expenses | $ | (818,394 | ) | $ | (6,327,287 | ) | ||
Net loss | $ | (8,035,372 | ) | $ | (12,013,542 | ) | ||
Loss per common share – basic and diluted | $ | (0.98 | ) | $ | (4.16 | ) |
Revenue
Revenue was $453,006 for the year ended December 31, 2019, as compared to $80,898 for the comparable year ended December 31, 2018, an increase of $372,108. The increase in revenue is primarily attributable to the launch and steady growth of Vocal+ paid subscribers, the rising price points for Vocal for Brands campaigns, and the integration of Seller’s Choice into Jerrick following the Company’s successful acquisition of Seller’s Choice in late third quarter. Over $400,000 of the $453,006 was generated in the second half of the year with approximately $300,000 generated in the fourth quarter alone.
Operating Expenses
Operating expenses for the year ended December 31, 2019 were $7,669,984 as compared to $5,767,153 for the year ended December 31, 2018. The increase of $1,902,831 in operating expenses is the result of an increase in general and administrative expenses and consulting fees. The increase to these expenses is mainly related to the acquisition of Seller’s Choice and the implementation of the Company’s future business plans.
Loss from Operations
Loss from operations for the year ended December 31, 2019 was $7,216,978 as compared to $5,686,255 for the year ended December 31, 2018. The increase in the loss from operations is primarily due to increased expenses due to the continued development of the Vocal platform and the acquisition of Seller’s Choice and the implementation of the Company’s future business plans.
Other Expenses
Other expenses for the year ended December 31, 2019 was $818,394 as compared to $6,327,287 for the year ended December 31, 2018. Other expenses during the year ended December 31, 2019 was comprised of interest expense of $612,830 on notes and related party notes, accretion of debt discount and issuance cost of $348,665 due to the incentives given with debentures, a loss on extinguishment of debt of $162,860. These expenses were offset by other income from an Australian tax credits for research and development of $292,387. During the year ended December 31, 2018, other expenses were comprised of interest expense of $923,008 on notes and related party notes and accretion of debt discount and issuance cost of $2,090,286 due to the incentives given with debentures, loss on extinguishment of liabilities of $3,453,137 for the incentives given to amend or convert debt.
Net Loss
Net loss attributable to common shareholder for the year ended December 31, 2019, was $8,035,372, or loss per share of $0.98, as compared to a net loss attributable to common shareholders of $14,204,408, or loss per share of $4.16, for the year ended December 31, 2018.
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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Summary of Statements of Operations for the Three Months Ended March 31, 2020 and 2019:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenue | $ | 293,142 | $ | 34,334 | ||||
Operating Expenses | $ | (2,119,091 | ) | $ | (1,739,328 | ) | ||
Loss from operations | $ | (1,825,949 | ) | $ | (1,704,994 | ) | ||
Other Expenses | $ | (1,160,048 | ) | $ | (179,447 | ) | ||
Net loss | $ | (2,985,997 | ) | $ | (1,884,441 | ) | ||
Loss per common share – basic and diluted | $ | (0.32 | ) | $ | (0.28 | ) |
Revenue
Revenue was $293,142 for the three months ended March 31, 2020, as compared to $34,334 for the comparable three months ended March 31, 2019, an increase of $258,808. The increase in revenue is primarily attributable to the launch and steady growth of Vocal+ paid subscribers, the rising price points for Vocal for Brands campaigns, and the integration of Seller’s Choice into Jerrick following the Company’s successful acquisition in late third quarter 2019.
Operating Expenses
Operating expenses for the three months ended March 31, 2020 were $2,119,091 as compared to $1,739,328 for the three months ended March 31, 2019. The increase of $379,763 in operating expenses is the result of an increase in general and administrative expenses and consulting fees. The increase to these expenses is mainly related to the acquisition of Seller’s Choice and subsequent integration into Jerrick’s infrastructure, as well as the implementation of the Company’s future business plans.
Loss from Operations
Loss from operations for the three months ended March 31, 2020 was $1,825,949 as compared to $1,704,994 for the three months ended March 31, 2019. The increase in the loss from operations is primarily due to increased expenses due to the continued development of the Vocal platform, the acquisition of Seller’s Choice and the implementation of the Company’s future business plans.
Other Expenses
Other expenses for the three months ended March 31, 2020 was $1,160,048 as compared to $179,447 for the three months ended March 31, 2019. Other expenses during the three months ended March 31, 2020 was comprised of interest expense of $375,530 on notes and related party notes, accretion of debt discount and issuance cost of $186,947 due to the incentives given with debentures, a loss on extinguishment of debt of $535,040. These expenses were offset by other income from an Australian tax credit for research and development of $63,556. During the three months ended March 31, 2019, other expenses were comprised of interest expense of $54,569 on notes and related party notes and accretion of debt discount and issuance cost of $47,364 due to the incentives given with debentures, loss on extinguishment of liabilities of $77,514 for the incentives given to amend or convert debt.
Net Loss
Net loss for the three months ended March 31, 2020, was $2,985,997, or loss per share of $0.32, as compared to a net loss of $1,884,441, or loss per share of $0.28, for the three months ended March 31, 2019.
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.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at March 31, 2020 compared to December 31, 2019:
March 31, 2020 | December 31, 2019 | Increase / (Decrease) | ||||||||||
Current Assets | $ | 397,917 | $ | 78,063 | $ | 319,854 | ||||||
Current Liabilities | $ | 12,809,118 | $ | 10,928,830 | $ | 1,880,288 | ||||||
Working Capital Deficit | $ | (12,411,201 | ) | $ | (10,850,767 | ) | $ | (1,560,434 | ) |
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At March 31, 2020, we had a working capital deficit of $12,411,201 as compared to a working capital deficit of $10,850,767 at December 31, 2019, an increase of $1,560,434. The increase is primarily attributable to an increase in notes payable related party, convertible notes payable, and accounts payable.
Net Cash
Net cash used in operating activities for the three months ended March 31, 2020 and 2019, was $1,314,863 and $1,461,053, respectively. The net loss for the three months ended March 31, 2020 and 2019 was $2,985,997 and $1,884,441, respectively. This change is primarily attributable to the net loss for the current period offset by share-based payments in the amount of $ 392,143 to employees and consultants for services rendered, the accretion of debt discount and debt issuance costs of $186,947 due to the incentives given with debentures, and a loss on extinguishment of debt of $535,040 in addition to a change in accounts payable and accrued expenses of $418,340. These increases were offset by a change in accounts receivable during the three months ended March 31, 2020.
Net cash used in investing activities for the three months ended March 31, 2020 and 2019 was $0 and $2,801, respectively. This change is attributable to the cash paid for property and equipment and the cash consideration for the acquisition.
Net cash provided by financing activities for the three months ended March 31, 2020 and 2019 was $1,430,826 and $1,726,561. During the three months ended March 31, 2020, the Company was predominantly financed by issuance of debt and related party notes of $1,475,610 and $252,989, respectively to fund operations. These increases were offset by repayment of notes and related party notes of $115,000 and $180,273, respectively.
Off-Balance Sheet Arrangements
As of March 31, 2020, we had 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 and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with U.S. 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:
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.
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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.
As of December 31, 2019, the Company’s consolidated subsidiaries and/or entities are as follows:
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All inter-company balances and transactions have been eliminated.
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:
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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.
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:
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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.
Leases
In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements.
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recognized a right of use (“ROU”) asset and liability in the condensed consolidated balance sheet in the amount of $ 289,167 related to the operating lease for office and warehouse space. Results for the year ended December 31, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the legacy accounting guidance under ASC Topic 840, Leases.
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As partover-subscription privilege by indicating on their subscription certificate the number of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to:
Long-lived Assets Including Goodwill and Other Acquired Intangibles Assets
We evaluate the recoverabilityadditional units they are willing to acquire. If sufficient units are available after all exercises of property and equipment and acquired finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amountsbasic rights, we will seek to honor over-subscriptions requests in full, subject to the future undiscounted cash flows the assets are expected to generate from the usepro rata allocations and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any significant impairment charges during the years presented.
We review goodwill for impairment at least annually or more frequently if events or changesownership limitation described in circumstances would more likely than not reduce the fair value of our single reporting unit below its carrying value. As of December 31, 2019, no impairment of goodwill has been identified.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. We routinely review the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If we change the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.
Commitments and Contingencies“-Over-Subscription Privilege
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.
Foreign Currency
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at our Consolidated Balance Sheet dates. Results of operations and cash flows are translated using the average exchange rates throughout the periods. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of shareholders’ equity in accumulated other comprehensive income. Gains and losses from foreign currency transactions, which are included in SG&A, have not been significant in any period presented.
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 consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.
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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:
Revenue disaggregated by revenue source for the years ended December 31, 2019 and 2018 consists of the following
Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Branded Content | $ | 107,335 | $ | 60,485 | ||||
Creator Subscriptions | 31,997 | - | ||||||
Managed Services | 283,332 | |||||||
Affiliate Sales | 15,300 | 11,553 | ||||||
Other Revenue | 15,042 | 8,860 | ||||||
$ | 453,006 | $ | 80,898 |
Branded Content
Revenues from branded content in 2019 increased 78% as compared to the previous year. Onboarding of additional brand clients as well as greater pricing strength contributed to a large part of the gain. The increased pricing strength was attributable to improved features, data analytics, and guidance on how to apply it. Clients are increasing their spend on Vocal for Brands campaigns with the company’s improved marketing strategies. The continued development of Vocal’s technology translates into a higher value proposition for brands. Revenue recognized from these tactical improvements occurred in the fourth quarter and have created a foundation for scale, future platform improvements, and continued pricing strength.
Branded content revenue is recognized when the Company fulfills its obligation to create and publish branded articles for clients on the Vocal platform, promote said stories, and meet any required promotional milestones as per the contract with the client. The revenue is recognized over time as the services are performed, with any payments received in advance being deferred until they are earned.
Below are the significant components of a typical agreement pertaining to branded content revenue:
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Creator Subscriptions
Vocal+ is a premium subscription offering. The Company initially offered the subscription to a Founding Member beta group starting in May 2019, utilizing our first-party data from the 425,000‘Vocal Free’ creators we had onboarded onto Vocal up until that point. We have seen a greater than 50% growth rate in the last 12 months.
Currently, Vocal+ subscribers receive access to value-added features such as increased rate of monetization per reads and views, a decreased minimum withdrawal threshold, a discount on platform processing fees, member badges for their profiles, participation in exclusive Challenges with monetary rewards, and early access to new Vocal features.
Subscription revenues stem from both monthly and annual subscriptions, which cost $9.99 per month and $99 per year, respectively, the latter of which is amortized over a twelve-month period. Any customer payments received are recognized over the subscription period, with any payments received in advance being deferred until they are earned. The subscription revenue model is the most scalable and predictable revenue stream on the platform. New features and opportunities for creators, audiences, and brands can introduce new subscription offerings, thereby scaling the company vertically and horizontally. In the future, premium services generate premium revenues.
The continued development of Vocal’s technology and targeting efficiencies translates into a decreasing cost of acquisition per creator, a scalable onboarding process, and an increasing rate of subscription signups.
Managed Services
Managed Services are provided by Seller’s Choice, and encompass a suite of digital marketing solutions for e-commerce brands. Services offered include listing and storefront optimization on e-commerce platforms like Amazon and Shopify, the setup and ongoing management of clients’ websites, search engine optimization, digital advertising, and other various tactics for sales growth and customer retention. Additionally, Seller’s Choice draws upon Vocal for Brand’s storytelling capabilities to provide Seller’s Choice additional value and maximize their success. Seller’s Choice clients generate revenues of between $3,500-$10,000 per month.
Affiliate Sales
Affiliate sales represent the commission the Company receives when a purchase is made through referral links. 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 maintains multiple affiliate relationships, with platforms such as Skimlinks, Amazon, and Tune, to form and maintain thousands of vendor relationships. Each vendor establishes their own commission percentage payout, which typically range from 5-15%. The revenue is recognized upon receipt of commission fees. This opportunity continues to grow in the current environment as consumer behavior continues to shift online.
Deferred Revenue
Deferred revenue consists of billings and payments from clients in advance of revenue recognition. As of December 31, 2019 and 2018, the Company had deferred revenue of $50,691 and $9,005, respectively.
Accounts Receivable and Allowances
Accounts receivable are recorded and carried when the Company uploads creator content and reaches predetermined metrics and 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. During the year ended December 31, 2019 the Company recorded $33,503 as a reserve for doubtful accounts. As of December 31, 2019 and 2018 the Company has an allowance for doubtful accounts of $33,503 and $0, respectively.
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Stock-Based Compensation
The Company recognizes compensation expense for all equity–based payments granted 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.
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.
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 years ended December 31, 2019 and 2018 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.
The Company had the following common stock equivalents at December 31, 2019 and 2018:
December 31, | ||||||||
2019 | 2018 | |||||||
Options | 911,500 | 882,500 | ||||||
Warrants | 742,221 | 5,542,954 | ||||||
Convertible notes - related party | 5,438 | 2,889 | ||||||
Convertible notes | 724,751 | 41,989 | ||||||
Totals | 2,383,910 | 6,470,332 |
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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 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 became 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.
Recent Accounting Guidance Not Yet Adopted
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.
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Overview
Jerrick Media Holdings, Inc. (“JMDA” or “the Company”) is the parent company and creator of the Vocal platform. The Company develops technology-based solutions to solve problems for the creator community, connecting creators with their ideal audiences and with the brands that want to access those audiences. Through a combination of data analysis, design, and development, the Company conceptualizes, creates, and maintains a suite of technology products and resources that can influence and service a global audience.
Jerrick identifies and leverages opportunities within the digital space. Its technology is built to self sustain and scale multiple lines of revenue in a capital light operational infrastructure. In addition, the Company has successfully acquired and integrated complementary technology platforms and media assets into its existing ecosystem. The Company expects to see one of the best buyer’s markets for distressed companies in decades. The success we have had in integrating the Seller’s Choice digital agency, resuscitating legacy assets such as General Media’s iconic women’s magazine Viva into a digital community, absorbing blog sites like sports startup Unbalanced, and once-defunct content communities like Creators Media at one time was valued at $50MM, are prime examples of our acquisition and assimilation skills. The Vocal technology platform, trademark, and acquired intellectual property are wholly owned and operated by Jerrick.
Our operations are organized into the following business segments:
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Vocal
Vocal is Jerrick’s proprietary flagship technology platform that provides creators with storytelling tools, engaged communities, and opportunities to monetize their content. Vocal’s framework was engineered to support a scalable and easy-to-update platform that could adapt its capacity to meet the current and growing demand for digital resources and technologies that foster virtual connection and community. We invest in R&D and stay on top of modern practices in the open-source code community. Our processes have been tested and proven successful by the onboarding of 650,000 creators onto the Vocal platform.
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When the Jerrick team first ideated the Vocal platform, we determined that our primary constituent was the creator. We placed creators at the center of our mission. We identified their pain points and created a blueprint to solve them.
There are over 4.5 billion internet users; of that, 83% create some form of content on a monthly basis (blogs, photos, videos, and more), and 3.8 billion of them are active on social media (according to a report published by GlobalWebIndex). In 2020, the internet has become the linchpin of the modern information society, as well as the center for society’s social discourse. Vocal exists to help the world find order in a vast ocean of opportunity.
A global crisis like the current COVID-19 pandemic only further emphasizes how critical a role digital platforms play in society, as governmental bodies are encouraging social distancing and restricting travel, and employers are widely implementing work-from-home policies, many that last deep into the future. Vocal was born in an environment where the total addressable market (TAM) for our platform is near unimaginable in scale and magnitude. With the emerging effects of COVID-19 and increased interest in socio-political movements, like Me Too and Black Lives Matter , we expect that our TAM will continue to expand, along with the need for community organization and communication.
Vocal’s proprietary technology was developed with the help of Thinkmill, our Sydney-based development partners and friends. We used Thinkmill’s open-source content management framework, Keystone, as a foundation for our proprietary technology, which enables us to provide above industry standard rapid updates and cost effective agile development. Together with Thinkmill, our internal product design and quantitative groups are able to quickly distribute product improvements, updates, and new features to improve our users’ experience.
We believe that the Vocal platform and its underlying technology allows us to maintain an advantageous capital-light infrastructure. By using cloud service providers, we are able to focus on platform and revenue growth rather than building and maintaining the costly internal infrastructures that have materially affected so many legacy media platforms. Vocal’s technology has been specifically designed and built to scale without a material corresponding increase in operational costs. While our users can embed rich media, such as video, audio, and product links, into their Vocal stories, the rich media content is hosted elsewhere (such as Tik Tok, YouTube, Vimeo, Shopify, Spotify, etc.). Thus, our platform can accommodate rich media content of all kinds without bearing the financial or operational costs associated with hosting the rich media itself.
Maintaining a sustainable and capital-light infrastructure is particularly important in tighter capital markets caused by external events that impact liquidity and credit, such as the current COVID-19 pandemic. Our technology is built to scale, while the rate of growth can be modulated through limits on capital expenditure. This creates a predictive environment in which the Company can continually reassess its capital needs and adjust its course when faced with unforeseen developments.
Since its 2016 launch, Vocal has amassed 650,000 content creators across a wide range of mediums and backgrounds, such as bloggers, journalists, influencers, musicians, artists, podcasters, gamers, entrepreneurs, and more. Vocal creators provide a steady stream of user-generated content, which can be monetized through reads, as well as through microtransactions, such as tips, received from audiences.
The Vocal content creation process can be broken down into three key steps:
1. Create: Vocal’s storytelling tools make it easy for creators of all kinds to produce beautiful, engaging, rich-media content.
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2. Share: Creators share stories on one of Vocal’s 34 genre-specific communities to get discovered and connect with like-minded creators and readers.
3. Earn: Creators can earn money every time their story is read, through participation in Challenges, and through tips received from fans.
We believe there is a huge opportunity to capture market share for user-generated content. Jerrick does not see Vocal as a substitute or competitor to segment-specific content platforms, such as Vimeo, YouTube, or SoundCloud. We don't want to replace anyone; we built Vocal to be accretive to the whole digital ecosystem. That’s why we made it easy for creators to embed their already published videos, songs, podcasts, photographs, and more directly into Vocal. We see this as a growth opportunity by building partnerships with the world’s greatest technology companies and to further spread our roots deeper into the digital foundation of society.
Vocal employs a number of strategies to collect first-party data around our users’ behavioral activity on the platform. The data is processed and analyzed by our internal business intelligence team with the goal of improving our product, services and users’ experience. Vocal’s growth and marketing strategies make use of these first-party data insights, resulting in a lower creator acquisition cost and reduced subscription churn when targeting third-party networks. Importantly, we do not sell our users’ information. We utilize data to optimize the success of our creators, and generate revenue when our creators monetize their content or brands reach the right audience. Additionally, unlike traditional publishing platforms that rely on charging their audience to justify a digital infrastructure, we do not charge the audience for consuming content.
Key User Demographics:
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Vocal’s Value for Creators:
Vocal is a proprietary technology platform, built to expand its digital audience through content distribution while providing an environment for creators to monetize and be rewarded for their content. We believe that digital audiences have become increasingly wary of traditional display and programmatic advertising tactics–intrusive ads like pop-ups that disrupt the consumer experience. The Company is therefore focused on building a network of user generated content communities that emphasize discovery, creator monetization, and non-interruptive branded storytelling.
In response to what we recognize as the growing shift away from interruptive ads, brand marketing teams actively seek partners like Vocal, that can deliver key performance metrics in an authentic and safe network. By utilizing Vocal’s first-party behavioral data, we can effectively pair content creators with the right brands to produce predictive strategies and successful non-interruptive marketing campaigns on the platform.
Record Date Shareholders Whose Shares are Held by a Nominee
Trust and safety are paramount to the Vocal ecosystem. We follow best practices when handling personally identifiable information, with guidance from the European Union’s General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and the Digital Millennium Copyright Act (DMCA).
Platform Compliance Policies include:
Vocal Users: Stories Published
BasedRecord date shareholders whose shares are held by a nominee, such as a bank, broker-dealer, trustee, depositories or mobile investment platform, must contact that nominee to exercise their subscription rights. In that case, the nominee will complete the subscription certificate on our internal data collected from branded Challenges over the last 5+ months, there has been a steady increase in creators who are publishing on our platform, which we believe to be a direct resultbehalf of the introduction of this feature.
As an example, we launched a branded Challenge called Pay It Forward, which was Sponsoredrecord date shareholder and arrange for proper payment by Vimeo. Vimeo came to us looking to promote their new tool Vimeo Create, which makes it easy to make high-impact videos that help you stand out on social media and boost your brand.
At this time, society was beginning to feel the economic impact of the pandemic. So we partnered to create a Challenge to not only promote Vimeo’s new tool, but also to give back and help champion and support small businesses by crowdsourcing promotional stories from our creators. The winner received a $5,000 prize to the small business they highlighted. The campaign was a success. We received over 600 hundred submissions and the campaign drove hundreds of signups to Vimeo’s premium subscription while increasing adoption to their new feature.
Figure 1 - # of Users who Published
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Vocal Users: Creator Acquisition Cost
As we continue to collect platform data, we are able to further refine our ideal user profile and hone our targeting strategies, such that the Creator Acquisition Cost (CAC) for both ‘Vocal Free’ (i.e. unpaid membership) and Vocal+ (i.e. paid premium membership) naturally declines over time. Having spent over three years executing marketing campaigns to attract Vocal Free users, and refining our strategy, the CAC for Vocal+ subscribers experienced an immediate decline; costs halved in the first 4 months following the launch of Vocal+. Meanwhile, the CAC for Vocal Free creators followed a similarly sharp rate of reduction, dropping from approximately $4.50 down to $2.00 in this same time frame.
Figure 2 - Vocal+ Creator Acquisition Cost (CAC)
Figure 3 - Vocal Free Creator Acquisition Cost (CAC)
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Digital Landscape and Industry
From 2006 through 2016, the online and digital content industry experienced rapid growth. This era resulted in various technology companies within the digital space expanding into some of the largest and most influential companies in the United States and around the world, such as Facebook, Amazon, Spotify, Vimeo, Etsy and more. Even with today’s market dislocation, many of these technology companies remain the industry leaders that will solve for a new era of social distancing.
During this same period of time, countless digital publishing platforms and tools were introduced that enabled creators and their audiences to create, share, and connect. However, hyper-growth in this sector eventually introduced a new series of problems. The largest issue was that the first wave of media publishing platforms and digital communities were reliant on a single line of revenue: traditional intrusive advertising.
As these companies scaled, so did their costs of operations, which eventually compelled them not only to compromise the integrity of their relationship to users, but to bombard audiences with invasive ads and use some aggressive marketing tactics in order to generate revenues and stay solvent. An intrusive user experience is not a sustainable model, particularly in the current socio-political environment.
Ad technology began experiencing rapidly declining margins and tended to require excessive traffic in order to monetize content. Digital content and media asset values deteriorated rapidly between 2016 and 2018, and continue to do so today. This was evident in the layoffs at companies like Vice and Buzzfeed. This compression of margins has, in recent years, also led to massive layoffs in multiple other industries that were dependent on this legacy form of advertising, from agencies to DTC brands. There will continue to be risk of future markdowns in legacy asset valuations, that will create new opportunities for the Vocal platform.
In designing Vocal, the Jerrick team focused on building a network of communities on a singular platform that would help people discover real stories, from authentic creators. Our team is always innovating and introducing new features based on two core principles: that creators and brands are our partners, and that we make money when our partners make money.
In the face of radical disruption in the digital marketing landscape, content distribution is undergoing a significant shift.
According to Statista, every 60 seconds on the internet:
Further, content monetization has become increasingly oriented toward native and creator-based fees. Facebook, Google, and Amazon already capture nearly 70% of digital ad spending, with that number projected to increase (Source: eMarketer). With these changes, and in light of more recent socio-economic developments – the shift toward remote workforces, the popularization of freelancing, and social distancing recommendations – we believe that digital content creation is at an all-time high. This new era will see these statistics grow rapidly and exponentially increase online activity, resulting in an evaluation of how to best support the creative community, its audiences, and the brands who want to reach them.
At the same time, branded content (a form of native advertising) is on the rise, and experiencing continuing growth year-over-year.
According to data from Pressboard:
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Brands are actively seeking trustworthy and safe platforms like Vocal to drive engagement through non-interruptive brand storytelling and deliver invaluable performance metrics that help optimize their marketing efforts. The Vocal platform provides a needed alternative for creators to participate within a community-first environment and access sustainable revenue sources. It was built on these transparent core values, which continue to inform how we work with creators, readers, brands, and partners.
History
In earnest, Jerrick was founded in 2014 by CEO Jeremy Frommer and became publicly listed on the OTCQB in February 2016, at which point the Company was renamed Jerrick Media Holdings, Inc. Jerrick began working with its Australia-based development partners, Thinkmill, in early 2014 to begin building its flagship product. The Vocal technology platform was released to the public in December 2016 with six niche communities in its network and a small group of less than 1,000 beta creators.
In late 2018, we introduced our in-house creative studio, Vocal for Brands, which partners with direct-to-consumer (DTC) brands to create engaging and campaign-optimized stories on Vocal that build brand affinity and trust, and drive results
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2019 was marked by a series of important milestones for the Company. First, in July 2019, the Vocal+ premium membership offering was introduced on the Vocal platform. This was followed by the completion of our acquisition and integration of boutique e-commerce marketing agency, Seller’s Choice, in September 2019. Earlier that year, we successfully tendered for the majority of Jerrick’s outstanding warrants, exchanging over 90% of outstanding warrants for common stock.
In January 2020, Vocal’s product team launched the latest feature for creators and brands, called “Challenges.” Challenges (which are either internally run or sponsored by brands) are themed story contests that incentivize content submissions and engage Vocal’s user base by providing creators with the chance to win cash prizes and other rewards. The introduction of creator Challenges, which represents Vocal’s most important product update to date, showcases Jerrick’s unique ability to leverage its powerful network to host unique content experiences that drive success and value for brands, creators, and audiences simultaneously. Moreover, creator Challenges are accretive to Jerrick’s own marketing efforts; Challenges offer further incentive for new creators to join Vocal and, in particular, to upgrade to Vocal+ (which offers exclusive members-only Challenges). As a result, since the launch of creator Challenges, we’ve seen our creator acquisition costs decrease.
Competition
The idea for Vocal came as a response to what Jerrick’s founders recognized as systemic flaws inherent to the digital media industry and its operational infrastructures. Depreciating value of digital media business models built on legacy technology platforms created a unique opportunity for development of a creator-centric platform that could appeal to a global community and, at the same time, be capable of acquiring undervalued complimentary technology assets.
Jerrick founders built the Vocal platform upon the general thesis that a closed and safe ecosystem utilizing first-party data to increase efficiencies could create a sustainable and defensible business model. Vocal was strategically developed to provide value for content creators, readers, and brands, and to serve as a home for the ever-increasing amount of digital content being produced and the libraries of digital assets lying dormant.
Since 2016, the ‘creator era,’ the industry has been marked by the proliferation of democratized and transparent platforms. The digital space now encompasses an online global audience of over 4.5 billion internet users and over 1.7 billion websites. The “read, write and execute” web, or Web 3.0, is a data-driven and more intelligent web that can adjust its output according to the particular needs and habits of the individual user, fostering more intelligent creation, greater personalization and, ultimately, a more satisfied end user.
In this context, legacy sites and platforms are becoming increasingly threatened by factors like fragmented content creation tools, excessive traffic and marketing dollars required to monetize content, and compressing margins for traditional digital advertising. This has led to a qualitative deterioration of online content. In addition, it means that companies operating on these models will continue to struggle with limited paths to scalable profitability.
There is limited competition that provides the specific type of resources and platform that Vocal provides the creative community. In addition, there are a limited number of digital media companies like Vocal that charge only creators and brands for publishing content, as opposed to charging the audience for accessing content. Jerrick’s management team believes that the primary competition for Vocal are other platforms that can draw attention or time from the creative community in general. These platforms can vary in scope, size, and genre. Simply put, platforms compete for the attention of the digital consumer.
Vocal’s Competitive Strengths
Digital platforms must differentiate themselves by providing executable solutions and fulfilling users’ empirical needs. Our focus on rewarding the creator for their content, partnering with them on distribution, and providing opportunities for monetization, is one of the key differentiating factors between Vocal and legacy publishing platforms.
methods set forth under “Payment for Securities” below.
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Product Revenues
Quality content submissions from creators attract audiences and brands, representing the three primary stakeholders who exist in Vocal’s ecosystem. Each of these primary stakeholders presents a unique set of needs and motivations for using Vocal, and thus a unique revenue opportunity. The continuous interactions between creators, audiences, and brands propel a virtuous cycle of transactions
Through this essential framework, we were able to segment and understand the motivations and behaviors of the key players transacting on the Vocal platform. Eventually, this framework lent itself to the development of what we now call the Creatd Cycle, which illustrates not only Vocal’s key stakeholders, but the numerous revenue touchpoints that were built into the platform to ensure a balanced portfolio of revenue streams, sustainable infrastructures, and compounding scalability.
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Revenues are primarily generated through:
Creator Subscriptions:
Vocal+ is a premium subscription membership for Vocal users. Vocal+ members pay a membership fee for premium features, including receiving increased earnings for their content, reduced platform processing fees for tips received, a Vocal+ badge on their creator page, eligibility to participate in exclusive Vocal+ Weekly Challenges, and more. Creators may sign up for a Vocal+ membership when they create an account, or they can upgrade an existing Vocal Free account to a Vocal+ account at any time. The current cost of a Vocal+ membership is either $9.99 per month or $99 annually.
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Brand Agency:
Nominees
We believe that like our creators, brandsNominees, such as brokers, trustees, depositories or mobile investment platforms for securities, who hold shares of common stock for the account of others, should notify the respective beneficial owners of the shares as soon as possible to ascertain the beneficial owners’ intentions and to obtain instructions with respect to the subscription rights. If the beneficial owner so instructs, the nominee should complete the subscription certificate and submit it to the subscription agent with the proper payment as described under “Payment for Securities” below.
Guaranteed Delivery Procedures
If you wish to exercise subscription rights, but you do not have a storysufficient time to tell. Our in-house content studio, Vocaldeliver the rights certificate evidencing your subscription rights to the subscription agent prior to the expiration of the rights offering, you may exercise your subscription rights by the following guaranteed delivery procedures:
deliver to the subscription agent prior to the expiration of the rights offering the subscription payment for Brands, specializes in producing authentic and educational branded stories. We leverage our first-party platform data and creator communityeach share you elected to help us do it.
Vocal for Brands pairs brands with active creatorspurchase pursuant to the exercise of subscription rights in the Vocal networkmanner set forth below under “Payment for Securities;”
deliver to produce bespoke branded content campaigns, brand-sponsored creator Challenges,the subscription agent prior to the expiration of the rights offering the form entitled “Notice of Guaranteed Delivery;” and other types of branded experiences on the Vocal platform that build brand engagement and trust, and drive results. The combination of Vocal’s hyper-engaged audiences, user-generated communities, and brand-safe environment help brands achieve maximum ROAS (return on ad spend).
Vocal’s first-party data enables our teamdeliver the properly completed rights certificate evidencing your subscription rights being exercised and the related Nominee Holder Certification, if applicable, with any required signatures guaranteed, to create highly targeted and segmented audiencesthe subscription agent within three (3) business days following the date you submit your Notice of Guaranteed Delivery.
Your Notice of Guaranteed Delivery must be delivered in substantially the same form provided with the “Instructions for Vocal for Brands campaigns, and helpUse of Non-Transferable Subscription Rights Certificates,” which will be distributed to you with your rights certificate. Your Notice of Guaranteed Delivery must include a signature guarantee from an eligible institution acceptable to the brand reach their ideal audience. Brands can access story performance data, engagement data, behavioral data, and sentiment data, allsubscription agent. A form of whichthat guarantee is used to further optimizeincluded with the campaign’s success.Notice of Guaranteed Delivery.
The Company typically collects fixed fees ranging from $5,000 to $50,000, depending on duration and scopeIn your Notice of third-party marketing spend.Guaranteed Delivery, you must provide:
● | your name; |
● | the number of subscription rights represented by your rights certificate, the number of shares of units for which you are subscribing under your basic rights, and the number of units for which you are subscribing under your over-subscription privilege, if any; and |
● | your guarantee that you will deliver to the subscription agent a rights certificate evidencing the subscription rights you are exercising within three (3) business days following the date the subscription agent receives your Notice of Guaranteed Delivery. |
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Marketing + Consulting Services:
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Seller’s Choice, LLC (“Seller’s Choice”), which we acquired in September 2019, is a digital marketing solution provider dedicatedAll questions as to the interests, growth,validity, form, eligibility (including times of receipt and profitabilitymatters pertaining to beneficial ownership) and the acceptance of e-commerce brands. Seller’s Choice cohesively focuses onsubscription forms and the four key factorssubscription price will be determined by us, which determinations will be final and binding. No alternative, conditional or contingent subscriptions will be accepted. We reserve the right to reject any or all subscriptions not properly submitted or the acceptance of online sellers – sell-through, differentiation, community and compliance – to help e-commerce businesses establish their brand identity and realize profitable and sustainable growth while maximizing customer engagement and retention.
Through Jerrick’s acquisition of Seller’s Choice, restructuring of their product line, and consolidation of staff, Jerrick has been able to expand its reach into the direct-to-consumer marketplace, while enabling some of Seller’s Choice’s clientele to leverage Vocal for Brand’s unique brand storytelling capabilities. With the power of Vocal, Jerrick has the ability to rapidly identify the winning aspects of an acquisition and eliminate unnecessary operational infrastructures.
Platform Processing Fees and Microtransactions:
With Tipping and other types of microtransactions, audiences can engage and support their favorite Vocal creators by actively investing in their creativity. Vocal takes a platform processing fee on all transactions. Each tip sent on Vocal generates revenue for the Companywhich would, in the formopinion of platform processing fees. For Vocal Free creators, we retain a 7% platform processing fee for every tip exchanged. For Vocal+ creators, we retain a 2.9% platform processing fee.
Vocal utilizes Stripe for payment processing, and currently supports Apple Pay and Google Wallet.
Additional applications for microtransactions on Vocal are in development, including the enablement of gated premium content, recurring tips, affiliate marketing features for brands, and incentivization fees for new creator referrals.
our counsel, be unlawful.
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Affiliate sales:
Vocal generates revenue through affiliate marketing relationships, which pays The Company a percentageWe reserve the right to reject any exercise of purchases made on our platform. Affiliate partnerships include Amazon, Skimlinks, Tune, and more. This represents a unique opportunityrights if such exercise is not in the post-pandemic environment where brands need expansive distribution pipelines such as Vocal to reach broader audiences.
E-commerce:
Our e-commerce strategy involves revitalizing archival imagery and media content in dormant legacy portfolios. Our curation and data capabilities have helped us create scalable and definable value for our internal collection of media assets through financing, trademarking, licensing, and production opportunities. The collectibles auction space and associated technology platforms represent a growing opportunity for Vocal to utilize its operational framework to leverage media libraries.
Growth Strategy
Continued growth is likely to be achieved by focusing on the following key areas:
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Customers
There are three primary categories of stakeholders/customers that interact within Vocal’s ecosystem: creators, brands, and readers.
Creators
Vocal provides a large stage for creators to connect with fans and find new audiences. In addition to enabling access to millions of monthly visitors, the platform provides creators with a full suite of tools and services for content creation, discovery, distribution, and monetization, including:
Brands
Vocal for Brands leverages Vocal to produce branded stories and Challenges that build affinity and trust, while generating sales and awareness. The key value propositions for brands include:
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Readers
We are focused on enabling the discovery and curation of stories for our readers through a range of products and services:
Corporate Information
We were originally incorporated under the laws of the State of Nevada on December 30, 1999 under the name LILM, Inc. The Company changed its name on December 3, 2013 to Great Plains Holdings, Inc.
On February 5, 2016 (the “Merger Closing Date”), we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with GPH Merger Sub, Inc., a Nevada corporation and our wholly-owned subsidiary (“Merger Sub”), and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), pursuant to which the Merger Sub was merged with and into Jerrick, with Jerrick surviving as our wholly-owned subsidiary (the “Merger”). Pursuant to the terms of this offering or not in proper form or if the Merger Agreement,acceptance thereof or the issuance of units thereto could be deemed unlawful. We reserve the right to waive any deficiency or irregularity with respect to any subscription certificate. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as we acquired, through a reverse triangular merger, all of the outstanding capital stock of Jerrickdetermine in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 28,500,000 shares of our common stock. Additionally, we assumed 33,415 shares of Jerrick’s Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred Stock (the “Jerrick Series B Preferred”).
Upon closing of the Merger on February 5, 2016, the Company changed its business plansole discretion. We will not be under any duty to our current plan.
In connection with the Merger, on the Merger Closing Date, we entered into a Spin-Off Agreement with Kent Campbell (the “Spin-Off Agreement”), pursuant to which Mr. Campbell purchased (i) all of our interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all of our interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 781,818 shares of our common stock held by Mr. Campbell. In addition, Mr. Campbell assumed all of our debts, obligations and liabilities, including any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.
Effective February 28, 2016, we entered into an Agreement and Plan of Merger (the “Statutory Merger Agreement”), pursuant to which we became the parent company of Jerrick Ventures, LLC, our wholly-owned operating subsidiary (the “Statutory Merger”).
On February 28, 2016, we changed our name to Jerrick Media Holdings, Inc. to better reflect our new business strategy.
Employees
As of July 21, 2020, we had 21 full-time employees. None of our employees are subject to a collective bargaining agreement, and we believe that relationship with our employees to be good.
Description of Property
Our corporate headquarters consists of a total of 3,000 square feet and is located at 2050 Center Ave, Suite 640 and Suite 660, Fort Lee, NJ 07024. The current lease term is effective June 5, 2018 through July 5, 2023, with monthly rent of $7,693 for the first year and increases at a rate of 3% for each subsequent year thereafter.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not awaregive notification of any such legal proceedingsdefect or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
On June 25, 2020, Home Revolution, LLC (“Home Revolution”) filed a lawsuit in the United States District Court for the District of New Jersey, entitled Home Revolution, LLC, et al v. Jerrick Media Holdings, Inc. et al, Case No. 2:20-cv-07775-JMV-MF. The complaint for the lawsuit alleges, among other things, that the Company breached the Membership Interest Purchase Agreement, as modified, and ancillary transaction documentsirregularity in connection with the acquisitionsubmission of Seller’s Choice, LLC, from Home Revolution in September 2019. The complaint additionally alleges violation of the New Jersey Uniform Securities Law, violations of the Exchange Act and Rule 10b-5 thereunder, fraud, equitable accounting, breach of fiduciary duty, conversion and unjust enrichment. The Company believes the lawsuit lacks merit and will vigorously challenge the action. At this time, the Company is unablesubscription certificates or incur any liability for failure to estimate potential damage exposure, if any, related to the litigation.give such notification.
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The following table and biographical summaries set forthOnce you submit the subscription certificate or have instructed your nominee of your subscription request, you are not allowed to revoke or change the exercise or request a refund of monies paid. All exercises of subscription rights are irrevocable, even if you learn information including principal occupation and business experience, about our directors and executive officers as ofus that you consider to be unfavorable. You should not exercise your subscription rights unless you are certain that you wish to purchase units at the date of this prospectus:subscription price.
Jeremy Frommer – Chief Executive Officer and Director
Mr. Frommer has served as our Chief Executive Officer and as a member of our board of directors since February 2016. Mr. Frommer has over 20 years of experience in the financial technology industry. Previously, Mr. Frommer held key leaderships roles in the investment banking and trading divisions of large financial institutions. From 2009 to 2012, Mr. Frommer was briefly retired until beginning concept formation for Jerrick Ventures which he officially founded in 2013. From 2007 to 2009, Mr. Frommer was Managing Director of Global Prime Services at RBC Capital Markets, the investment banking arm of the Royal Bank of Canada, the largest financial institution in Canada, after the sale of Carlin Financial Group, a professional trading firm. From 2004 to 2007, Mr. Frommer was the Chief Executive Officer of Carlin Financial Group after the sale of NextGen Trading, a software development company focused on building equity trading platforms. From 2002 to 2004, Mr. Frommer was Founder and Chief Executive Officer of NextGen Trading. From 2000 to 2002, he was Managing Director of Merger Arbitrage Trading at Bank of America, a financial services firm. Mr. Frommer was also a director of LionEye Capital, a hedge fund from June 2012 to June 2014. He holds a B.A. from the University of Albany. We believe Mr. Frommer is qualified to serve on our board of directors due to his financial and leadership experience.
Mark Standish – Chairman of the Board of Directors
Mr. Standish was elected to our board of directors in July 2020 and serves as its Chairman. He has served as a Senior Partner for HHM Capital since January 2017. Additionally, he has served as a member of the Board of Directors for LightPoint Financial Technology LLC since January 2017. From February 2015 to December 2016, he served as Managing Partner and Chief Information Officers for Deimos Asset Management LLC. In 1995 he joined the Royal Bank of Canada and served as Co-Chief Executive Officer of RBC Capital Markets from 2008 to 2014. He studied banking and finance at Croydon College in England in 1983. We believe Mr. Standish is qualified to serve as a member of our board because of his extensive financial industry and leadership experience.
Leonard Schiller – Director
Mr. Schiller is the Chairman of our board of directors. He is President and Managing Partner of the Chicago law firm of Schiller, Strauss and Lavin PC and has been associated with the firm since 1977. Mr. Schiller also has served as the President of The Dearborn Group, a residential property management and real estate company with properties located in the Midwest. Mr. Schiller has also been involved in the ownership of residential properties and commercial properties throughout the country. Mr. Schiller has acted as a principal in numerous private loan transactions and has been responsible for the structure, and management of these transactions. Mr. Schiller has also served as a member of the Board of Directors of IMALL, an internet search engine company, which was acquired by Excite@Home. He also served as a member of the Board of AccuMed International, Inc., a company which manufactured and marketed medical diagnostic screening products, which was acquired by Molecular Diagnostics, Inc. He presently serves as a director of Milestone Scientific, Inc., a Delaware company. We believe Mr. Schiller is qualified to serve on our board of directors due to his legal and business experience.
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Laurie Weisberg – Director
Ms. Weisberg was elected to our board of directors in July 2020. Weisberg, who has served as the Chief Sales Officer at Intent since February 2019, has spent over 25 years at the forefront of sales and marketing innovation in the technology space, having held leadership positions at various technology companies including Thrive Global, Curalate, and Oracle Data Cloud. From October 2010 to April 2015, Ms. Weisberg was a member of the executive leadership team at Datalogix, leading up to its acquisition by Oracle in 2015, at which point she assumed the role of VP of Oracle Data Cloud. Additionally, Ms. Weisberg has served on the Advisory Board at Crowdsmart, an intelligent data-driven investment prediction platform since April 2019. Ms. Weisberg was born and educated in England. We believe Ms. Weisberg is qualified to serve on our board of directors due to her extensive global sales and brand marketing expertise as well as her leadership experience working within the technology space.
Mark Patterson – Director
Mr. Patterson was elected to our board of directors in July 2020. Mr. Patterson, a private equity and hedge fund businessman, co-founded MatlinPatterson Global Advisors, a leading private equity firm in the distressed investing space in 2002. Early in his career, Patterson worked in leveraged finance at Credit Suisse, Scully Brothers & Foss, Salomon Brothers, and Bankers Trust. During his tenure as chairman and chief executive of MatlinPatterson’s asset management division, Mr. Patterson expanded the firm’s portfolio beyond distressed debt, implementing other investment strategies such as credit trading, securitized credit, and senior credit. Mark Patterson currently holds the position of Non-Executive Chairman of MatlinPatterson Asset Management. Mr. Patterson received degrees in Law and Economics from Stellenbosch University in South Africa and an M.B.A. from New York University’s Stern School of Business. We believe Mr. Patterson is qualified to serve on our board of directors due to his extensive experience in financial markets, investment management, and his corporate governance experience on various boards.
Justin Maury – President
Mr. Maury has served as our President since January 2019. He is a full stack design director with an expertise in product development. With over ten years of design and product management experience in the creative industry, Mr. Maury’s passion for the creative arts and technology ultimately resulted in the vision for Vocal. Since joining Jerrick in 2013, Maury has overseen the development and launch of the company’s flagship product, Vocal, an innovative platform that provides storytelling tools and engaged communities for creators and brands to get discovered while funding their creativity. Under Maury’s supervision, Vocal has achieved growth to over 380,000 creators across 34 genre-specific communities in its first two years since launch.
Chelsea Pullano – Chief Financial Officer
Ms. Pullano has been our Chief Financial Officer since June 2020. She has a long history of leadership at Jerrick, serving as a member of the Company’s Management Committee for four years. Prior to her current role, Ms. Pullano was an integral member of our finance department since 2017, most recently serving as our Head of Corporate Finance, a role in which she coordinated our periodic reports under the Exchange Act and other financial matters. Prior to joining the Finance Department, Ms. Pullano was a member of our operations team from 2015 to 2017. She holds a B.A. from the State University of New York College at Geneseo.
Danielle Banner – Chief Revenue Officer Nominee
Ms. Banner is a nominee for appointment as our Chief Revenue Officer, and such appointment will be effective upon the completion of this offering. Since joining Jerrick in 2015, Ms. Banner has managed teams in business development, sales and general operations in order to optimize revenue growth for the company through our subsidiaries, Vocal and Seller’s Choice. Ms. Banner is a member of the Company’s Management Committee and Chairs our Operating Committee. Before she joined the Jerrick team, Ms. Banner started her career at the Miami International Film Festival in 2012. She holds a B.A. in Multimedia Studies from Florida Atlantic University
Robert Tal – Chief Strategy Officer Nominee
Mr. Tal is a nominee for appointment as our Chief Strategy Officer, and such appointment will be effective upon the completion of this offering. After joining Jerrick in 2015, Mr. Tal built Jerrick’s business intelligence unit from the ground up and has since led his team through the successful deployment of a scalable and sustainable first-party data model that has mobilized over 650,000 creators to join the Vocal platform. In 2017, Mr. Tal joined Jerrick’s Management Committee, in which he plays a central role in advising the Company’s Chief Executive Officer and President on market intelligence, data insights, and growth strategy. He holds a B.A in Information Technology and Informatics from Rutgers University
Transferability
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Director Terms; Qualifications
Members of our board of directors serve until the next annual meeting of stockholders, or until their successors have been duly elected.
When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the board of directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the board of directors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director.
Director or Officer Involvement in Certain Legal Proceedings
There are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.
Directors and Officers Liability Insurance
The Company has directors’ and officers’ liability insurance insuring its directors and officers against liability for acts or omissions in their capacities as directors or officers, subject to certain exclusions. Such insurance also insures the Company against losses, which it may incur in indemnifying its officers and directors. In addition, officers and directors also have indemnification rights under applicable laws, and the Company’s Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws.
Director Independence
The listing rules of The Nasdaq Stock Market LLC (“Nasdaq”) require that independent directors must comprise a majority of a listed company’s board of directors. In addition, the rules of Nasdaq require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating and governance committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. Under the rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Our board of directors has undertaken a review of the independence of our directors and considered whether any director has a material relationship with it that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, the board of directors has determined that Leonard Shiller, Mark Standish, Laurie Weisberg, and Mark Patterson are “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing standards of Nasdaq. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with the Company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of the Company’s capital stock by each non-employee director, and any transactions involving them described in the section captioned “—Certain relationships and related transactions and director independence.”
Board Committees
Upon the consummation of this Offering, the Company’s Board will establish three standing committees: Audit, Compensation, and Nominating and Corporate Governance. Each of the committees will operate pursuant to its charter. The committee charters will be reviewed annually by the Nominating and Corporate Governance Committee. If appropriate, and in consultation with the chairs of the other committees, the Nominating and Corporate Governance Committee may propose revisions to the charters. The responsibilities of each committee are described in more detail below.
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Nasdaq permits a phase-in period of up to one year for an issuer registering securities in an initial public offering to meet the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee independence requirements. Under the initial public offering phase-in period, only one member of each committee is required to satisfy the heightened independence requirements at the time our registration statement becomes effective, a majority of the members of each committee must satisfy the heightened independence requirements within 90 days following the effectiveness of our registration statement, and all members of each committee must satisfy the heightened independence requirements within one year from the effectiveness of our registration statement.
Audit Committee
The Audit Committee, among other things, will be responsible for:
The board of directors has affirmatively determined that each member of the Audit Committee meets the additional independence criteria applicable to audit committee members under SEC rules and Nasdaq listing rules. Effective upon the completion of this offering the board of directors will adopt a written charter setting forth the authority and responsibilities of the Audit Committee. The Board has affirmatively determined that each member of the Audit Committee is financially literate, and that Mr. Standish meets the qualifications of an Audit Committee financial expert.
The Audit Committee will consist of Mr. Standish, Mr. Schiller, Ms. Weisberg, and Mr. Patterson. Mr. Standish will chair the Audit Committee. We believe that, after consummation of this offering, the functioning of the Audit Committee will comply with the applicable requirements of the rules and regulations of the Nasdaq listing rules and the SEC.
Compensation Committee
The Compensation Committee will be responsible for:
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Effective upon the completion of this offering, the board of directors will adopt a written charter setting forth the authority and responsibilities of the Compensation Committee.
The Compensation Committee will consist of Mr. Standish, Mr. Schiller, Ms. Weisberg, and Mr. Patterson. Mr. Patterson will serve as chairman of the Compensation Committee. The board of directors has affirmatively determined that each member of the Compensation Committee meets the independence criteria applicable to compensation committee members under SEC rules and Nasdaq listing rules. The Company believes that, after the consummation of the offering, the composition of the Compensation Committee will meet the requirements for independence under, and the functioning of such Compensation Committee will comply with, any applicable requirements of the rules and regulations of Nasdaq listing rules and the SEC.
NominatingSubscription Rights. The subscription rights are evidenced by a subscription certificate and Corporate Governance Committee
are non-transferable. The Nominating and Corporate Governance Committee, among other things,subscription rights will not be responsible for:
Effective upon completion of this offering., the board of directors will adopt a written charter setting forth the authority and responsibilities of the Corporate Governance/Nominating Committee.
The Nominating and Corporate Governance Committee will consist of Mr. Standish, Mr. Schiller, Ms. Weisberg, and Mr. Patterson. Ms. Weisberg will serve as chairman. The Company’s board of directors has determined that each member of the Nominating and Corporate Governance Committee is independent within the meaning of the independent director guidelines of Nasdaq listing rules.
Compensation Committee Interlocks and Insider Participation
None of the Company’s executive officers serves, or in the past has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of the Company’s board of directors or its compensation committee. None of the members of the Company’s compensation committee is, or has ever been, an officer or employee of the company.
Code of Business Conduct and Ethics
Prior to the completion of this offering, the Company’s Board of Directors will adopt a code of business conduct and ethics applicable to its employees, directors and officers, in accordance with applicable U.S. federal securities laws and the corporate governance rules of Nasdaq. The code of business conduct and ethics will be publicly available on the Company’s website. Any substantive amendments or waivers of the code of business conduct and ethics or code of ethicslisted for senior financial officers may be made only by the Company’s board of directors and will be promptly disclosed as required by applicable U.S. federal securities laws and the corporate governance rules of Nasdaq.
Corporate Governance Guidelines
Prior to the completion of this offering, the Company’s board of directors will adopt corporate governance guidelines in accordance with the corporate governance rules of Nasdaq.
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Summary Compensation Table
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the years ended December 31, 2019, and 2018.
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||
Jeremy Frommer | 2019 | $ | 168,269 | $ | 300,080 | - | - | - | - | $ | 104,667 | (1) | $ | 573,016 | |||||||||||||||||||||
Chief Executive Officer | 2018 | $ | 152,879 | $ | 135,700 | - | - | - | - | $ | 96,463 | (3) | $ | 385,042 | |||||||||||||||||||||
Rick Schwartz | 2019 | $ | 33,642 | - | - | - | - | - | $ | 9,708 | $ | 43,350 | |||||||||||||||||||||||
Former President | 2018 | $ | 124,476 | - | - | - | - | - | - | $ | 124,476 | ||||||||||||||||||||||||
Justin Maury | 2019 | $ | 117,751 | - | - | - | - | - | $ | 8,094 | (4) | $ | 125,845 | ||||||||||||||||||||||
President | 2018 | $ | 90,846 | - | - | 107 | - | - | - | $ | 90,846 |
Employment Agreements
As of July 21, 2020, the Company has not entered into any employment agreements, but intends on entering into such agreements with its Chief Executive Officer and President by the end of fiscal year 2020.
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Outstanding Equity Awards at Fiscal Year-End 2019
At December 31, 2019, we had outstanding equity awards as follows:
Name | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Weighted Average Exercise Price | Expiration Date | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested | |||||||||||||||||||||||||
Jeremy Frommer (1) | 200,000 | - | 200,000 | $ | 7.5 | May 22, 2022 | - | $ | - | - | - | |||||||||||||||||||||||
Rick Schwartz (1) | 200,000 | - | 200,000 | $ | 7.5 | May 22, 2022 | - | $ | - | - | - | |||||||||||||||||||||||
Justin Maury (2) | 167,955 | - | 167,955 | $ | 9.9 | May 22, 2022 | - | - | - | - |
Director Compensation
The following table presents the total compensation for each person who served as a non-employee member of our board of directors and received compensation for such service during the fiscal year ended December 31, 2019. Other than as set forth in the table and described more fully below, we did not pay any compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee members of our board of directors in 2019.
Director | Option Awards (1) | Fees Earned or Paid in Cash | Total | |||||||||
Andrew Taffin(2) | $ | 3,021 | $ | - | $ | 3,021 | ||||||
Leonard Schiller | $ | - | $ | - | $ | - |
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been limited public market for the Company’s common stock, and a liquid trading market for its common stock may not develop or be sustained after this offering. Future sales of substantial amounts of the Company’s common stock in the public market, or the anticipation of these sales, could materially and adversely affect market prices prevailing from time to time, and could impair the Company’s ability to raise capital through sales of equity or equity-related securities.
Only a limited number of shares of the Company’s common stock will be available for sale in the public market for a period of several months after completion of this offering due to contractual and legal restrictions on resale described below. Nevertheless, sales of a substantial number of shares of the Company’s common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could materially and adversely affect the prevailing market price of its common stock. Although the Company intends to list its common stock on The Nasdaq Capital Market or any other securities exchange or trading system.
Units. The common stock, Series A warrants and Series B warrants comprising the Companyunits will be issued separately. The units will not be issued as a separate security and will not be transferable.
Common Stock. The shares of common stock included in units will be separately transferable following their issuance. All of the shares of common stock issued in this offering are expected to be listed on The Nasdaq Capital Market.
Series A warrants and Series B warrants. The Series A warrants and Series B warrants will be separately transferable following their issuance and through , 2027 and will be exercisable for cash or, solely during any period when a registration statement covering the issuance of the shares of common stock subject to the redeemable warrants is not in effect, on a cashless basis. We are applying to list the Series A warrants and Series B warrants for trading on The Nasdaq Capital Market. We may not be able to meet the applicable standards for the listing of the Series A warrants and Series B warrants on Nasdaq. We cannot assure you that therewe will be an active market for its common stock.meet listing standards of with respect to the redeemable warrants. If we do not meet such required listing standards, we will use our commercially reasonable efforts to list the Series A warrants and Series B warrants on another suitable securities exchange or recognized trading system.
Of the sharesForeign Shareholders
Subscription certificates will not be mailed to be outstanding immediately after the completionforeign shareholders. Foreign shareholders will receive written notice of this offering,offering. The subscription agent will hold the Company expects thatsubscription rights to which those subscription certificates relate for these shareholders’ accounts until instructions are received to exercise the sharessubscription rights, subject to applicable law.
Payment for Securities
Participating rights holders may choose between the following methods of payment:
(1) A participating rights holder may send to the subscription agent (a) payment of the subscription price for units acquired in the basic right and any additional units subscribed for pursuant to the over-subscription privilege and (b) a properly completed and duly executed subscription certificate, which must be sold inreceived by the subscription agent at the subscription agent’s offices set forth above (see “-Subscription Agent”), at or prior to 5:00 p.m. (Eastern time) on the expiration date. A properly completed and duly executed subscription certificate and full payment for the units must be received by the subscription agent at or prior to 5:00 p.m. (Eastern time) on , 2022, unless this offering will be freely tradable without restriction under the Securities Act unless purchasedis extended by the Company’s “affiliates,”us.
(2) A participating rights holder may request an Eligible Guarantor Institution as that term is defined in Rule 14417Ad-15 under the Securities Act. The Company expects that of its remaining shares will be subject to the -day lock-up period under the lock-up agreements as described below. These restricted securities may be sold in the public market only if the lock-up expires and they are registered or sold pursuant to an exemption from registration, such as Rule 144 or Rule 701 under the Securities Act.
Rule 144
In general, under Rule 144 as currently in effect, once the Company has been subject to the public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act to send a notice of guaranteed delivery or otherwise guaranteeing delivery of (a) payment of the full subscription price for the units subscribed for in the basic right and any additional units subscribed for pursuant to the over-subscription privilege, and (b) a properly completed and duly executed subscription certificate. The subscription agent will not honor a notice of guaranteed delivery unless a properly completed and duly executed subscription certificate and full payment for the units is received by the subscription agent at or prior to 5:00 p.m. (Eastern time) on , 2022, unless this offering is extended by us.
All payments by a participating rights holder must be in U.S. dollars by money order or check or bank draft drawn on a bank or branch located in the United States and payable to the order of “Continental Stock Transfer & Trust, as Subscription Agent for Creatd, Inc.” Payment also may be made by wire transfer to the account maintained by Continental Stock Transfer & Trust, as subscription agent, for purposes of accepting subscriptions in this offering at , with reference to the rights holder’s name. The subscription agent will deposit all funds received by it prior to the final payment date into a segregated account pending pro-ration and distribution of the units.
The method of delivery of subscription certificates and payment of the subscription price to us will be at the election and risk of the participating rights holders, but if sent by mail it is recommended that such certificates and payments be sent by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to the subscription agent and clearance of payment prior to 5:00 p.m. (Eastern time) on the expiration date or the date guaranteed payments are due under a notice of guaranteed delivery (as applicable). Because uncertified personal checks may take at least 90five business days to clear, you are strongly urged to pay, or arrange for payment, by means of certified or cashier’s check or money order.
Whichever of the two methods described above is used, subscription rights will not be successfully exercised unless the subscription agent actually receives checks and actual payment. If a personparticipating rights holder who issubscribes for units as part of the basic right or over-subscription privilege does not make payment of any amounts due by the expiration date, the date guaranteed payments are due under a notice of guaranteed delivery or as promptly as practicable of the confirmation date, as applicable, the subscription agent reserves the right to take any or all of the following actions: (i) reallocate the units to other participating rights holders in accordance with the over-subscription privilege; (ii) apply any payment actually received by it from the participating rights holder toward the purchase of the greatest whole number of units that could be acquired by such participating rights holder upon exercise of the basic right and/or the over-subscription privilege; and/or (iii) exercise any and all other rights or remedies to which it may be entitled, including the right to set off against payments actually received by it with respect to such subscribed for units.
All questions concerning the timeliness, validity, form and eligibility of any exercise of subscription rights will be determined by us, whose determinations will be final and binding. We may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as we may determine, or reject the purported exercise of any right. Subscriptions will not be deemed to have been onereceived or accepted until all irregularities have been waived or cured within such time as we determine. The subscription agent will not be under any duty to give notification of any defect or irregularity in connection with the submission of subscription certificates or incur any liability for failure to give such notification.
Escrow Arrangements; Return of Funds
An escrow agent retained by the subscription agent will hold funds received in payment for units in a segregated escrow account pending completion of the Company’s affiliatesrights offering. An escrow agent retained by the subscription agent will hold this money in escrow until the rights offering is completed or is terminated. If the rights offering is terminated for purposesany reason, all subscription payments received by the subscription agent will be promptly returned, without interest or penalty.
Delivery of Securities
Shareholders whose shares are held of record by Cede & Co. or by any other depository or nominee on their behalf or their broker-dealers’ behalf will have any shares of common stock, Series A warrants, and Series B warrants comprising units that they acquire credited to the Securities Actaccount of Cede & Co. or the other depository or nominee. With respect to all other shareholders, certificates for all common stock or redeemable warrants acquired will be mailed after payment for all the units subscribed for has cleared, which may take up to 15 business days from the expiration date.
Termination
We reserve the right to terminate the rights offering before its expiration for any reason. In particular, we may terminate the rights offering, in whole or in part, if at any time duringbefore completion of the 90 days precedingrights offering there is any judgment, order, decree, injunction, statute, law or regulation entered, enacted, amended or held to be applicable to the rights offering that in the sole judgment of the board would or might make the rights offering or its completion, whether in whole or in part, illegal or otherwise restrict or prohibit completion of the rights offering. We may choose to proceed with the rights offering even if one or more of these events occur. If we terminate the rights offering in whole or in part, we will issue a salepress release notifying the shareholders of such event, all affected subscription rights will expire without value, and whoall excess subscription payments received by the subscription agent will be promptly returned, without interest or penalty, following such termination.
If this offering is terminated, all rights will expire without value and we will promptly arrange for the refund, without interest or deduction, of all funds received from rights holders. All monies received by the subscription agent in connection with this offering will be held in escrow by an escrow agent retained by the subscription agent, on our behalf, in a segregated account. Any interest earned on such account shall be payable to us even if we determine to terminate this offering and return your subscription payment.
No Recommendation to Rights Holders
Our board of directors has beneficially ownednot made, nor will it make, any recommendation to rights holders regarding the exercise of subscription rights under this offering. We cannot predict the price at which shares of itsour outstanding common stock proposedwill trade after this offering. You should consult with your legal, tax and financial advisors prior to making your independent investment decision about whether or not to exercise your subscription rights.
Holders who exercise subscription rights risk investment loss on new money invested. We cannot assure you that the market price for common stock will ever be sold for at least six months is entitledabove the subscription price or above the exercise price of the redeemable warrants, or that anyone purchasing units, or exercising the redeemable warrants to purchase shares, will be able to sell those shares without complying within the mannerfuture at the same price or a higher price. If you do not exercise your subscription rights, you will lose any value represented by your subscription rights, and if you do not exercise your basic rights in full, your percentage ownership interest in our company will be diluted. For more information on the risks of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than Company affiliates, then that person would be entitled to sell those shares without complying with anyparticipating in this offering, see “Risk Factors.”
Effect of the requirementsRights Offering on Existing Shareholders; Interests of Rule 144.Certain Shareholders, Directors and Officers
In general, under Rule 144,Based on shares outstanding as currentlyof May 25, 2022, after giving effect to this offering (assuming that it is fully subscribed and that the Series A warrants and Series B warrants issued in effect, the Company’s affiliates or persons sellingoffering are exercised in full), we would have approximately 80,094,433 shares of its common stock on behalfoutstanding, representing an increase in outstanding shares of its affiliates are entitledapproximately 299%. If you fully exercise the basic rights that we distribute to sell upon expirationyou, your proportional interest in our company will remain the same. If you do not exercise any subscription rights, or you exercise less than all of the market standoff agreements and lock-up agreements described above, within any three-month period,your basic rights, your interest in our company will be diluted, as you will own a smaller proportional interest in our company compared to your interest prior to this offering.
The number of shares that does not exceed the greater of:
Sales under Rule 144 by the Company’s affiliates or persons selling shares of its common stock on behalf of its affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company.
Rule 701
Rule 701 generally allows a stockholder who purchased sharesoutstanding listed in each case above assumes that (a) all of the Company’s common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of the Company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits affiliates of the Company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701 and until expiration of the -day lock-up period described below.
Lock-Up Agreements
In connection with this offering, the Company, and its officers, directors and stockholders have agreed to a nine-month “lock-up” period from the closing of this offering, with respect to the shares that they beneficially own, including shares issuable upon the exercise of convertible securities and options that are currently outstanding or which may be issued. This means that, for a period of nine months following the closing of this offering, such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of the underwriters. The nine-month restricted period is subject to extension upon certain events and the terms of the lock-up agreements may be waived at the underwriters’ discretion. The lock-up restrictions, specified exceptions and the circumstances under which the nine-month lock-up period may be extended are described in more detail under “Underwriting.”
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF THE COMPANY’S COMMON STOCK
The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the ownership and disposition of the Company’s common stock but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income tax consequences different from those set forth below. No ruling on the U.S. federal, state, or local tax considerations relevant to the Company’s operations or to the purchase, ownership or disposition of its shares, has been requested from the IRS or other tax authority. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This summary also does not address the tax considerations arising under the laws of any non-U.S., state or local jurisdiction, or under U.S. federal gift and estate tax laws, except to the limited extent set forth below. In addition, this discussion does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:
In addition, if a partnership or entity classified as a partnership for U.S. federal income tax purposes holds the Company’s common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold the Company’s common stock, and partners in such partnerships, should consult their tax advisors.
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You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and disposition of the Company’s common stock arising under the U.S. federal estate or gift tax rules or under the laws of any state, local, non-U.S., or other taxing jurisdiction or under any applicable tax treaty.
Non-U.S. Holder Defined
For purposes of this discussion, you are a non-U.S. holder (other than a partnership) if you are any holder other than:
Distributions
As described in “Dividend Policy,” the Company has never declared or paid cash dividends on its common stock and do not anticipate paying any dividends on its common stock in the foreseeable future. However, if the Company does make distributions on its common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from the Company’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both the Company’s current and its accumulated earnings and profits, they will constitute a return of capital and will first reduce your basis in the Company’s common stock, but not below zero, and then will be treated as gain from the sale of stock as described below under “— Gain on Disposition of common stock.”
Subject to the discussion below on effectively connected income, backup withholding and foreign accounts, any dividend paid to you generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. In order to receive a reduced treaty rate, you must provide us with an IRS Form W-8BEN, IRS Form W-8BEN-E, or other appropriate version of IRS Form W-8 certifying qualification for the reduced rate. A non-U.S. holder of shares of the Company’s common stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then will be required to provide certification to the Company or its paying agent, either directly or through other intermediaries.
Dividends received by you that are effectively connected with your conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, attributable to a permanent establishment maintained by you in the United States) are generally exempt from the withholding tax described above. In order to obtain this exemption, you must provide us with an IRS Form W-8ECI or other applicable IRS Form W-8 properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. In addition, if you are a corporate non-U.S. holder, dividends you receive that are effectively connected with your conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. You should consult your tax advisor regarding any applicable tax treaties that may provide for different rules.
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Gain on Disposition of Common Stock
Subject to the discussion below regarding backup withholding and foreign accounts, you generally will not be required to pay U.S. federal income tax on any gain realized upon the sale or other disposition of the Company’s common stock unless:
The Company believes that it is not currently and will not become a USRPHC for U.S. federal income tax purposes, and the remainder of this discussion so assumes. However, because the determination of whether it is a USRPHC depends on the fair market value of its U.S. real property relative to the fair market value of its other business assets, there can be no assurance that the Company will not become a USRPHC in the future. Even if it becomes a USRPHC, however, as long as the Company’s common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if you actually or constructively hold more than five percent of such regularly traded common stock at any time during the shorter of (i) the five-year period preceding your disposition of the Company’s common stock, or (ii) your holding period for the Company’s common stock.
If you are a non-U.S. holder described in the first bullet above, you will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and a corporate non-U.S. holder described in the first bullet above also may be subject to the branch profits tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty. If you are an individual non-U.S. holder described in the second bullet above, you will be required to pay a flat 30% tax (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, which gain may be offset by U.S. source capital losses for the year (provided you have timely filed U.S. federal income tax returns with respect to such losses). You should consult any applicable income tax or other treaties that may provide for different rules.
Backup Withholding and Information Reporting
Generally, the Company must report annually to the IRS, regardless of whether any tax was withheld, the amount of dividends paid to you, your name and address and the amount of tax withheld, if any. A similar report will be sent to you. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in your country of residence.
Payments of dividends or of proceeds on the disposition of stock made to you may be subject to information reporting and backup withholding at a current rate of 24% unless you establish an exemption, for example, by properly certifying your non-U.S. status on an IRS Form W-8BEN, IRS Form W-8BEN-E, or another appropriate version of IRS Form W-8.
Backup withholding is not an additional tax; rather, the U.S. federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance Act, or FATCA, imposes withholding tax at a rate of 30% on dividends on and gross proceeds from the sale or other disposition of the Company’s common stock paid to “foreign financial institutions” (as specially defined under these rules), unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding the U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise establishes an exemption. FATCA also generally imposes a U.S. federal withholding tax of 30% on dividends on and gross proceeds from the sale or other disposition of the Company’s common stock paid to a “non-financial foreign entity” (as specially defined for purposes of these rules) unless such entity provides the withholding agent with a certification identifying certain substantial direct and indirect U.S. owners of the entity, certifies that there are none or otherwise establishes an exemption. The withholding provisions under FATCA generally apply to dividends on our common stock, and under current transition rules, are expected to apply with respect to the gross proceeds from the sale or other disposition of the Company’s common stock on or after January 1, 2019. An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Non-U.S. holders should consult their own tax advisors regarding the possible implications of this legislation on their investment in the Company’s common stock.
Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of the Company’s common stock, including the consequences of any proposed change in applicable laws.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company’s common stock, beneficially owned as of July 21, 2020 (i) each person known to the Company to beneficially own more than 5% of its common stock, (ii) each executive officer, director and director nominee and (iii) all officers, directors and director nominees as a group. The following table is based on the Company having 10,147,420 shares of common stock issued and outstanding on the record date will remain issued and outstanding and owned by the same persons as of July 21, 2020. The Company calculated beneficial ownership according to Rule 13d-3the closing of this offering, and (b) we will not issue any shares of common stock in the period between the record date and the closing of the Securities Exchange Actoffering.
Material U.S. Federal Income Tax Treatment of 1934,Rights Distribution
The receipt and exercise of subscription rights by shareholders should generally not be taxable for U.S. federal income tax purposes. You should seek specific tax advice from your tax advisor in light of your particular circumstances and as amendedto the applicability and effect of any other tax laws. See “Material U.S. Federal Income Tax Consequences.”
Distribution Arrangements
RHK Noble is the dealer-manager for this offering. The dealer-manager will provide marketing assistance and advice to us in connection with this offering. We have agreed to pay the dealer-manager certain fees and to reimburse the dealer-manager for certain expenses in connection with this offering. See “Plan of Distribution.”
Fees and Expenses
We will pay all fees charged by the subscription agent, the information agent and the warrant agent. We will also pay the fees and expenses charged by RHK Noble, as dealer-manager for this offering and placement agent for any unsubscribed units. RHK Noble has informed us that it will re-allow [●]% of its dealer-manager fee to each broker-dealer whose clients purchase units in this offering pursuant to the exercise of their subscription rights. See “Plan of Distribution.” You are responsible for paying any commissions, fees, taxes or other expenses incurred in connection with the exercise of your subscription rights.
Other Matters
We are not making this offering in any state or other jurisdiction in which it is unlawful to do so, nor are we distributing or accepting any offers to purchase any shares of common stock from rights holders who are residents of those states or other jurisdictions or who are otherwise prohibited by federal or state laws or regulations to accept or exercise the subscription rights. We may delay the commencement of this offering in those states or other jurisdictions, or change the terms of the offering, in whole or in part, in order to comply with the securities laws or other legal requirements of those states or other jurisdictions. Subject to state securities laws and regulations, we also have the discretion to delay allocation and distribution of any units you may elect to purchase by exercise of your subscription rights in order to comply with state securities laws. We may decline to make modifications to the terms of this offering requested by those states or other jurisdictions, in which case, if you are a resident in those states or jurisdictions or if you are otherwise prohibited by federal or state laws or regulations from accepting or exercising the subscription rights, you will not be eligible to participate in the offering. However, we are not currently aware of any states or jurisdictions that would preclude participation in this offering.
DESCRIPTION OF SECURITIES
We are issuing non-transferable subscription rights, at no charge, to each holder of common stock as of that date. Sharesa record date of 5:00 p.m. (Eastern time) on , 2022 and holders of the Company’sPreferred Shares, Eligible Warrants and/or Eligible Options, whom we refer to as a “holder” or “you.” For each share of common stock you hold as of the record date or each share of common stock issuable upon conversion or exercise of options the Preferred Shares, Eligible Warrants and/or warrants or conversionEligible Options you held as of notes that are exercisable or convertible within 60 days after July 21, 2020 are included as beneficially owned by the holder, butrecord date, we will issue to you two subscription rights, each of which includes (a) a basic right entitling you to purchase one unit at a subscription price of $2.00 per unit and (b) an over-subscription privilege which will entitle you to purchase additional units for which other rights holders do not deemed outstanding for computing the percentagesubscribe, subject to you exercising your basic right in full and other limitations. Each unit will consist of any other stockholder for Percentageone share of common stock, Beneficially Owned. For each individual and group included in the table below, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the 9,347,682 sharesa Series A warrant exercisable to acquire one share of common stock outstanding at July 21, 2020, plus the number of shares of common stock that such person or group had the right to acquire on or within 60 days after July 21, 2020. Beneficial ownership generally includes voting and dispositive power with respect to securities. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole dispositive power with respect to all shares beneficially owned.
Shares Beneficially Owned (1) | Percentage Beneficially Owned | |||||||
Executive Officers and Directors | ||||||||
Jeremy Frommer | 903,508 | (2) | 8.90 | % | ||||
Justin Maury | 283,297 | (3) | 2.79 | % | ||||
Chelsea Pullano | 22,908 | (6) | * | % | ||||
Leonard Schiller | 238,521 | (4) | 2.35 | % | ||||
Mark Standish | 468,001 | (7) | 4.54 | % | ||||
Mark Patterson | -- | -- | % | |||||
Laurie Weisberg | -- | -- | % | |||||
All current directors and officers as a group | 1,916,235 | 18.57 | % | |||||
5% or Greater Stockholders | ||||||||
Chris Gordon | 772,716 | 7.61 | % | |||||
Arthur Rosen | 1,337,453 | (5) | 13.14 | % |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following includes a summary of transactions during our fiscal years ended December 31, 2019 and December 31, 2018 to which we have been a party, including transactions in which the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described elsewhere in this proxy statement. We are not otherwise a party to a current related party transaction, and no transaction is currently proposed, in which the amount of the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years and in which a related person had or will have a direct or indirect material interest.
The January 2018 Rosen Loan Agreement
On January 16, 2018, the Company entered into a loan agreement (the “January 2018 Rosen Loan Agreement”) with Arthur Rosen, a shareholder of the Company, whereby the Company issued Mr. 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, our Chief Executive Officer, whereby upon default Mr. Frommer’s personal shares of the Company’s common stock would be available to Mr. Rosen in an amount equal to the 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 May 2016 Rosen Loan 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 Christopher Gordon (“Gordon”), whereby the Company issued Mr. 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, our Chief Executive Officer, whereby upon default Mr. Frommer’s personal shares of the Company’s common stock would be available to Mr. Gordon in amount equal to the 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 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 Mr. Rosen, whereby the Company issued Mr. 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 Mr. 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 nine months 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 Mr. Rosen, whereby the Company issued Mr. 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 Mr. 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 nine months 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 Mr. Rosen, whereby the Company issued Mr. 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 Mr. 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 nine months 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 Leonard Schiller, Chairman of our board of directors, whereby the Company issued Mr. 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 Mr. 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”) at which time all outstanding principal, accrued and unpaid interest are due under the May 2018 Schiller Loan.
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 our Chief Executive Officer, 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”) at which time all outstanding principal, accrued and unpaid interest are due under the June 2018 Frommer Loan. 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 40,854 warrants to purchase common stock of the Company at an exercise price of $0.30. On March 29, 2019 the Company executed upon an agreement that extended the maturity date$3, and a Series B warrant exercisable to acquire one share of this loan to May 15, 2019. On December 15, 2019 the Company executed upon an agreement that further extended the maturity date of this loan to May 15, 2020.
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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 Leonard Schiller, a member of the Board, whereby the Company issued Mr. Schiller a promissory note 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 at which time all outstanding principal, accrued and unpaid interest were due under the First July 2018 Schiller Loan. 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 142,987 warrants to purchase common stock of the Company at an exercise price of $0.30. On March 29, 2019 the Company executed upon an agreement that extended the maturity date$6. The subscription rights may only be exercised in aggregate for whole numbers of this loan to May 15, 2019.
During the year ended December 31, 2018 the Company repaid $20,000 in principal. During the year ended December 31, 2019, the Company converted $15,000 in principal and $863.33 into the February 2019 Offering and the note is no longer outstanding.
units. 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 Mr. Schiller a promissory note 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 Mr. Schiller a four-year warrant to purchase 75,000 shares of the Company’s common stock, atSeries A warrants and Series B warrants comprising the units may only be purchased as 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 at which time all outstanding principal, accrued and unpaid interest were due under the Second July 2018 Schiller Loan. Subsequent to the balance sheet date, on November 8, 2018 the Company entered into an agreement with Mr. Schiller that extended the maturity date of this loan to March 7, 2019. As part of the extension agreement, the Companyunit, but will be issued 101,900 warrants to Mr. Schiller to purchase common stock of the Company at an exercise price of $0.30. On March 29, 2019 the Company entered into an agreement that extended the maturity date of this loan to May 15, 2019. On December 15, 2019 the Company executed upon an agreement that further extended the maturity date of this loan to May 15, 2020.
During the year ended December 31, 2019 the Company converted $4,136.67 in principal into the February 2019 Offering.
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 Mr. Rosen, a shareholder of the Company, whereby the Company issued Mr. Rosen a promissory note 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 at which time all outstanding principal, accrued and unpaid interest are due under the First July 2018 Rosen Note. 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 to Mr. Rosen 27,534 warrants to purchase common stock of the Company at an exercise price of $0.30. On March 29, 2019 the Company entered into an agreement that extended the maturity date of this loan to May 15, 2019.
During the year ended December 31, 2019, the Company repaid $10,000 of principal and all unpaid interest and the loan is no longer outstanding.
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 Mr. Rosen a promissory note 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 Mr. 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. Pursuant to the Second July 2018 Rosen Loan Agreement, 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 at which time all outstanding principal, accrued and unpaid interest are due under the Second July 2018 Rosen Note. Subsequent to the balance sheet date, on November 8, 2018 the Company entered into an agreement that extended the maturity date of this loan to March 7, 2019. As part of the extension agreement, the Company issued to Mr. Rosen 203,967 warrants to purchase common stock of the Company at an exercise price of $0.30. On March 29, 2019 the Company entered into an agreement that extended the maturity date of this loan to May 15, 2019.
During the year ended December 31, 2019, the Company repaid $50,000 of principal and all unpaid interest and the loan is no longer outstanding.
separately.
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The November 2018 Rosen Loan Agreement
On November 29, 2018, the Company entered into a loan agreement (the “November 2018 Rosen Loan Agreement”) with Mr. Rosen, whereby the Company issued Mr. 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 Mr. 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. Pursuant to the November 2018 Rosen Loan Agreement, the November 2018 Rosen Note bears interest at a rate of 6% per annum and payable on the maturity date of December 23, 2018 (the “November 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest are due under the November 2018 Rosen Loan.
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.
The December 2018 Rosen Loan Agreement
On December 27, 2018, the Company entered into a loan agreement (the “December 2018 Rosen Loan Agreement”) with Mr. Rosen, whereby the Company issued Mr. 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 Mr. 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. Pursuant to the December 2018 Rosen Loan Agreement, the December 2018 Rosen Note bears interest at a rate of 6% per annum and payable on the maturity date of January 26, 2018 (the “December 2018 Rosen Maturity Date”) at which time all outstanding principal, accrued and unpaid interest are due under the November 2018 Rosen Loan. On March 29, 2019 the Company entered into an agreement that extended the maturity date of this loan to May 15, 2019.
During the year ended December 31, 2019, the Company converted this loan and all unpaid interest into the June 2019 Loan Agreement and the loan is no longer outstanding.
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. Pursuant to the December 2018 Gravitas Capital Loan Agreement, the December 2018 Gravitas Capital Note bears interest at a rate of 6% per annum and payable on the maturity date of January 27, 2018 (the “December 2018 Gravitas Capital Maturity Date”) at which time all outstanding principal, accrued and unpaid interest are due under the November 2018 Gravitas Capital Loan. In January 2019, the Company repaid $50,000 in principal and $250 in interest, and the loan is no longer outstanding.
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The January 2019 Rosen Loan Agreement
On January 30, 2019, the Company entered into a loan agreement (the “January 2019 Rosen Loan Agreement”) with Mr. Rosen, whereby the Company issued Mr. Rosen a promissory note in the principal amount of $175,000 (the “January 2019 Rosen Note”). As additional consideration for entering in the January 2019 Rosen Note Loan Agreement, the Company issued Mr. Rosen a four-year warrant to purchase 15,000 shares of the Company’s common stock at a purchase price of $6.00 per share. Pursuant to the January 2019 Rosen Loan Agreement, the January 2019 Rosen Note bears interest at a rate of 10% per annum and payable on the maturity date of February 15, 2019 (the “January 2019 Rosen Maturity Date”). On February 19, 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 Mr. Rosen warrants to purchase 35,194 shares of common stock of the Company at an exercise price of $6.00. On March 29, 2019 the Company entered into an agreement with Mr. Rosen that extended the maturity date of this loan to May 15, 2019.
On August 8, 2019 the Company entered into an agreement further extending the maturity date to September 20, 2019.
During the year ended December 31, 2019 the Company repaid $175,000 in principal and $15,073 in interest and the loan is no longer outstanding.
The February 2019 Rosen Loan Agreement
On February 14, 2019, the Company entered into a loan agreement (the “February 2019 Rosen Loan Agreement”) with Mr. Rosen, whereby the Company issued Mr. Rosen a promissory note in the principal amount of $50,000 (the “February 2019 Rosen Note”). As additional consideration for entering in the February 2019 Rosen Note Loan Agreement, the Company issued Mr. Rosen a four-year warrant to purchase 5,000 shares of the Company’s common stock at a purchase price of $6.00 per share. Pursuant to the February 2019 Rosen Loan Agreement, the February 2019 Rosen Note bears interest at a rate of 10% per annum and payable on the maturity date of February 28, 2019 (the “February 2019 Rosen Maturity Date”). On March 29, 2019 the Company entered into an agreement with Mr. Rosen that extended the maturity date of this loan to May 15, 2019. On August 8, 2019 the Company entered into an agreement further extending the maturity date to September 20, 2019.
During the year ended December 31, 2019 the Company repaid $50,000 in principal and $3,208 in interest and the loan is no longer outstanding.
The June 2019 Loan Agreement
On June 3, 2019, the Company entered into a loan agreement (the “June 2019 Loan Agreement”) with Mr. Rosen, pursuant to which the Company was to be indebted in the amount of $2,400,000, of which $1,200,000 was funded by September 30, 2019 and $1,200,000 was exchanged from the May 2016 Rosen Loan Agreement dated May 26, 2016 in favor of Rosen for a joint and several interest in the Term Loan pursuant to the Debt Exchange Agreement. The June 2019 Loan Agreement, the June 2019 Loan bears interest at a rate of 12.5% per annum, compounded annually and payable on the maturity date of December 3, 2019 (the “June 2019 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the June 2019. In connection with the conversion of the May 2016 Rosen Loan Agreement the Company recorded a debt discount of $92,752. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.
The August 2019 Schiller Loan Agreement
On August 6, 2019, the Company entered into a loan agreement (the “August 2019 Schiller Loan Agreement”) with Mr. Schiller, whereby the Company issued a promissory note to Mr. Schiller in the principal amount of $15,000 (the “August 2019 Schiller Note”). Pursuant to the August 2019 Schiller Loan Agreement, the August 2019 Schiller Note bears interest at a rate of $750 per month. As additional consideration for entering in the August 2019 Schiller Loan Agreement, the Company issued a five-year warrant to purchase 225 shares of the Company’s common stock at a purchase price of $6.00 per share.
During the year ended December 31, 2019 the Company repaid $15,000 in principal and $750 in interest and the loan is no longer outstanding.
The September 2019 Schiller Loan Agreement
On September 26, 2019, the Company entered into a loan agreement (the “September 2019 Schiller Loan Agreement”) with Mr. Schiller, whereby the Company issued Mr. Schiller a promissory note in the principal amount of $50,000 (the “September 2019 Schiller Note”). Pursuant to the September 2019 Schiller Loan Agreement, the September 2019 Schiller Note bears interest at a rate of $2,250 per month. As additional consideration for entering in the First September 2019 Schiller Loan Agreement, the Company issued Schiller a five-year warrant to purchase 1,000 shares of the Company’s common stock at a purchase price of $6.00 per share.
During the year ended December 31, 2019 the Company repaid $50,000 in principal and $2,250 in interest and the loan is no longer outstanding.
The October 2019 Frommer Loan Agreement
On October 7, 2019, the Company entered into a loan agreement (the “October 2019 Frommer Loan Agreement”) with Mr. Frommer, whereby the Company issued Mr. Frommer a promissory note in the principal amount of $10,000 (the “October 2019 Frommer Note”). Pursuant to the October 2019 Frommer Loan Agreement, the October 2019 Frommer Note bears interest at a flat rate of $500. As additional consideration for entering in the October 2019 Frommer Loan Agreement, the Company issued Mr. Frommer a five-year warrant to purchase 150 shares of the Company’s common stock at a purchase price of $6.00 per share.
During the year ended December 31, 2019 the Company repaid $10,000 in principal and $225 in interest and the loan is no longer outstanding.
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The Benchmark Company, LLC is acting as the underwriter of the offering, and the Company has entered into an underwriting agreement on the date of this prospectus, with it as underwriter. Subject to the terms and conditions of the underwriting agreement, the Company has agreed to sell to the underwriters and the underwriters have agreed to purchase from us, Units, consisting of shares of common stock and warrants, less the underwriting discounts set forth on the cover page of this prospectus.
The underwriters are committed to purchase all of the Units offered by us other than those covered by the option to purchase additional securities described below, if they purchase any such securities. The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.
The Company has agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments the underwriters may be required to make in respect thereof.
The underwriters are offering the Units, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Over-allotment Option
The Company has granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of additional shares (15% of the shares sold in this offering) from us to cover over-allotments, if any. If the underwriters exercise all or part of this option, it will purchase shares covered by the option at the public offering price per share that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total offering price to the public will be $ and the total net proceeds, before expenses, to us will be $ ..
Discount
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
The underwriters propose to offer the shares offered by us to the public at the public offering price per share set forth on the cover of this prospectus. In addition, the underwriters may offer some of the shares to other securities dealers at such price less a concession of $ per share. If all of the shares offered by us are not sold at the public offering price per share, the underwriters may change the offering price per share and other selling terms by means of a supplement to this prospectus.
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The Company will pay the out-of-pocket accountable expenses of the underwriters in connection with this offering. The underwriting agreement, however, provides that in the event the offering is terminated, any advance expense deposits paid to the underwriters will be returned to the extent that offering expenses are not actually incurred in accordance with FINRA Rule 5110(f)(2)(C).
The Company has agreed to pay the underwriters’ non-accountable expenses allowance equal to 1% of the aggregate gross proceeds of this offering. The Company has also agreed to pay for a certain amount of the underwriter’s accountable expenses including actual accountable road show expenses for the offering; prospectus tracking and compliance software for the offering; the reasonable and documented fees and disbursements of the underwriter’s counsel up to an amount of $75,000; background checks of the Company’s officers and directors; preparation of bound volumes and cube mementos in such quantities as the underwriter may reasonably request; provided that these actual accountable expenses of the underwriter shall not exceed $100,000 in the aggregate, including the fees and disbursements of the underwriter’s counsel.
The Company estimates that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ ..
Discretionary Accounts
The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.
Lock-Up Agreements
Pursuant to certain “lock-up” agreements, the Company, its executive officers, directors and holders of the Company’s common stock and securities exercisable for or convertible into its common stock outstanding immediately upon the closing of this offering, have agreed, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or arrangement that transfers, in whole or in part, the economic risk of ownership of, directly or indirectly, engage in any short selling of any common stock or securities convertible into or exchangeable or exercisable for any common stock, whether currently owned or subsequently acquired, without the prior written consent of the underwriters, for a period of nine (9) months from the date of effectiveness of the offering.
The lock-up period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the restricted period, the Company issues an earnings release or announce material news or a material event; or (2) prior to the expiration of the lock-up period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the lock-up period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the earnings release, unless the underwriters waive this extension in writing; provided, however, that this lock-up period extension shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an emerging growth company (as defined in the JOBS Act) prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its stockholders that restricts or prohibits the sale of securities held by the emerging growth company or its stockholders after the initial public offering date.
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Underwriter Warrants
The Company has agreed to issue to the underwriters warrants to purchase up to a total of 7.5% of the shares of common stock sold in this offering (excluding the shares sold through the exercise of the over-allotment option). The warrants are exercisable at $ per share (110% of the public offering price) commencing on a date which is six (6) months from the effective date of the offering under this prospectus supplement and expiring on a date which is no more than five (5) years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G). The warrants have been deemed compensation by FINRA and are therefore subject to a 6-month lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriters (or their permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 12 months from effectiveness. The warrants may be exercised as to all, or a lesser number of shares of common stock, and will provide for cashless exercise and will contain provisions for one demand registration of the sale of the underlying shares of common stock and unlimited “piggyback” registration rights, both for a period of no greater than five (5) years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(iv). The Company will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or the Company’s recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.
Electronic Offer, Sale and Distribution of Shares
A prospectus in electronic format may be made available on the websites maintained by the underwriters, if any, participating in this offering and the underwriters participating in this offering may distribute prospectuses electronically. The underwriters may agree to allocate a number of shares for sale to its online brokerage account holders. Internet distributions will be allocated by the underwriters that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.
Stabilization
In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.
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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of the Company’s shares of common stock or preventing or retarding a decline in the market price of its shares of common stock. As a result, the price of the Company’s common stock or warrants in the open market may be higher than it would otherwise be in the absence of these transactions. Neither the Company nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the Company’s common stock. These transactions may be effected on the Nasdaq Capital Market, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.
Passive Market Making
In connection with this offering, the underwriters may engage in passive market making transactions in the Company’s common stock on The Nasdaq Capital Market in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.
Other Relationships
The underwriters and their respective affiliates may, in the future provide various investment banking, commercial banking and other financial services for the Company and its affiliates for which they have received, and may in the future receive, customary fees. However, except as disclosed in this prospectus, the Company has no present arrangements with the underwriters for any further services.
Offer Restrictions Outside the United States
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
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Authorized and Outstanding Capital Stock
The following description of the Company’s capital stock and provisions of its Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws are summaries and are qualified by reference to the Company’s Second Amended and Restated Articles of Incorporation and Amended and Restated Bylaws which are filed as exhibits to the registration statementBylaws.
Description of which this prospectus forms a part.Common Stock
The Company is authorized to issue 120,000,000 shares of capital stock, par value $0.001 per share, of which 100,000,000 are shares of common stock and 20,000,000 are shares of “blank check” preferred stock.
As of July 21, 2020, the Company had outstanding 10,147,420May 25, 2022, there were 20,174,168 shares of common stock held by 276 shareholdersissued and outstanding. There were 500 shares of record.Preferred Series E Stock issued or outstanding as of May 25, 2022.
Units Offered Hereby
We are offering Units atOn August 13, 2020, we filed a fixed pricecertificate of per Unit. Each Unit shall consistamendment to our Second Amended and Restated Articles of (a) one shareIncorporation (the “Amendment”), with the Secretary of State of the State of Nevada to effectuate a one-for-three (1:3) reverse stock split (the “August 2020 Reverse Stock Split”) of our common stock and (b) one warrantwithout any change to purchase one share of our common stock,its par value. The Amendment became effective on August 17, 2020. No fractional shares were issued in connection with an exercise price of $ perthe August 2020 Reverse Stock Split as all fractional shares were rounded down to the next whole share.
Common Stock
The holders of the Company’s common stockCommon Stock are entitled to one vote per share. In addition, the holders of the Company’s common stock will be entitled to receive dividends ratably, if any, declared by the Company’s board of directors out of legally available funds; however, the current policy of the board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of the Company’s common stock are entitled to share ratably in all assets that are legally available for distribution. The holders of the Company’s common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of the Company’s common stock are subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be designated solely by action of the board of directors and issued in the future.
Warrants Offered HerebyThe Common Stock is listed on The Nasdaq Capital Market under the trading symbol “CRTD.”
The Company’s transfer agent is Pacific Stock Transfer.
Series A Warrants and Series B warrants entitleIncluded in Units Issuable in this Offering
The redeemable warrants to be issued as a part of this offering will be designated as Series A warrants and Series B warrants. These redeemable warrants will be separately transferable following their issuance and through their expiration years from the registereddate of issuance. We are applying to list the Series A warrants and Series B warrants for trading on The Nasdaq, however, there is no assurance that we will be able to meet the applicable standards for the listing of the Series A warrants and Series B warrants on the Nasdaq. The common stock underlying the redeemable warrants, upon issuance, is expected to be listed for trading on The Nasdaq Capital Market under the symbol “CRTD.”
Exercisability. Each warrant will be exercisable at any time and from time to time after the date of issuance and will expire on . The Series A warrants and the Series B warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us the warrant certificate or warrant, as applicable a duly executed exercise notice and payment in full for the number of shares of common stock purchased upon such exercise, except in the case of a cashless exercise as discussed below.
Cashless Exercise. If at the time of exercise of the Series A warrants and/or the Series B warrants there is no effective registration statement registering, or the prospectus contained therein is not available for issuance of, the shares issuable upon exercise of the warrant, the holder may exercise the warrant on a cashless basis. When exercised on a cashless basis, a portion of the warrant is cancelled in payment of the purchase price payable in respect of the number of shares of common stock purchasable upon such exercise.
Exercise Price. Each Series A warrant represents the right to purchase one share of our common stock at aan exercise price equalof $3 per share and each Series B warrant represents the right to $purchase one share of common stock at an exercise price of $6 per share. In addition, the exercise price per share is subject to adjustment as discussed below, at any time commencing on date of issuance (the “Issuance Date”) and terminating at 5:00 p.m., New York City time, on the fifth (5th) anniversary of the Issuance Date.for stock dividends, distributions, subdivisions, combinations, reclassifications or certain similar transactions.
TheRedemption of Warrants. We may redeem the outstanding redeemable warrants:
● | in whole only; |
● | at a price of $0.01 per warrant (each, an “issuer redemption option price”); |
● | the warrant redemption shall be executed by the Company filing a Form 8-K and Form TO if necessary and issuing a press release and upon a minimum of 30 days’ prior written notice of redemption, which we refer to as the 30-day redemption period; and |
● | if, and only if, the last sale price of our common stock equals or exceeds (i) $ 4.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) with respect to Series A warrants, and (ii) $8.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) with respect to Series B warrants, for any 10 trading days, we may redeem and buy the warrants back for a penny ($0.01) per warrant. |
● | We will not redeem the warrants unless a registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants is effective and a current prospectus relating to those shares of common stock is available throughout the 30-day redemption period, except if the warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration under the Securities Act. If and when the warrants become redeemable by us, we may exercise our redemption right on a cashless basis even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Please see the section of this prospectus entitled “Description of Securities — Series A warrants and Series B warrants Included in Units Issuable in this Offering” for additional information. |
Redemption Procedures and Cashless Exercise.If we call the redeemable warrants for redemption as described above, our management will be issued in registered form underhave the option to require any holder that wishes to exercise its redeemable warrant to do so on a warrant agent agreement (the “Warrant Agent Agreement”) between us and“cashless basis.” In determining whether to require all holders to exercise their redeemable warrants on a “cashless basis,” our warrant agent, Pacific Stock Transfer (the “Warrant Agent”). The material provisionsmanagement will consider, among other factors, our cash position, the number of theredeemable warrants that are set forth herein and a copy of the Warrant Agent Agreement has been filed as an exhibit to the Registration Statement on Form S-1, of which this prospectus forms a part. The Companyoutstanding and the Warrant Agent may amend or supplementdilutive effect on our stockholders of issuing the Warrant Agent Agreement without the consent of any holder for the purpose of curing any ambiguity, or curing, correcting or supplementing any defective provision contained therein or adding or changing any other provisions with respect to matters or questions arising under the Warrant Agent Agreement as the parties thereto may deem necessary or desirable and that the parties determine, in good faith, shall not adversely affect the interest of the holders. All other amendments and supplements shall require the vote or written consent of holders of at least 50.1%. The exercise price andmaximum number of shares of common stock issuable upon the exercise of theour redeemable warrants. If our management takes advantage of this option, all holders of redeemable warrants may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation.
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The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form attached to the warrant certificate completed and executed as indicated, accompanied by full payment ofwould pay the exercise price by certified or official bank check payable to us,surrendering their redeemable warrants for thethat number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exerciseequal to the quotient obtained by dividing (x) the product of the warrants, each holder will be entitled to one vote for each share heldnumber of record on all matters to be voted on by stockholders.
No warrants will be exercisable unless at the time of the exercise a prospectus or prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of the Warrant Agent Agreement, we have agreed to use our best efforts to maintain a current prospectus or prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. If we are unable to maintain the qualification or effectiveness of such registration statement until the expiration of the warrants, and therefore are unable to deliver registered shares of common stock, the warrants may become worthless. Such expiration would result in each holder paying the full Unit purchase price solely for the shares of common stock underlying the Units. Additionally,redeemable warrants, multiplied by the excess of the “fair market forvalue” (defined below) over the exercise price of the redeemable warrants may be limited ifby (y) the prospectus or prospectus relating tofair market value. The “fair market value” shall mean the average last reported sale price of the common stock issuable upon exercisefor the 10 trading days ending on the third trading day prior to the date on which the notice of the warrantsredemption is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in whichsent to the holders of such warrants reside. In no event will the registered holders of a Warrant be entitled to receive a net-cash settlement, stock or other consideration in lieu of physical settlement in shares of our common stock.
No fractional shares of common stock will be issued upon exercise of theredeemable warrants. If upon exerciseour management takes advantage of this option, the warrants, a holder would be entitlednotice of redemption will contain the information necessary to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole numbercalculate the number of shares of common stock to be issued to the Warrant holder. If multiple warrants are exercised by the holder at the same time, we will aggregate the number of whole shares issuablereceived upon exercise of all the warrants.
The price ofredeemable warrants, including the warrants has been arbitrarily established by us and the Underwriter after giving consideration to numerous factors, including but not limited to, the pricing of the Units“fair market value” in such case. Requiring a cashless exercise in this offering. No particular weighting was given to any one aspect of those factors considered. We have not performed any method of valuation of the warrants.
Preferred Stock
The Company’s board of directors are authorized, subject to any limitations prescribed by law, without further vote or action by its stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stockmanner will havereduce the number of shares designations, preferences, voting powers, qualificationsto be issued and special or relative rights or privileges as shall be determined bythereby lessen the Company’s board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
It is not possible to state the actualdilutive effect of a redeemable warrant redemption.
Transferability. Subject to applicable laws and restrictions, a holder may transfer a warrant upon surrender of the issuancewarrant to us with a completed and signed assignment in the form attached to the warrant. The transferring holder will be responsible for any tax that liability that may arise as a result of the transfer.
Rights as Shareholder. The holder of a Series A warrant and/or a Series B warrant, solely in such holder’s capacity as a holder of a Series A warrant and/or a Series B warrant, will not be entitled to vote or to any shares of preferred stock upon the other rights of holdersour shareholders.
Amendments and Waivers. The provisions of each Series A warrant and a Series B warrant may be modified or amended or the Company’s common stock untilprovisions thereof waived with the boardwritten consent of directors determines the specific rights ofus and the holders of its preferred stock. However,a majority of the effects might include, among other things:outstanding Series A warrant or Series B warrant, respectively.
The Series A warrants and Series B warrants will be issued pursuant to a warrant agreement by and between us and Pacific Stock Transfer, the warrant agent.
Applicable Anti-Takeover Law
Set forth below is a summary of provisions in our Articles of Incorporation and |
Blank Check Preferred Stock
The ability to authorize “blank check” preferred stock makes it possible for the Company’s board of directors to issue preferred stock with voting or other rights or preferencesBylaws that could impede the success of any attempt to acquire the Company. These and other provisions may have the effect of deferring hostile takeoversdelaying or delaying changespreventing a change in control or management of the Company.
The following description is only a summary and it is qualified by refence our Articles of Incorporation, Bylaws and relevant provisions of the Nevada Revised Statutes.
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No Cumulative Voting
Our Articles of Incorporation and the Bylaws do not provide holders of our common stock cumulative voting rights in the election of directors. The absence of cumulative voting could have the effect of preventing stockholders holding a minority of our shares of common stock from obtaining representation on our board of directors. The absence of cumulative voting might also, under certain circumstances, render more difficult or discourage a merger, tender offer or proxy contest favored by a majority of our stockholders, the assumption of control by a holder of a large block of our stock or the removal of incumbent management.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal income tax considerations with respect to the receipt and exercise (or expiration) of the subscription rights acquired through this offering, the ownership and disposition of shares of common stock, Series A warrants and Series B warrants received upon exercise of the subscription rights, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service, or IRS, in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a holder of the subscription rights, Series A warrants, Series B warrants or shares of common stock. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the receipt of subscription rights acquired through this offering by persons holding shares of common stock, the exercise (or expiration) of the subscription rights, the acquisition, ownership and disposition (or expiration) of Series A warrants and Series B warrants acquired upon exercise of the subscription rights, and the acquisition, ownership and disposition of shares of common stock acquired upon exercise of the redeemable warrants.
This discussion is limited to rights holders that hold the subscription rights, Series A warrants, Series B warrants, and shares of common stock, in each case, as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a rights holder’s particular circumstances, including the impact of the alternative minimum tax or the unearned income Medicare contribution tax. In addition, it does not address consequences relevant to rights holders subject to particular rules, including:
● | U.S. expatriates and former citizens or long-term residents of the United States; |
● | persons holding the subscription rights, Series A warrants, Series B warrants, or shares of common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment; |
● | banks, insurance companies, and other financial institutions; |
● | brokers, dealers or traders in securities; |
● | “controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax; |
● | entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein); |
● | tax-exempt organizations or governmental organizations; |
● | persons deemed to sell Series A warrants, Series B warrants, or shares of common stock under the constructive sale provisions of the Code; |
● | persons subject to special tax accounting rules as a result of any item of gross income with respect to the subscription rights, Series A warrants, Series B warrants, or shares of common stock being considered in an “applicable financial statement” (as defined in the Code); |
● | persons for whom our capital stock constitutes “qualified small business stock” within the meaning of Section 1202 of the Code; |
● | persons who hold or receive the subscription rights, Series A warrants, Series B warrants, or shares of common stock pursuant to the exercise of any employee stock option or otherwise as compensation; and |
● | tax-qualified retirement plans. |
If an entity treated as a partnership for U.S. federal income tax purposes holds subscription rights, shares of common stock, Series A warrants, and Series B warrants acquired upon exercise of subscription rights or shares of common stock acquired upon exercise of the Series A warrants and/or Series B warrants, as the case may be, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.
THIS DISCUSSION IS FOR INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE RECEIPT, OWNERSHIP AND EXERCISE OF SUBSCRIPTION RIGHTS AND THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF SHARES OF COMMON STOCK, SERIES A WARRANTS AND SERIES B WARRANTS ACQUIRED UPON EXERCISE OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK ACQUIRED UPON EXERCISE OF THE REDEEMABLE WARRANTS ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
Tax Considerations Applicable to U.S. Holders
Common Stock Purchase WarrantsDefinition of a U.S. Holder
AsFor purposes of July 21, 2020 the Company had outstanding warrants to purchase 954,389 sharesthis discussion, a “U.S. holder” is any beneficial owner of its common stock outstanding with various exercise prices and expiration dates, held by 176 warrant holders.
Common Stock Purchase Options
As of July 21, 2020 the Company had stock options to purchase 452,523 shares of its common stock outstanding, all of which were exercisable, with various exercise prices and expiration dates, held by 20 option holders.
Listing
Oursubscription rights, shares of common stock, are currently quoted on The OTCQB Venture Market, operated by OTC Markets Group, under the symbol “JMDA”. We have applied to list ourSeries A warrants, and Series B warrants acquired upon exercise of subscription rights, or shares of common stock acquired upon exercise of Series A warrants and/or Series B warrants as the case may be, that, for U.S. federal income tax purposes, is:
● | an individual who is a citizen or resident of the United States; |
● | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia; |
● | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
● | a trust that (a) is subject to the primary supervision of a U.S. court and the control of one or more United States persons (within the meaning of Section 7701(a)(30) of the Code), or (b) has made a valid election under applicable Treasury Regulations to continue to be treated as a United States person. |
Receipt of Subscription Rights
Section 305(a) of the Code states that a shareholder’s taxable income does not include in-kind stock dividends. The general non-recognition rule in Section 305(a) of the Code is, however, subject to exceptions described in Section 305(b) of the Code, which include “disproportionate distributions” and certain distributions with respect to certain preferred stock. A disproportionate distribution is a distribution or a series of distributions, including deemed distributions, that has the effect of the receipt of cash or other property by some shareholders or holders of debt instruments convertible into stock and an increase in the proportionate interest of other shareholders in a corporation’s assets or earnings and profits.
Although the authorities governing transactions such as this offering are complex and do not speak directly to the consequences of certain aspects of the offering, including the effects of the over-subscription privilege, we do not believe a U.S. holder’s receipt of subscription rights pursuant to the offering should be treated as a taxable distribution with respect to their existing shares of common stock for U.S. federal income tax purposes. Our position regarding the tax-free treatment of the receipt of subscription rights with respect to existing shares of common stock is not binding on the Nasdaq Capital Market upon our satisfactionIRS or the courts. If this position were finally determined by the IRS or a court to be incorrect, whether on the basis that the issuance of the exchange’s initial listing criteria. Upon approvalsubscription rights is a “disproportionate distribution” or otherwise, the fair market value of the subscription rights would be taxable to listU.S. rights in the manner described under “-Tax Consequences Applicable to U.S. Holders- Distributions on Common Stock” below. If our position were incorrect, the U.S. federal income tax consequences applicable to the rights holders may also be materially different than as described below.
The following discussion is based upon the treatment of the subscription right issuance as a non-taxable distribution with respect to a U.S. holder’s existing shares of common stock for U.S. federal income tax purposes.
Tax Basis and Holding Period in the warrantsSubscription Rights
If the fair market value of the subscription rights a U.S. holder receives with respect to existing shares of common stock is less than 15% of the fair market value of the U.S. holder’s existing shares of common stock (with respect to which the subscription rights are distributed) on the Nasdaq Capital Market, wedate the U.S. holder receives the subscription rights, the subscription rights will change our namebe allocated a zero tax basis for U.S. federal income tax purposes, unless the U.S. holder elects to “Creatd, Inc.” and we anticipate that theallocate its tax basis in its existing shares of common stock between its existing shares of common stock and warrants underlying the Units (oncesubscription rights in proportion to the warrants have begun to trade separately), will be listed onrelative fair market values of the Nasdaq Capital Market under the symbols “CRTD” and “CRTDW”, respectively. No assurance can be given that our application will be approved. If ourexisting shares of common stock and the warrants are not approved for listingsubscription rights determined on the Nasdaq Capital Market, we will not consummate this offering.
Exclusive Forum
Eachdate of our Second Amended Articles of Incorporation and our Amended and Restated Bylaws provide that unless the Company consents in writing to the selection of an alternative forum, the Eighth Judicial District Court of Clark County, Nevada shall be the sole and exclusive forum for state law claims with respect to: (i) any derivative action or proceeding brought in the name or rightreceipt of the Company or onsubscription rights. If a U.S. holder chooses to allocate tax basis between its behalf, (ii) any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders, (iii) any action arising or asserting a claim arising pursuant to any provision of Nevada Revised Statutes Chapters 78 or 92A or any provision of the Company’s Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce or determine the validity of the Company’s Second Amended and Restated Articles of Incorporation or Amended and Restated Bylaws. This exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. The enforceability of similar exclusive forum provisions in other corporations’ bylaws has been challenged in legal proceedings, and it is possible that a court could rule that this provision in our Amended and Restated Bylaws is inapplicable or unenforceable.
Additionally, each of our Second Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest inexisting shares of capital stock of the Company are deemed to have notice of and consented to this provision. As this provision applies to Securities Act claims, there may be uncertainty whether a court would enforce such a provision.
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Transfer Agent and Warrant Agent
The Company’s transfer agent and Warrant Agent is Pacific Stock Transfer with an address 6725 Via Austi Parkway, Suite 300 Las Vegas, NV 89119.
Indemnification of Directors and Officers
Each of our Second Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide for indemnification of our directors and officers. Our Amended and Restated Bylaws provide that we will indemnify any person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director or officer of the corporation, against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent will not, without more, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The Company may by action of its Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents of the Company with the same scope and effects as the indemnification provisions for officers and directors.
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities under the Securities Act may be permitted to officers, directors or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that is it is the opinion of the Securities and Exchange Commission that such indemnification is against public policy as expressed in such Securities Act and is, therefore, unenforceable.
2015 Incentive Stock and Award Plan
On February 5, 2016, the Company assumed the Jerrick Ventures, Inc. 2015 Incentive Stock and Award Plan (the “2015 Plan”), and all awards thereunder, which provides for the issuance of up to 900,000 shares of the Company’s common stock. As described below, no further awards shall be issued pursuant to the 2015 Plan as a result of the approval by our stockholders of the Company’s 2020 Equity Incentive Plan.
The purpose of the 2015 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, attorneys, advisors or directors (including non-employee directors) of the Company or of any parent, subsidiary or affiliate of the Company. Upon recommendation from 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, the Company’s Common Stock; provided, however, that Incentive Options may only be granted to employees of the Company or its subsidiaries.
The provisions of each option granted need not be the same with respect to each option recipient. Option recipients have entered into award agreements with the Company, in such form as the Compensation Committee of the board of directors (or the full board of directors) has determined.
The 2015 Plan is 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 directors administers the 2015 Plan.
Each stock option under the 2015 Plan contains the following material terms:
(i) the purchase price of each share of common stock and the subscription rights, the U.S. holder must make this election on a statement included with respect to Incentive Options shall be determined byits timely filed tax return (including extensions) for the Compensation Committee attaxable year in which the time of grant, shall not be less than 100%U.S. holder receives the subscription rights. Such an election is irrevocable. If the fair market value of the Fair Market Value (defined as the closing price on the final trading day immediately prior to the grant on the principal exchangesubscription rights a U.S. holder receives is 15% or quotation system on which the common stock is listed or quoted, as applicable)more of the common stockfair market value of the Company, provided that if the recipient of the stock 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 Nonqualified Option shall be at least 100% of the Fair Market Value of such sharetheir existing shares of common stock on the date the Nonqualified Option is granted, unlessU.S. holder receives the Compensation Committee,subscription rights, however, then the U.S. holder must allocate its tax basis in its soleexisting shares of common stock between those shares and absolute discretion, determinesthe subscription rights the U.S. holder receives in proportion to set the purchase price of such Nonqualified Option below Fair Market Value.
(iii) the term of each stock option shall be fixed by the Compensation Committee, provided that such stock option shall not be exercisable more than five (5) years aftertheir fair market values determined on the date suchthe U.S. holder receives the subscription rights. The holding period of subscription rights received will include a holder’s holding period in shares of common stock option is granted, and provided further that with respect to an Incentive Option, ifwhich the recipient owns more than ten percent (10%)subscription rights were distributed. Please refer to discussion below regarding the U.S. tax treatment of a U.S. holder that, at the time of the total combined voting powerreceipt of the Company,subscription right, no longer holds the Incentive Option shall not be exercisable more than five (5) years aftercommon stock with respect to which the date such Incentive Option is granted;subscription right was distributed.
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(iv) subject to acceleration in the event of a Change of ControlThe fair market value of the Company (as further described insubscription rights on the 2015 Plan),date that the subscription rights are distributed is uncertain, and we have not obtained, and do not intend to obtain, an appraisal of the fair market value of the subscription rights on that date. In determining the fair market value of the subscription rights, U.S. holders should consider all relevant facts and circumstances, including any difference between the subscription price of the subscription rights and the trading price of common stock on the date that the subscription rights are distributed, the exercise price of the redeemable warrants, the length of the period during which the stock options vest shallsubscription rights may be designated byexercised and the Compensation Committeefact that the subscription rights are non-transferable.
Exercise of Subscription Rights
Generally, a U.S. holder will not recognize gain or loss upon the exercise of a subscription right received in this offering. A U.S. holder’s adjusted tax basis, if any, in the absencesubscription right plus the subscription price should be allocated between the new shares of anycommon stock option vesting periods designated byand the Compensation Committeewarrants acquired upon exercise of the subscription right in proportion to their relative fair market values on the exercise date. This allocation will establish the U.S. holder’s initial tax basis for U.S. federal income tax purposes in the new shares of common stock and warrants received upon exercise. The holding period of a share of common stock or a warrant acquired upon exercise of a subscription right in this offering will begin on the date of exercise.
If, at the time of grant, shall vest and become exercisable in equal amounts on each fiscal quarterthe receipt or exercise of the Company throughsubscription right, the four (4) year anniversary ofU.S. holder no longer holds the date on which thecommon stock option was granted;
(v) no stock 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
(vi) with respect to Incentive Options,which the aggregate Fair Market Valuesubscription right was distributed, then certain aspects of the tax treatment of the receipt and exercise of the subscription right are unclear, including (1) the allocation of the tax basis between the shares of common stock previously sold and the subscription right, (2) the impact of such allocation on the amount and timing of gain or loss recognized with respect to the shares of common stock previously sold, and (3) the impact of such allocation on the tax basis of the shares of common stock and the redeemable warrants acquired upon exercise of the subscription right. If a U.S. holder exercises a subscription right received in this offering after disposing of shares of common stock with respect to which the subscription right is received, the U.S. holder should consult its tax advisor.
Expiration of Subscription Rights
If a U.S. holder that receives subscription rights with respect to their common stock allows such subscription rights received in this offering to expire, the U.S. holder should not recognize any gain or loss for U.S. federal income tax purposes, and the U.S. holder should re-allocate any portion of the tax basis in its existing shares of common stock previously allocated to the subscription rights that have expired to the existing shares of common stock.
Sale or Other Disposition, Exercise or Expiration of the Redeemable Warrants
Upon the sale or other disposition of a Series A warrants and/or Series B warrants (other than by exercise), a U.S. holder will generally recognize capital gain or loss equal to the difference between the amount realized on the sale or other disposition and the U.S. holder’s tax basis in the redeemable warrant. This capital gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period in such redeemable warrant is more than one year at the time of the sale or other disposition. The deductibility of capital losses is subject to certain limitations.
In general, a U.S. holder will not be required to recognize income, gain or loss upon exercise of a warrant for its exercise price. A U.S. holder’s tax basis in a share of common stock received upon exercise of the redeemable warrants will be equal to the sum of (1) the U.S. holder’s tax basis in the warrants exchanged therefor and (2) the exercise price of such redeemable warrants. A U.S. holder’s holding period in the shares of common stock received upon exercise will commence on the day after such U.S. holder exercises the redeemable warrants. Although there is no direct legal authority as to the U.S. federal income tax treatment of an exercise of a warrant on a cashless basis, we intend to take the position that such exercise will not be taxable, either because the exercise is not a gain realization event or because it qualifies as a tax-free recapitalization. In the former case, the holding period of the shares of common stock received upon exercise of warrants should commence on the day after the warrants are exercised. In the latter case, the holding period of the shares of common stock received upon exercise of warrants would include the holding period of the exercised warrants. However, our position is not binding on the IRS and the IRS may treat a cashless exercise of a redeemable warrant as a taxable exchange. U.S. holders are urged to consult their tax advisors as to the consequences of an exercise of a warrant on a cashless basis, including with respect to their holding period and tax basis in the common stock received.
If a Series A warrant or a Series B warrant expires without being exercised, a U.S. holder will recognize a capital loss in an amount equal to such holder’s tax basis in the redeemable warrant. Such loss will be long-term capital loss if, at the time of the expiration, the U.S. holder’s holding period in such redeemable warrant is more than one year. The deductibility of capital losses is subject to certain limitations.
Constructive Dividends on Series A Warrants and Series B Warrants
If at any time during the period in which a U.S. holder holds the redeemable warrants, we were to pay a taxable dividend to our shareholders and, in accordance with the anti-dilution provisions of the redeemable warrants, if any, the exercise price of the redeemable warrants were decreased, that decrease would be deemed to be the payment of a taxable dividend to a U.S. holder of the redeemable warrants to the extent of our earnings and profits, notwithstanding the fact that such U.S. holder will not receive a cash payment. If the exercise price is adjusted in certain other circumstances (or in certain circumstances, there is a failure to make an adjustment), such adjustments may also result in the deemed payment of a taxable dividend to a U.S. holder. U.S. holders should consult their tax advisors regarding the proper treatment of any adjustments to the exercise price of the redeemable warrants.
Distributions on Common Stock
If we make distributions of cash or property on common stock, such distributions will constitute dividends to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Dividends received by a corporate U.S. holder may be eligible for a dividends received deduction, subject to applicable limitations. Dividends received by certain non-corporate U.S. holders, including individuals, are generally taxed at the lower applicable capital gains rate provided certain holding period and other requirements are satisfied. Distributions in excess of our current and accumulated earnings and profits will constitute a return of capital and first be applied against and reduce a U.S. holder’s adjusted tax basis in its common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below in the section relating to the sale or disposition of common stock.
Sale, Exchange or Other Disposition of Common Stock exercisable
Upon a sale, exchange, or other disposition of common stock, a U.S. holder generally will recognize capital gain or loss equal to the difference between the amount realized (not including any amount attributable to declared and unpaid dividends, which will be taxable as described above to U.S. holders of record who have not previously included such dividends in income) and the U.S. holder’s adjusted tax basis in common stock. A U.S. holder’s adjusted tax basis in common stock generally will equal its initial tax basis in common stock reduced by the amount of any cash distributions treated as a return of capital as described above. Such capital gain or loss generally will be long-term capital gain or loss if the U.S. holder’s holding period for common stock exceeded one year at the time of disposition). Long-term capital gains recognized by certain non-corporate U.S. holders, including individuals, generally are subject to reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Information Reporting and Backup Withholding
A U.S. holder may be subject to information reporting and backup withholding when such holder receives dividend payments or receives proceeds from the sale or other taxable disposition of the redeemable warrants or shares of common stock acquired through exercise of the redeemable warrants. Certain U.S. holders are exempt from backup withholding, including corporations and certain tax-exempt organizations. A U.S. holder will be subject to backup withholding if such holder is not otherwise exempt and such U.S. holder:
● | fails to furnish such U.S. holder’s taxpayer identification number; |
● | furnishes an incorrect taxpayer identification number; |
● | is notified by the IRS that such U.S. holder previously failed to properly report payments of interest or dividends; or |
● | fails to certify under penalties of perjury that such U.S. holder has furnished a correct taxpayer identification number and that the IRS has not notified the holder that such U.S. holder is subject to backup withholding. |
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS. U.S. holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption.
Tax Considerations Applicable to Non-U.S. Holders
For purposes of this discussion, a “non-U.S. holder” is any beneficial owner of subscription rights, shares of common stock, Series A warrants, and Series B warrants acquired upon exercise of subscription rights, or shares of common stock acquired upon exercise of the redeemable warrants, as the case may be, that is neither a U.S. holder nor an entity treated as a partnership for U.S. federal income tax purposes.
Receipt, Exercise and Expiration of the Subscription Rights
The discussion assumes that the receipt of subscription rights with respect to existing shares of common stock will be treated as a nontaxable distribution. See “-Tax Consequences Applicable to U.S. Holders-Receipt of Subscription Rights” above. Non-U.S. holders that receive subscription rights with respect to existing shares of common stock will generally not be subject to U.S. federal income tax (or any withholding thereof) on the receipt, exercise or expiration of the subscription rights.
Exercise of the Redeemable Warrants
A non-U.S. holder generally will not be subject to U.S. federal income tax on the exercise of Series A warrants or Series B warrants into shares of common stock. If a cashless exercise of the redeemable warrants results in a taxable exchange, however, as described in “-Tax Considerations Applicable to U.S. holders-Sale or Other Disposition, Exercise or Expiration of Warrants,” the rules described below under “Sale or Other Disposition of Common Stock, Series A warrants, or Series B warrants” would apply.
Constructive Dividends on Series A Warrants and Series B Warrants
If at any time during the period in which a non-U.S. holder holds Series A warrants and/or Series B warrants we were to pay a taxable dividend to our shareholders and, in accordance with the anti-dilution provisions of the redeemable warrants, the exercise price of the redeemable warrants were decreased, that decrease would be deemed to be the payment of a taxable dividend to a non-U.S. holder to the extent of our earnings and profits, notwithstanding the fact that such non-U.S. holder will not receive a cash payment. If the exercise price is adjusted in certain other circumstances (or in certain circumstances, there is a failure to make an adjustment), such adjustments may also result in the deemed payment of a taxable dividend to a non-U.S. holder. Any resulting withholding tax attributable to deemed dividends may be collected from other amounts payable or distributable to, or other assets of, the non-U.S. holder. Non-U.S. holders should consult their tax advisors regarding the proper treatment of any adjustments to the warrants.
Distributions on Common Stock
If we make distributions of cash or property on common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a non-U.S. holder’s adjusted tax basis in its common stock, as the case may be, but not below zero. Any excess will be treated as capital gain and will be treated as described below in the section relating to the sale or disposition of common stock or the redeemable warrants. Because we may not know the extent to which a distribution is a dividend for U.S. federal income tax purposes at the time it is made, for purposes of the withholding rules discussed below we or the applicable withholding agent may treat the entire distribution as a dividend.
Subject to the discussion below on backup withholding and foreign accounts, dividends paid to a non- U.S. holder of common stock that are not effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty).
Non-U.S. holders will be entitled to a reduction in or an exemption from withholding on dividends as a result of either (a) an applicable income tax treaty or (b) the non-U.S. holder holding common stock in connection with the conduct of a trade or business within the United States and dividends being effectively connected with that trade or business. To claim such a reduction in or exemption from withholding, the non-U.S. holder must provide the applicable withholding agent with a properly executed (a) IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) claiming an exemption from or reduction of the withholding tax under the benefit of an income tax treaty between the United States and the country in which the non-U.S. holder resides or is established, or (b) IRS Form W-8ECI stating that the dividends are not subject to withholding tax because they are effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States, as may be applicable. These certifications must be provided to the applicable withholding agent prior to the payment of dividends and must be updated periodically. Non-U.S. holders that do not timely provide the applicable withholding agent with the required certification, but that qualify for a reduced rate under an applicable income tax treaty, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
If dividends paid to a non-U.S. holder are effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment in the United States to which such dividends are attributable), then, although exempt from U.S. federal withholding tax (provided the non-U.S. holder provides appropriate certification, as described above), the non-U.S. holder will be subject to U.S. federal income tax on such dividends on a net income basis at the regular graduated U.S. federal income tax rates. In addition, a non-U.S. holder that is a corporation may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on its effectively connected earnings and profits for the first time duringtaxable year that are attributable to such dividends, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under any calendar year shall not exceed $100,000.applicable income tax treaty.
Sale or Other Disposition of Common Stock, Series A warrants, or Series B warrants
Each awardSubject to the discussions below on backup withholding and foreign accounts, a non-U.S. holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of Restricted Stockthe redeemable warrants or common stock unless:
● | the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment in the United States to which such gain is attributable); |
● | the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or |
● | The Series A warrants, Series B warrants or common stock constitutes a U.S. real property interest, or USRPI, by reason of our status as a U.S. real property holding corporation, or USRPHC, for U.S. federal income tax purposes. |
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on any gain derived from the disposition, which may be offset by U.S. source capital losses of the non-U.S. holder (even though the individual is not considered a resident of the United States), provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses.
With respect to the third bullet point above, we believe we are not currently and do not anticipate becoming a USRPHC. Because the determination of whether we are a USRPHC depends on the fair market value of our USRPIs relative to the fair market value of our other business assets and our non- U.S. real property interests, however, there can be no assurance we are not a USRPHC or will not become one in the future.
Non-U.S. holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Subject to the discussion below on foreign accounts, a non-U.S. holder will not be subject to backup withholding with respect to distributions on common stock we make to the non-U.S. holder, provided the applicable withholding agent does not have actual knowledge or reason to know such non-U.S. holder is a United States person and such non-U.S. holder certifies its non-U.S. status, such as by providing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or other applicable certification. Information returns generally will be filed with the IRS, however, in connection with any distributions (including deemed distributions) made on Series A warrants, Series B warrants, and common stock to the non-U.S. holder, regardless of whether any tax was actually withheld. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the non-U.S. holder resides or is established.
Information reporting and backup withholding may apply to the proceeds of a sale or other taxable disposition of Series A warrants, Series B warrants, or common stock within the United States, and information reporting may (although backup withholding generally will not) apply to the proceeds of a sale or other taxable disposition of the redeemable warrants or common stock outside the United States conducted through certain U.S.-related financial intermediaries, in each case, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder on IRS Form W-8BEN or W-8BEN-E, or other applicable form (and the payor does not have actual knowledge or reason to know that the beneficial owner is a U.S. person) or such owner otherwise establishes an exemption. Proceeds of a disposition of the redeemable warrants or common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Additional Withholding Tax on Payments Made to Foreign Accounts
Withholding taxes may be imposed under the Foreign Account Tax Compliance Act, or FATCA, on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends (including deemed dividends) or gross proceeds from the sale or other disposition of the redeemable warrants or common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the following material terms:diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.
(i) no rightsUnder the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to an awardpayments of Restricted Stock are granteddividends (including deemed dividends), and will apply to payments of gross proceeds from the intended recipientsale or other disposition of Restricted Stock unless and untilSeries warrants or common stock on or after January 1, 2019. Because we may not know the grant of Restricted Stockextent to which a distribution is accepted within the period prescribed by the Compensation Committee;
(ii) No certificates evidencing shares of Restricted Stock shall be delivered until such shares are free of any restrictions specified by the Compensation Committeea dividend for U.S. federal income tax purposes at the time it is made, for purposes of grant;these withholding rules we or the applicable withholding agent may treat the entire distribution as a dividend. Prospective investors should consult their tax advisors regarding the potential application of these withholding provisions.
(iii) recipients
PLAN OF DISTRIBUTION
As soon as practicable after 5:00 p.m. (Eastern time) on , 2022, the record date for this offering, we will distribute the subscription rights and subscription certificates to persons who owned settled shares of Restricted Stock havecommon stock at 5:00 p.m. (Eastern time) on the rights of a stockholder ofrecord date or held the CompanyPreferred Shares, Eligible Warrants and/or Eligible Options as of the record date. If you wish to exercise your subscription rights and purchase units, you should complete the subscription certificate and return it with the subscription payment to Continental Stock Transfer & Trust, the subscription agent.
See “The Rights Offering-Methods for Exercising Subscription Rights.” If you have any questions or need further information about this offering, please contact D.F. King & Co., Inc., the information agent, by telephone at (212) 269-5550 (bankers and brokers) or (877) 283-0323 (all others) or by email at creatd@dfking.com.
Dealer-Manager
RHK Noble is the dealer-manager of this offering and, under the terms and subject to the conditions contained in its dealer-manager agreement with us, RHK Noble will provide marketing assistance and advice to us in connection with the offering.
We have agreed to pay RHK Noble a dealer-manager fee equal to 6%, a non-accountable expense fee of 1.8% and an out-of-pocket accountable expense allowance of up to 0.02% of the proceeds of this offering.
In addition, RHK Noble is acting as placement agent for any unsubscribed units. For any unsubscribed units placed by it during the 45-day placement period following the expiration date of the grantrights offering, we have agreed to pay the dealer-manager a placement fee equal to 6.00% of such sales, in lieu of the Restricted Stock,dealer-manager fee, together with the continuing non-accountable expense fee and out-of-pocket accountable expense allowance, with such fees and expenses not to exceed the aggregate amounts that would have been otherwise received by the dealer-manager if this offering were to have been fully subscribed.
The dealer-manager has informed us that it has entered into or intends to enter into selected dealer agreements with other broker-dealers pursuant to which (i) such other broker-dealers have agreed or will agree to use their commercially reasonable efforts to procure subscriptions for the units, and (ii) the dealer-manager has agreed or will agree to re-allow [●]% of its dealer-manager fee to each such broker-dealer whose clients purchase units in the rights offering pursuant to their subscription rights.
We have agreed to indemnify RHK Noble and its affiliates against, or contribute to losses arising out of, certain liabilities, including liabilities under the Securities Act. RHK Noble’s participation in this offering is subject to vesting with respectcustomary conditions contained in the dealer-manager agreement. The dealer-manager agreement provides that the dealer-manager will not be subject to dividendsany liability to us in rendering the services contemplated by the dealer-manager agreement except for any act of bad faith, willful misconduct or gross negligence of the dealer-manager. The dealer-manager and its affiliates may provide to us from time to time in the future in the ordinary course of its business certain financial advisory, investment banking and other non-transferability and forfeiture restrictions described below;services for which it will be entitled to receive customary fees.
(iv)The maximum commission to be received by any independent broker-dealer, dealer-manager or any member of FINRA will not be greater than 8% of the gross proceeds from the exercise of subscription rights in this offering.
Other than as described herein, we do not know of any existing agreements between or among any shareholder, broker, dealer, underwriter or agent relating to the sale or distribution of the underlying shares of Restricted Stockcommon stock.
Some of our officers, employees and directors may solicit responses from holders of subscription rights. None of our officers, directors or employees will be compensated in connection with these actions by the payment of commissions or other remuneration based either directly or indirectly on the subscriptions, but will be reimbursed for reasonable expenses.
We have agreed to pay the subscription agent and the information agent customary fees plus certain expenses in connection with the offering. Except as described in this section, we are forfeitable untilnot paying any commissions, underwriting fees or discounts in connection with this offering.
Electronic Distribution
This prospectus may be made available in electronic format on websites or via email or through other online services maintained by RHK Noble or us. Other than this prospectus in electronic format, the information on our and RHK Noble’s websites is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or RHK Noble, and should not be relied upon by investors.
The foregoing does not purport to be a complete statement of the terms and conditions of the Restricted Stock grant have been satisfied or the recipient’s employment with the Company is terminated;dealer-manager agreement between RHK Noble and
(v) the Restricted Stock is not transferable until the date on which the Compensation Committee has specified such restrictions have lapsed.
2020 Equity Incentive Plan
The following is a summary us. A copy of the material features of our 2020 Equity Incentive Plan (the “2020 Plan”). This summary is qualified in its entirety by the full text of the 2020 Plan, a copy of which isdealer-manager agreement will be filed as an exhibit to the registration statement of which this prospectus forms a part. See “Where You Can Find Additional Information.”
Authorized Shares. A total of 7,500,000 shares of our common stock have been reserved for issuance pursuant to the 2020 Plan. Our board of directors adopted the 2020 Plan on May 7, 2020 and our stockholders approved the 2020 Plan on July 8, 2020 (the “Effective Date”). Following the Effective Date, no further awardsRegulation M Restrictions
RHK Noble, as dealer-manager, may be issued under our 2015 Plan, but all awards under the 2015 Plan that are outstanding as of the Effective Date will continuedeemed to be governed by the terms, conditions and procedures set forth in the 2015 Plan and any applicable award agreement.
Types of Awards. The 2020 Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), and other stock-based awards. Items described above in the Section called “Shares Available” are incorporated herein by reference.
Administration. The 2020 Plan will be administered by our board of directors, or if our board of directors does not administer the 2020 Plan, a committee or subcommittee of our board of directors that complies with the applicable requirements of Section 16 of the Exchange Act and any other applicable legal or stock exchange listing requirements (each of our board of directors or such committee or subcommittee, the “plan administrator”). The plan administrator may interpret the 2020 Plan and may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the 2020 Plan, provided that, subject to the equitable adjustment provisions described below, the plan administrator will not have the authority to reprice or cancel and re-grant any award at a lower exercise, base or purchase price or cancel any award with an exercise, base or purchase price in exchange for cash, property or other awards without first obtaining the approval of our stockholders.
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The 2020 Plan permits the plan administrator to select the eligible recipients who will receive awards, to determine the terms and conditions of those awards, including but not limited to the exercise price or other purchase price of an award, the number of shares of common stock or cash or other property subject to an award, the term of an award and the vesting schedule applicable to an award, and to amend the terms and conditions of outstanding awards.
Restricted Stock and Restricted Stock Units. Restricted stock and RSUs may be granted under the 2020 Plan. The plan administrator will determine the purchase price, vesting schedule and performance goals, if any, and any other conditions that apply to a grant of restricted stock and RSUs. If the restrictions, performance goals or other conditions determined by the plan administrator are not satisfied, the restricted stock and RSUs will be forfeited. Subject to the provisions of the 2020 Plan and the applicable award agreement, the plan administrator has the sole discretion to provide for the lapse of restrictions in installments.
Unless the applicable award agreement provides otherwise, participants with restricted stock will generally have all of the rights of a stockholder; provided that dividends will only be paid if and when the underlying restricted stock vests. RSUs will not be entitled to dividends prior to vesting, but may be entitled to receive dividend equivalents if the award agreement provides for them. The rights of participants granted restricted stock or RSUs upon the termination of employment or service to us will be set forth in the award agreement.
Options. Incentive stock options and non-statutory stock options may be granted under the 2020 Plan. An “incentive stock option” means an option intended to qualify for tax treatment applicable to incentive stock options under Section 422 of the Internal Revenue Code. A “non-statutory stock option” is an option that is not subject to statutory requirements and limitations required for certain tax advantages that are allowed under specific provisions of the Internal Revenue Code. A non-statutory stock option under the 2020 Plan is referred to for federal income tax purposes as a “non-qualified” stock option. Each option granted under the Plan will be designated as a non-qualified stock option or an incentive stock option. At the discretion of the administrator, incentive stock options may be granted only to our employees, employees of our “parent corporation” (as such term is defined in Section 424(e) of the Code) or employees of our subsidiaries.
The exercise period of an option may not exceed ten years from the date of grant and the exercise price may not be less than 100% of the fair market value of a share of common stock on the date the option is granted (110% of fair market value in the case of incentive stock options granted to ten percent stockholders). The exercise price for shares of common stock subject to an option may be paid in cash, or as determined by the administrator in its sole discretion, (i) through any cashless exercise procedure approved by the administrator (including the withholding of shares of common stock otherwise issuable upon exercise), (ii) by tendering unrestricted shares of common stock owned by the participant, (iii) with any other form of consideration approved by the administrator and permitted by applicable law or (iv) by any combination of these methods. The option holder will have no rights to dividends or distributions or other rights of a stockholder with respect to the shares of Common Stock subject to an option until the option holder has given written notice of exercise and paid the exercise price and applicable withholding taxes.
In the event of an participant’s termination of employment or service, the participant may exercise his or her option (to the extent vested as of such date of termination) for such period of time as specified in his or her option agreement.
Stock Appreciation Rights. SARs may be granted either alone (a “free-standing SAR”) or in conjunction with all or part of any option granted under the 2020 Plan (a “tandem SAR”). A free-standing SAR will entitle its holder to receive, at the time of exercise, an amount per share up to the excess of the fair market value (at the date of exercise) of a share of common stock over the base price of the free-standing SAR (which shall be no less than 100% of the fair market value of the related shares of common stock on the date of grant) multiplied by the number of shares in respect of which the SAR is being exercised. A tandem SAR will entitle its holder to receive, at the time of exercise of the SAR and surrender of the applicable portion of the related option, an amount per share up to the excess of the fair market value (at the date of exercise) of a share of common stock over the exercise price of the related option multiplied by the number of shares in respect of which the SAR is being exercised. The exercise period of a free-standing SAR may not exceed ten years from the date of grant. The exercise period of a tandem SAR will also expire upon the expiration of its related option.
The holder of a SAR will have no rights to dividends or any other rights of a stockholder with respect to the shares of Common Stock subject to the SAR until the holder has given written notice of exercise and paid the exercise price and applicable withholding taxes.
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In the event of an participant’s termination of employment or service, the holder of a SAR may exercise his or her SAR (to the extent vested as of such date of termination) for such period of time as specified in his or her SAR agreement.
Other Stock-Based Awards. The administrator may grant other stock-based awards under the 2020 Plan, valued in whole or in part by reference to, or otherwise based on, shares of common stock. The administrator will determine the terms and conditions of these awards, including the number of shares of common stock to be granted pursuant to each award, the manner in which the award will be settled, and the conditions to the vesting and payment of the award (including the achievement of performance goals). The rights of participants granted other stock-based awards upon the termination of employment or service to us will be set forth in the applicable award agreement. In the event that a bonus is granted in the form of shares of common stock, the shares of common stock constituting such bonus shall, as determined by the administrator, be evidenced in uncertificated form or by a book entry record or a certificate issued in the name of the participant to whom such grant was made and delivered to such participant as soon as practicable after the date on which such bonus is payable. Any dividend or dividend equivalent award issued hereunder shall be subject to the same restrictions, conditions and risks of forfeiture as apply to the underlying award.
Equitable Adjustment and Treatment of Outstanding Awards Upon a Change in Control
Equitable Adjustments. In the event of a merger, consolidation, reclassification, recapitalization, spin-off, spin-out, repurchase, reorganization, special or extraordinary dividend or other extraordinary distribution (whether in the form of common shares, cash or other property), combination, exchange of shares, or other change in corporate structure affecting our common stock, an equitable substitution or proportionate adjustment shall be made in (i) the aggregate number and kind of securities reserved for issuance under the 2020 Plan, (ii) the kind and number of securities subject to, and the exercise price of, any outstanding options and SARs granted under the 2020 Plan, (iii) the kind, number and purchase price of shares of common stock, or the amount of cash or amount or type of property, subject to outstanding restricted stock, RSUs and other stock-based awards granted under the 2020 Plan and (iv) the terms and conditions of any outstanding awards (including any applicable performance targets). Equitable substitutions or adjustments other than those listed above may also be made as determined by the plan administrator. In addition, the plan administrator may terminate all outstanding awards for the payment of cash or in-kind consideration having an aggregate fair market value equal to the excess of the fair market value of the shares of common stock, cash or other property covered by such awards over the aggregate exercise price, if any, of such awards, but if the exercise price of any outstanding award is equal to or greater than the fair market value of the shares of common stock, cash or other property covered by such award, the plan administrator may cancel the award without the payment of any consideration to the participant. With respect to awards subject to foreign laws, adjustments will be made in compliance with applicable requirements. Except to the extent determined by the plan administrator, adjustments to incentive stock options will be made only to the extent not constituting a “modification”underwriter within the meaning of Section 424(h)(3)2(a)(11) of the Code.
Change in Control. The 2020 Plan provides that, unless otherwise determined by the plan administrator and evidenced in an award agreement, if a “change in control” (as defined below) occurs and a participant is employed by us or any of our affiliates immediately prior to the consummation of the change in control, then the plan administrator, in its sole and absolute discretion, may (i) provide that any unvested or unexercisable portion of an award carrying a right to exercise will become fully vested and exercisable; and (ii) cause the restrictions, deferral limitations, payment conditions and forfeiture conditions applicable to any award granted under the 2020 Plan to lapse, and the awards will be deemed fully vestedSecurities Act, and any performance conditions imposed with respect to such awards willfees received by it might be deemed to be fully achieved at target performance levels. The administrator shall have discretion in connection with such change in control to provide that all outstanding and unexercised options and SARs shall expire upon the consummation of such change in control.
For purposes of the 2020 Plan, a “change in control” means, in summary, the first to occur of the following events: (i) a personunderwriting discounts or entity becomes the beneficial owner of more than 50% of our voting power; (ii) an unapproved change in the majority membership of our board of directors; (iii) a merger or consolidation of us or any of our subsidiaries, other than (A) a merger or consolidation that results in our voting securities continuing to represent 50% or more of the combined voting power of the surviving entity or its parent and our board of directors immediately prior to the merger or consolidation continuing to represent at least a majority of the board of directors of the surviving entity or its parent or (B) a merger or consolidation effected to implement a recapitalization in which no person is or becomes the beneficial owner of our voting securities representing more than 50% of our combined voting power; or (iv) stockholder approval of a plan of our complete liquidation or dissolution or the consummation of an agreement for the sale or disposition of substantially all of our assets, other than (A) a sale or disposition to an entity, more than 50% of the combined voting power of which is owned by our stockholders in substantially the same proportions as their ownership of us immediately prior to such sale or (B) a sale or disposition to an entity controlled by our board of directors. However, a change in control will not be deemed to have occurred as a result of any transaction or series of integrated transactions following which our stockholders, immediately prior thereto, hold immediately afterward the same proportionate equity interests in the entity that owns all or substantially all of our assets.
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Tax Withholding
Each participant will be required to make arrangements satisfactory to the plan administrator regarding payment of up to the maximum statutory tax rates in the participant’s applicable jurisdiction with respect to any award grantedcommissions under the 2020 Plan, as determined by us. We have the right, to the extent permitted by applicable law, to deduct any such taxes from any payment of any kind otherwise due to the participant. With the approval of the plan administrator, the participant may satisfy the foregoing requirement by either electing to have us withhold from delivery of shares of common stock, cash or other property, as applicable, or by delivering already owned unrestricted shares of common stock, in each case, having a value not exceeding the applicable taxes toSecurities Act. As an underwriter, RHK Noble would be withheld and applied to the tax obligations. We may also use any other method of obtaining the necessary payment or proceeds, as permitted by applicable law, to satisfy our withholding obligation with respect to any award.
Amendment and Termination of the 2020 Plan
The 2020 Plan provides our board of directors with authority to amend, alter or terminate the 2020 Plan, but no such action impair the rights of any participant with respect to outstanding awards without the participant’s consent. The plan administrator may amend an award, prospectively or retroactively, but no such amendment may materially impair the rights of any participant without the participant’s consent. Stockholder approval of any such action will be obtained if required to comply with the requirements of the Securities Act and the Exchange Act, including Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of any purchases and sales of securities by RHK Noble acting as a principal. Under these rules and regulations, RHK Noble must not engage in any stabilization activity in connection with our securities, and must not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act.
Price Stabilization
We have not authorized any person to engage in any form of price stabilization in connection with this offering.
Selling Restrictions
BELGIUM
The rights offering is exclusively conducted under applicable law. private placement exemptions and therefore it has not been and will not be notified to, and this document or any other offering material relating to the securities has not been and will not be approved by, the Belgian Banking, Finance and Insurance Commission (“Commission bancaire, financière et des assurances/Commissie voor het Bank-, Financie- en Assurantiewezen”). Any representation to the contrary is unlawful.
The 2020 Plan will terminateplacement agent has undertaken not to offer sell, resell, transfer or deliver directly or indirectly, any securities, or to take any steps relating/ancillary thereto, and not to distribute or publish this document or any other material relating to the securities or to the offering in a manner which would be construed as: (a) a public offering under the Belgian Royal Decree of 7 July 1999 on the tenth anniversarypublic character of financial transactions; or (b) an offering of securities to the public under Directive 2003/71/EC which triggers an obligation to publish a prospectus in Belgium. Any action contrary to these restrictions will cause the recipient and the issuer to be in violation of the Effective Date (although awards granted before that timeBelgian securities laws.
FRANCE
Neither this prospectus nor any other offering material relating to the securities has been submitted to the clearance procedures of the Autorité des marchés financiers in France. The securities have not been offered or sold and will remain outstandingnot be offered or sold, directly or indirectly, to the public in France. Neither this prospectus nor any other offering material relating to the securities has been or will be: (a) released, issued, distributed or caused to be released, issued or distributed to the public in France; or (b) used in connection with any offer for subscription or sale of the securities to the public in France. Such offers, sales and distributions will be made in France only: (i) to qualified investors (investisseurs qualifiés) and/or to a restricted circle of investors (cercle restreint d’investisseurs), in each case investing for their own account, all as defined in and in accordance with their terms).
Clawback. If we are required to prepare a financial restatement due to the material non-compliance with any financial reporting requirement, then the plan administrator may require any Section 16 officer to repay or forfeit to us that partArticles L.411-2,D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the cashFrench Code monétaire et financier; (ii) to investment services providers authorised to engage in portfolio management on behalf of third parties; or equity incentive compensation received by(iii) in a transaction that, Section 16 officer during the preceding three years that the plan administrator determines was in excessaccordance with article L.411-2-II-1° -or-2° -or3° of the amount that such Section 16 officer would have received had such cash or equity incentive compensation been calculated based on the financial results reported in the restated financial statement. The plan administrator may take into account any factors it deems reasonable in determining whether to seek recoupment of previously paid cash or equity incentive compensationFrench Code monétaire et financier and how much of such compensation to recoup from each Section 16 officer (which need not be the same amount or proportion for each Section 16 officer). The amount and formarticle 211-2 of the incentive compensation toGeneral Regulations (Règlement Général) of the Autorité des marchés financiers, does not constitute a public offer (appel public à l’épargne). Such securities may be recouped shall be determined byresold only in compliance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the administrator in its sole and absolute discretion.
French Code monétaire et financier.
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UNITED KINGDOM/GERMANY/NORWAY/THE NETHERLANDS
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any securities which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State other than the offers contemplated in this prospectus in name(s) of Member State(s) where prospectus will be approved or passported for the purposes of a non-exempt offer once this prospectus has been approved by the competent authority in such Member State and published and passported in accordance with the Prospectus Directive as implemented in name(s) of relevant Member State(s) only required where specific regulatory approvals being sought except that an offer to the public in that Relevant Member State of any securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a) | to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities; |
(b) | to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; |
(c) | by the underwriter to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or |
(d) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, |
provided that no such offer of securities shall result in a requirement for the publication by issuer or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any securities to be offered so as to enable an investor to decide to purchase any securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
The placement agent has represented, warranted and agreed that:
(a) | it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with the issue or sale of any securities in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and |
(b) | it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the United Kingdom. |
ISRAEL
In the State of Israel, the securities offered hereby may not be offered to any person or entity other than the following:
(a) | a fund for joint investments in trust (i.e., mutual fund), as such term is defined in the Law for Joint Investments in Trust, 5754-1994, or a management company of such a fund; |
(b) | a provident fund as defined in Section 47(a)(2) of the Income Tax Ordinance of the State of Israel, or a management company of such a fund; |
(c) | an insurer, as defined in the Law for Oversight of Insurance Transactions, 5741-1981, (d) a banking entity or satellite entity, as such terms are defined in the Banking Law (Licensing), 5741-1981, other than a joint services company, acting for their own account or for the account of investors of the type listed in Section 15A(b) of the Securities Law 1968; |
(d) | a company that is licensed as a portfolio manager, as such term is defined in Section 8(b) of the Law for the Regulation of Investment Advisors and Portfolio Managers, 5755-1995, acting on its own account or for the account of investors of the type listed in Section 15A(b) of the Securities Law 1968; |
(e) | a company that is licensed as an investment advisor, as such term is defined in Section 7(c) of the Law for the Regulation of Investment Advisors and Portfolio Managers, 5755-1995, acting on its own account; |
(f) | a company that is a member of the Tel Aviv Stock Exchange, acting on its own account or for the account of investors of the type listed in Section 15A(b) of the Securities Law 1968; |
(g) | an underwriter fulfilling the conditions of Section 56(c) of the Securities Law, 5728-1968; |
(h) | a venture capital fund (defined as an entity primarily involved in investments in companies which, at the time of investment, (i) are primarily engaged in research and development or manufacture of new technological products or processes and (ii) involve above-average risk); |
(i) | an entity primarily engaged in capital markets activities in which all of the equity owners meet one or more of the above criteria; and |
(j) | an entity, other than an entity formed for the purpose of purchasing securities in this offering, in which the shareholders equity (including pursuant to foreign accounting rules, international accounting regulations and U.S. generally accepted accounting rules, as defined in the Securities Law Regulations (Preparation of Annual Financial Statements), 1993) is in excess of NIS 250 million. |
Any offeree of the securities offered hereby in the State of Israel shall be required to submit written confirmation that it falls within the scope of one of the above criteria. This prospectus will not be distributed or directed to investors in the State of Israel who do not fall within one of the above criteria.
ITALY
The rights offering of the securities offered hereby in Italy has not been registered with the Commissione Nazionale per la Società e la Borsa (“CONSOB”) pursuant to Italian securities legislation and, accordingly, the securities offered hereby cannot be offered, sold or delivered in the Republic of Italy (“Italy”) nor may any copy of this prospectus or any other document relating to the securities offered hereby be distributed in Italy other than to professional investors (operatori qualificati) as defined in Article 31, second paragraph, of CONSOB Regulation No. 11522 of 1 July, 1998 as subsequently amended. Any offer, sale or delivery of the securities offered hereby or distribution of copies of this document or any other document relating to the securities offered hereby in Italy must be made:
(a) | by an investment firm, bank or intermediary permitted to conduct such activities in Italy in accordance with Legislative Decree No. 58 of 24 February 1998 and Legislative Decree No. 385 of 1 September 1993 (the “Banking Act”); |
(b) | in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy; and |
(c) | in compliance with any other applicable laws and regulations and other possible requirements or limitations which may be imposed by Italian authorities. |
SWEDEN
This prospectus has not been nor will it be registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this prospectus may not be made available, nor may the securities offered hereunder be marketed and offered for sale in Sweden, other than under circumstances which are deemed not to require a prospectus under the Financial Instruments Trading Act (1991: 980). This offering will only be made to qualified investors in Sweden. This offering will be made to no more than 100 persons or entities in Sweden.
SWITZERLAND
The securities offered pursuant to this prospectus will not be offered, directly or indirectly, to the public in Switzerland and this prospectus does not constitute a public offering prospectus as that term is understood pursuant to art. 652a or art. 1156 of the Swiss Federal Code of Obligations. The issuer has not applied for a listing of the securities being offered pursuant to this prospectus on the SWX Swiss Exchange or on any other regulated securities market, and consequently, the information presented in this prospectus does not necessarily comply with the information standards set out in the relevant listing rules. The securities being offered pursuant to this prospectus have not been registered with the Swiss Federal Banking Commission as foreign investment funds, and the investor protection afforded to acquirers of investment fund certificates does not extend to acquirers of securities.
Investors are advised to contact their legal, financial or tax advisers to obtain an independent assessment of the financial and tax consequences of an investment in securities.
LEGAL MATTERS
The validity of the issuance of the Units, and the common stock and warrants underlying the Units,securities offered by us in this offeringhereby will be passed upon for us by Sheppard, Mullin, Richter & HamptonLucosky Brookman LLP. RHK Noble is being represented by Olshan Frome Wolosky LLP, New York, New York. Certain legal matters will be passed upon for the underwriter by Lucosky Brookman LLP, Woodbridge, New Jersey.
EXPERTS
The financial statements as of and for the yearsfiscal year ended December 31, 20192021 and 20182020 have been audited by Rosenberg Rich Baker Berman, P.A., 265 Davidson Avenue, Suite 210, Somerset, NJ 08873, an independent registered public accounting firm, as set forthstated in their report and arereports,. Such financial statements have been so included in reliance upon such report given as authoritythe reports of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MOREADDITIONAL INFORMATION
The Company files annual, quarterly and currentAvailable Information
We file reports, proxy statements and other information with the SEC. The Company hasInformation filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the common stock being offered under this prospectus. This prospectus does not contain all of the information set forth in the registration statementby us can be inspected and the exhibits to the registration statement. For further information with respect to the Company and the securities being offered under this prospectus, please refer to the complete registration statement and the exhibits and schedules filed as a part of the registration statement.
You may read and copy the registration statement, as well as the Company’s reports, proxy statements and other information,copied at the SEC’s Public Reference Room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please callYou may also obtain copies of this information by mail from the Public Reference Room of the SEC at 1-800-SEC-0330 for moreprescribed rates. Further information abouton the operation of the SEC’s Public Reference Room.Room in Washington, D.C. can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Interneta web site that contains reports, proxy and information statements and other information regardingabout issuers, thatsuch as us, who file electronically with the SEC. The SEC’s Internet site can be found ataddress of that website is http://www.sec.gov. You may access
Our website address is https://creatd.com. The information on our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-Kwebsite, however, is not, and other reportsshould not be deemed to be, a part of this prospectus.
This prospectus and any prospectus supplement are part of a registration statement that we filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC freeand do not contain all of charge onthe information in the registration statement. The full registration statement may be obtained from the SEC or us, as provided below. Forms of the documents establishing the terms of the offered securities are or may be filed as exhibits to the registration statement. Statements in this prospectus or any prospectus supplement about these documents are summaries and each statement is qualified in all respects by reference to the document to which it refers. You should refer to the actual documents for a more complete description of the relevant matters. You may inspect a copy of the registration statement at the SEC’s website.Public Reference Room in Washington, D.C. or through the SEC’s website, as provided above.
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INDEX TO FINANCIAL STATEMENTSCreatd, Inc.
March 31, 2022
Index to the Condensed Consolidated Financial Statements
Jerrick Media Holdings, Inc.
Contents | Page(s) | |
Creatd, Inc.
Condensed Consolidated Balance Sheets
March 31, 2022 | December 31, 2021 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 3,229,627 | $ | 3,794,734 | ||||
Accounts receivable, net | 390,605 | 337,440 | ||||||
Inventory | 436,981 | 106,403 | ||||||
Prepaid expenses and other current assets | 274,840 | 236,665 | ||||||
Total Current Assets | 4,332,053 | 4,475,242 | ||||||
Property and equipment, net | 139,479 | 102,939 | ||||||
Intangible assets | 2,520,373 | 2,432,841 | ||||||
Goodwill | 1,383,785 | 1,374,835 | ||||||
Deposits and other assets | 914,700 | 718,951 | ||||||
Minority investment in businesses | 50,000 | 50,000 | �� | |||||
Operating lease right of use asset | - | 18,451 | ||||||
Total Assets | $ | 9,340,390 | $ | 9,173,259 | ||||
Liabilities and Stockholders’ Deficit | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 4,832,103 | $ | 3,730,540 | ||||
Convertible Notes, net of debt discount and issuance costs | - | 159,193 | ||||||
Current portion of operating lease payable | - | 18,451 | ||||||
Note payable, net of debt discount and issuance costs | 1,151,087 | 1,278,672 | ||||||
Deferred revenue | 211,676 | 234,159 | ||||||
Total Current Liabilities | 6,194,866 | 5,421,015 | ||||||
Non-current Liabilities: | ||||||||
Note payable | 35,905 | 63,992 | ||||||
Total Non-current Liabilities | 35,905 | 63,992 | ||||||
Total Liabilities | 6,230,771 | 5,485,007 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity | ||||||||
Common stock par value $0.001: 100,000,000 shares authorized; 19,915,090 issued and 19,909,433 outstanding as of March 31, 2021 and 16,691,170 issued and 16,685,513 outstanding as of December 31, 2021 | 19,915 | 16,691 | ||||||
Additional paid in capital | 117,949,487 | 111,563,618 | ||||||
Subscription receivable | - | - | ||||||
Less: Treasury stock, 5,657 and 5,657 shares, respectively | (62,406 | ) | (62,406 | ) | ||||
Accumulated deficit | (115,977,464 | ) | (109,632,574 | ) | ||||
Accumulated other comprehensive income | (83,222 | ) | (78,272 | ) | ||||
Total Creatd, Inc. Stockholders’ Equity | 1,846,310 | 1,807,057 | ||||||
Non-controlling interest in consolidated subsidiaries | 1,263,309 | 1,881,195 | ||||||
3,109,619 | 3,688,252 | |||||||
Total Liabilities and Stockholders’ Equity | $ | 9,340,390 | $ | 9,173,259 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Creatd, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
For the Three Months Ended | For the Three Months Ended | |||||||
March 31, 2022 | March 31, 2021 | |||||||
Net revenue | $ | 1,348,738 | $ | 743,913 | ||||
Cost of revenue | 1,572,170 | 867,150 | ||||||
Gross margin (loss) | (223,432 | ) | (123,237 | ) | ||||
Operating expenses | ||||||||
Research and development | 226,654 | 328,852 | ||||||
Marketing | 2,092,021 | 2,042,655 | ||||||
Stock based compensation | 1,080,792 | 1,570,239 | ||||||
General and administrative | 3,386,385 | 1,881,014 | ||||||
Total operating expenses | 6,785,852 | 5,822,760 | ||||||
Loss from operations | (7,009,284 | ) | (5,945,997 | ) | ||||
Other income (expenses) | ||||||||
Other income | 99 | - | ||||||
Interest expense | (13,896 | ) | (198,671 | ) | ||||
Accretion of debt discount and issuance cost | (23,477 | ) | (497,165 | ) | ||||
Derivative expense | - | (100,502 | ) | |||||
Change in derivative liability | 3,729 | (197,389 | ) | |||||
Settlement of vendor liabilities | 14,525 | 92,909 | ||||||
Gain on extinguishment of debt | 147,256 | 203,578 | ||||||
Other expenses, net | 128,236 | (697,240 | ) | |||||
Loss before income tax provision | (6,881,048 | ) | (6,643,237 | ) | ||||
Income tax provision | - | - | ||||||
Net loss | (6,881,048 | ) | (6,643,237 | ) | ||||
Non-controlling interest in net loss | 617,886 | - | ||||||
Net Loss attributable to Creatd, Inc. | (6,263,162 | ) | (6,643,237 | ) | ||||
Deemed dividend | (81,728 | ) | - | |||||
Net loss attributable to common shareholders | $ | (6,344,890 | ) | $ | (6,643,237 | ) | ||
Comprehensive loss | ||||||||
Net loss | (6,881,048 | ) | (6,643,237 | ) | ||||
Currency translation gain (loss) | (4,950 | ) | (7,311 | ) | ||||
Comprehensive loss | $ | (6,885,998 | ) | $ | (6,650,548 | ) | ||
Per-share data | ||||||||
Basic and diluted loss per share | $ | (0.36 | ) | $ | (0.68 | ) | ||
Weighted average number of common shares outstanding | 17,707,951 | 9,836,443 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Creatd, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended March 31, 2022
(Unaudited)
Series E Preferred Stock | Common Stock | Treasury stock | Additional Paid In | Accumulated | Non- Controlling | Other Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Income | Equity | ||||||||||||||||||||||||||||||||||
Balance, January 1, 2022 | 500 | $ | - | 16,691,170 | $ | 16,691 | (5,657 | ) | $ | (62,406 | ) | $ | 111,563,618 | $ | (109,632,574 | ) | $ | 1,881,195 | $ | (78,272 | ) | $ | 3,688,252 | |||||||||||||||||||||
Stock based compensation | - | - | 18,171 | 18 | - | - | 1,067,591 | - | - | - | 1,067,609 | |||||||||||||||||||||||||||||||||
Shares issued for prepaid services | - | - | 50,000 | 50 | - | - | 68,950 | - | - | - | 69,000 | |||||||||||||||||||||||||||||||||
Cash received for common stock and warrants, net of $115,000 of issuance costs | - | - | 3,046,314 | 3,046 | - | - | 4,994,254 | - | - | - | 4,997,300 | |||||||||||||||||||||||||||||||||
Common stock issued upon conversion of notes payable | - | - | 109,435 | 110 | - | - | 173,346 | - | - | - | 173,456 | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | - | - | - | - | (4,950 | ) | (4,950 | ) | |||||||||||||||||||||||||||||||
Dividends | - | - | - | - | - | - | 81,728 | (81,728 | ) | - | - | - | ||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 20222 | - | - | - | - | - | - | - | (6,263,162 | ) | (617,886 | ) | - | (6,881,048 | ) | ||||||||||||||||||||||||||||||
Balance, March 31, 2022 | 500 | $ | - | 19,915,090 | $ | 19,915 | (5,657 | ) | $ | (62,406 | ) | $ | 117,949,487 | $ | (115,977,464 | ) | $ | 1,263,309 | $ | (83,222 | ) | $ | 3,109,619 |
The accompanying notes are an integral part of these consolidated financial statements.
Creatd, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended March 31, 2021 (Unaudited)
Series E | Additional | Other | ||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Treasury stock | Paid In | Subscription | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Income | Equity | ||||||||||||||||||||||||||||||||||
Balance, January 1, 2021 | 7,738 | $ | 8 | 8,736,378 | $ | 8,737 | (5,657 | ) | $ | (62,406 | ) | $ | 77,505,013 | $ | (40,000 | ) | $ | (71,928,922 | ) | $ | (37,234 | ) | $ | 5,445,196 | ||||||||||||||||||||
Stock based compensation | - | - | 112,261 | 112 | - | - | 1,345,803 | - | - | - | 1,345,915 | |||||||||||||||||||||||||||||||||
Shares issued for prepaid services | - | - | 40,000 | 40 | - | - | 191,960 | - | - | - | 192,000 | |||||||||||||||||||||||||||||||||
Shares issued to settle vendor liabilities | - | - | 44,895 | 45 | - | - | 181,341 | - | - | - | 181,386 | |||||||||||||||||||||||||||||||||
Common stock issued upon conversion of notes payable | - | - | 65,328 | 65 | - | - | 142,735 | - | - | - | 142,800 | |||||||||||||||||||||||||||||||||
Exercise of warrants to stock | - | - | 302,434 | 302 | - | - | 1,272,370 | - | - | - | 1,272,672 | |||||||||||||||||||||||||||||||||
Cash received for preferred series E and warrants | 40 | - | - | - | - | - | (4,225 | ) | 40,000 | - | - | 35,775 | ||||||||||||||||||||||||||||||||
Conversion of preferred series E to stock | (6,690 | ) | (7 | ) | 1,623,730 | 1,624 | - | - | (1,617 | ) | - | - | - | - | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | - | - | - | - | (7,311 | ) | (7,311 | ) | |||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2021 | - | - | - | - | - | -- | - | - | (6,643,237 | ) | - | (6,643,237 | ) | |||||||||||||||||||||||||||||||
Balance, March 31, 2021 | 1,088 | $ | 1 | 10,925,026 | $ | 10,925 | (5,657 | ) | $ | (62,406 | ) | $ | 80,633,380 | $ | - | $ | (78,572,159 | ) | $ | (44,545 | ) | $ | 1,965,196 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Creatd, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended | For the Three Months Ended | |||||||
March 31, 2022 | March 31, 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (6,881,048 | ) | $ | (6,643,237 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 141,892 | 41,199 | ||||||
Accretion of debt discount and issuance cost | 23,477 | 497,165 | ||||||
Share-based compensation | 1,080,491 | 1,570,239 | ||||||
Bad debt expense | 92,987 | - | ||||||
Settlement of vendor liabilities | (14,525 | ) | (92,908 | ) | ||||
Change in fair value of derivative liability | (3,729 | ) | 197,389 | |||||
Derivative expense | - | 100,502 | ||||||
Gain on extinguishment of debt | (147,256 | ) | (203,578 | ) | ||||
Non cash lease expense | 18,451 | 19,709 | ||||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses | (6,373 | ) | (391,918 | ) | ||||
Inventory | (136,213 | ) | - | |||||
Accounts receivable | (139,388 | ) | (61,374 | ) | ||||
Deposits and other assets | (195,749 | ) | - | |||||
Deferred revenue | (22,483 | ) | 60,123 | |||||
Accounts payable and accrued expenses | 1,170,738 | (370,528 | ) | |||||
Operating lease liability | (18,451 | ) | (19,421 | ) | ||||
Net Cash Used In Operating Activities | (5,037,179 | ) | (5,296,638 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Cash paid for property and equipment | (44,927 | ) | (12,637 | ) | ||||
Deposits | - | (100,000 | ) | |||||
Cash paid for minority investment in business | - | (100,000 | ) | |||||
Cash acquired from acquisition | 44,977 | - | ||||||
Purchases of digital assets | (51,000 | ) | - | |||||
Net Cash Used In Investing Activities | (50,950 | ) | (212,637 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from the exercise of warrant | - | 1,312,672 | ||||||
Net proceeds from issuance of notes | 463,559 | 85,500 | ||||||
Repayment of notes | (932,888 | ) | (43,716 | ) | ||||
Repayment of convertible notes | - | (941,880 | ) | |||||
Proceeds from issuance of common stock and warrants | 4,997,301 | - | ||||||
Net Cash Provided By Financing Activities | 4,527,972 | 412,576 | ||||||
Effect of exchange rate changes on cash | (4,950 | ) | (7,311 | ) | ||||
Net Change in Cash | (565,107 | ) | (5,104,010 | ) | ||||
Cash – Beginning of period | 3,794,734 | 7,906,752 | ||||||
Cash – End of period | $ | 3,229,627 | $ | 2,802,742 | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
Cash Paid During the Year for: | ||||||||
Income taxes | $ | - | $ | - | ||||
Interest | $ | 139,000 | $ | 55,276 | ||||
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Settlement of vendor liabilities | $ | 20,297 | $ | 168,667 | ||||
Issuance of common stock for prepaid services | $ | 69,000 | $ | 155,178 | ||||
Deferred offering costs | $ | - | $ | 4,225 | ||||
Common stock and warrants issued upon conversion of notes payable | $ | 173,456 | $ | 142,800 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Creatd, Inc.
March 31, 2022
Notes to the Condensed Consolidated Financial Statements
Note 1 – Organization and Operations
Creatd, Inc., formerly Jerrick Media Holdings, Inc. (“we,” “us,” the “Company,” or “Creatd”), is a technology company focused on providing economic opportunities for creators, which it accomplishes through its four main business pillars: Creatd Labs, Creatd Partners, Creatd Ventures, and Creatd Studios. Creatd’s flagship product, Vocal, delivers a robust long-form, digital publishing platform organized into highly engaged niche-communities capable of hosting all forms of rich media content. Through Creatd’s proprietary algorithm dynamics, Vocal enhances the visibility of content and maximizes viewership, providing advertisers access to target markets that most closely match their interests.
The Company was originally incorporated under the laws of the State of Nevada on December 30, 1999 under the name LILM, Inc. The Company changed its name on December 3, 2013 to Great Plains Holdings, Inc. as part of its plan to diversify its business.
On February 5, 2016 (the “Closing Date”), GTPH, GPH Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of GTPH (“Merger Sub”), and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), entered into an Agreement and Plan of Merger (the “Merger”) pursuant to which the Merger Sub was merged with and into Jerrick, with Jerrick surviving as a wholly-owned subsidiary of GTPH (the “Merger”). GTPH acquired, pursuant to the Merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 475,000 shares of GTPH’s common stock. In connection therewith, GTPH acquired 33,415 shares of Jerrick’s Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred Stock (the “Jerrick Series B Preferred”).
In connection with the Merger, on the Closing Date, GTPH and Kent Campbell entered into a Spin-Off Agreement (the “Spin-Off Agreement”), pursuant to which Mr. Campbell purchased from GTPH (i) all of GTPH’s interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all of GTPH’s interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 39,091 shares of GTPH’s Common Stock held by Mr. Campbell. In addition, Mr. Campbell assumed all debts, obligations and liabilities of GTPH, including any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.
Upon closing of the Merger on February 5, 2016, the Company changed its business plan to that of Jerrick.
Effective February 28, 2016, GTPH entered into an Agreement and Plan of Merger (the “Statutory Merger Agreement”) with Jerrick, pursuant to which GTPH became the parent company of Jerrick Ventures, LLC, a wholly-owned operating subsidiary of Jerrick (the “Statutory Merger”) and GTPH changed its name to Jerrick Media Holdings, Inc. to better reflect its new business strategy.
On September 11, 2019, the Company acquired 100% of the membership interests of Seller’s Choice, LLC, a New Jersey limited liability company (“Seller’s Choice”). Seller’s Choice is a digital e-commerce agency based in New Jersey.
On September 9, 2020, the Company filed a certificate of amendment with the Secretary of State of the State of Nevada to change our name to “Creatd, Inc.”, which became effective on September 10, 2020.
On June 4, 2021, the Company acquired 89% of the membership interests of Plant Camp, LLC, a Delaware limited liability company (“Plant Camp”), which the Company subsequently rebranded as Camp. Plant Camp is a direct-to-consumer (DTC) food brand which creates healthy upgrades to classic comfort food favorites. The results of Plant Camp’s operations have bene included since the date of acquisition in the Statements of Operations.
On July 20, 2021, the Company acquired 44% of the membership interests of WHE Agency, Inc. WHE Agency, Inc, is a talent management and public relations agency based in New York. WHE Agency, Inc, has been consolidated due to the Company’s ownership of 55% voting control, and the results of operations have been included since the date of acquisition in the Statements of Operations.
On August 16, 2021, the Company acquired 16% of the membership interests of Dune, Inc. bring our total membership interests to 21%.
On October 3, 2021, the Company acquired 29% of the membership interests of Dune, Inc. bring our total membership interests to 50%. Dune, Inc. is a direct-to-consumer brand focused on promoting wellness through its range of health-oriented beverages. Dune, Inc, has been consolidated due to the Company’s ownership of 50% voting control, and the results of operations have been included since the date of acquisition in the Statements of Operations.
On March 7, 2022, the Company acquired 100% of the membership interests of Denver Bodega, LLC, d/b/a Basis, a Colorado limited liability company (“Basis”). Basis is a direct-to-consumer functional beverage brand that makes high-electrolyte mixes meant to aid hydration. Denver Bodega, LLC has been consolidated due to the Company’s ownership of 100% voting control, and the results of operations have been included since the date of acquisition in the Statement of Operations.
Note 2 – Significant Accounting Policies and Practices
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 the accounting principles generally accepted in the United States of America.
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and following the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or any other interim period or for any other future year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2021, included in the Company’s 2021 Annual Report on Form 10-K filed with the SEC. The balance sheet as of December 31, 2021 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.
Use of Estimates and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with U.S. 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.
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. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve, and impairment of intellectual property.
Actual results could differ from those estimates.
Presentation
During 2021, we adopted a change in presentation on our Condensed Consolidated Statements of Comprehensive Loss in order to present a gross profit line and allocate certain overhead expenses, the presentation of which is consistent with our peers. Under the new presentation, we began allocating overhead expenses related to cost of goods sold. Prior periods have been revised to reflect this change in presentation.
Principles of consolidation
The Company consolidates all majority-owned subsidiaries, if any, in which the parent’s power to control exists.
As of March 31, 2022, the Company’s consolidated subsidiaries and/or entities are as follows:
Name of combined affiliate | State or other jurisdiction of incorporation or organization | Company Ownership Interest | ||||
Jerrick Ventures LLC | Delaware | 100 | % | |||
Abacus Tech Pty Ltd | Australia | 100 | % | |||
Seller’s Choice, LLC | New Jersey | 100 | % | |||
Creatd Studios, LLC | Delaware | 100 | % | |||
Give, LLC | Delaware | 100 | % | |||
Creatd Partners LLC | Delaware | 100 | % | |||
Denver Bodega, LLC | Colorado | 100 | % | |||
Dune Inc. | Delaware | 50 | % | |||
Plant Camp LLC | Delaware | 89 | % | |||
Sci-Fi.com, LLC | Delaware | 100 | % | |||
OG Collection LLC | Delaware | 100 | % | |||
OG Gallery, Inc. | Delaware | 100 | % | |||
VMENA LLC | Delaware | 100 | % | |||
Vocal For Brands, LLC | Delaware | 100 | % | |||
Vocal Ventures LLC | Delaware | 100 | % | |||
What to Buy, LLC | Delaware | 100 | % | |||
WHE Agency, Inc. | Delaware | 44 | % |
All inter-company balances and transactions have been eliminated. The condensed consolidated financial statements include Denver Bodega, LLC activity since March 7, 2022.
Variable Interest Entities
Management performs an ongoing assessment of its noncontrolling interests from investments in unrelated entities to determine if those entities are variable interest entities (VIEs), and if so, whether the Company is the primary beneficiary. If an entity in such a transaction, by design, meets the definition of a VIE and the Company determines that it, or a condensed consolidated subsidiary is the primary beneficiary, the Company will include the VIE in its condensed consolidated financial statements. If such an entity is deemed to not be condensed consolidated, the Company records only its investment in equity securities as a marketable security or investment under the equity method, as applicable
Fair Value of Financial Instruments
The fair value measurement disclosures are grouped into three levels based on valuation factors:
● | Level 1 – quoted prices in active markets for identical investments |
● | Level 2 – other significant observable inputs (including quoted prices for similar investments and market corroborated inputs) |
● | Level 3 – significant unobservable inputs (including our own assumptions in determining the fair value of investments) |
The Company’s Level 1 assets/liabilities include cash, accounts receivable, marketable trading securities, accounts payable, prepaid and other current assets, line of credit and due to related parties. Management believes the estimated fair value of these accounts at March 31, 2022 approximate their carrying value as reflected in the balance sheets due to the short-term nature of these instruments or the use of market interest rates for debt instruments.
The Company’s Level 2 assets/liabilities include certain of the Company’s notes payable. Their carrying value approximates their fair values based upon a comparison of the interest rate and terms of such debt given the level of risk to the rates and terms of similar debt currently available to the Company in the marketplace.
The Company’s Level 3 assets/liabilities include goodwill, intangible assets, equity investments at cost, and derivative liabilities. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.
The following tables provides a summary of the relevant assets that are measured at fair value on non-recurring basis:
Fair Value Measurements as of
March 31, 2022
Total | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Equity investments, at cost | $ | 50,000 | $ | - | $ | - | $ | 50,000 | ||||||||
Total assets | $ | 50,000 | $ | - | $ | - | $ | 50,000 |
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
At times, cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) or Financial Claims Scheme (“FCS”) insurable limits. The Company has never experienced any losses related to these balances. As of March 31, 2022, cash amounts in excess of $250,000 were not fully insured. The uninsured cash balance as of March 31, 2022, was approximately $2.4 million. The Company does not believe it is exposed to significant credit risk on cash and cash equivalents.
Concentration of Credit Risk and Other Risks and Uncertainties
The Company provides credit in the normal course of business. The Company maintains allowances for credit losses on factors surrounding the credit risk of specific customers, historical trends, and other information.
The Company operates in Australia and holds total assets of $935,285 that are considered to be reasonably possible that operations located outside an entity’s home country will be disrupted in the near term.
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 fixtures | 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 condensed consolidated statements of operations.
Long-lived Assets Including Goodwill and Other Acquired Intangible Assets
We evaluate the recoverability of property and equipment and acquired finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. During the three months ended March 31, 2022, the Company recorded an impairment charge of $0 for intangible assets.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. We routinely review the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If we change the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life. The remaining weighted average life of the intangible assets are 6.94 years.
Scheduled amortization over the next five years are as follows: |
Twelve months ending March 31, | ||||
2023 | $ | 498,641 | ||
2024 | 429,030 | |||
2025 | 325,307 | |||
2026 | 246,840 | |||
2027 | 228,499 | |||
Thereafter | 792,056 | |||
Total | $ | 2,520,373 |
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “Intangibles – Goodwill and Other – Testing Indefinite-Lived Intangible Assets for Impairment” (“ASC Topic 350”). The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company has four reporting units. The Company uses an income-based approach to determine the fair value of the reporting units. This approach uses a discounted cash flow methodology and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units.
During the year ended December 31, 2021, the Company completed its annual impairment test of goodwill. The Company performed the qualitative assessment as permitted by ASC 350-20 and determined for three of its reporting units that the fair value of those reporting units was more likely than not greater than their carrying value, including Goodwill. However, based on this qualitative assessment, the Company determined that the carrying value of the Seller’s Choice reporting unit was more likely than not greater than its carrying value, including Goodwill. Based on completion of the annual impairment test, the Company recorded an impairment charge of $1,035,795 for goodwill During the year ended December 31, 2021.
The following table sets forth a summary of the changes in goodwill for the three months ended March 31, 2022.
For the three months ended March 31, 2022 | ||||
Total | ||||
As of January 1, 2022 | $ | 1,374,835 | ||
Goodwill acquired in a business combination | 8,950 | |||
Impairment of goodwill | - | |||
As of March 31, 2022 | 1,383,785 |
Commitments and Contingencies
The Company follows subtopic 450-20 of the FASB ASC to report accounting for contingencies. Certain conditions may exist as of the date the condensed 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 condensed 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.
Foreign Currency
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at our Condensed Consolidated Balance Sheet dates. Results of operations and cash flows are translated using the average exchange rates throughout the periods. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of stockholders’ equity in accumulated other comprehensive income. Gains and losses from foreign currency transactions, which are included in operating expenses, have not been significant in any period presented.
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 condensed 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.
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 a binomial option model for convertible notes that have an option to convert at a variable number of shares 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 inputs utilized in the application of the Binomial model included a stock price on valuation date, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate. The Company records the change in the fair value of the derivative as other income or expense in the condensed consolidated statements of operations.
Shipping and Handling Costs
The Company classifies freight billed to customers as sales revenue and the related freight costs as cost or revenue.
Revenue Recognition
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. The transaction price for any given subscriber could decrease based on any payments made to that subscriber. A subscriber may be eligible for payment through one or more of the monetization features offered to Vocal creators, including earnings through reads (on a cost per mile basis) and cash prizes offered to Challenge winners; |
● | 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 three months ended March 31, 2022 and 2021 consists of the following:
Three Months Ended | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Agency (Managed Services, Branded Content, & Talent Management Services) | $ | 583,141 | $ | 428,300 | ||||
Platform (Creator Subscriptions) | 508,233 | 306,902 | ||||||
Ecommerce (Tangible products) | 254,724 | - | ||||||
Affiliate Sales | 2,640 | 8,008 | ||||||
Other Revenue | - | 703 | ||||||
$ | 1,348,738 | $ | 743,913 |
The Company utilizes the output method to measures the results achieved and value transferred to a customer over time. Timing of revenue recognition for the three months ended March 31, 2022 and 2021 consists of the following:
Three Months Ended | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Products and services transferred over time | $ | 1,091,374 | $ | 735,202 | ||||
Products and services transferred at a point in time | 257,364 | 8,711 | ||||||
$ | 1,348,738 | $ | 743,913 |
Agency Revenue
Managed Services
The Company provides Studio/Agency Service offerings to business-to-business (B2B) and business-to-consumer (B2C) product and service brands which encompasses a full range of digital marketing and e-commerce solutions. The Company’s services include the setup and ongoing management of clients’ websites, Amazon and Shopify storefronts and listings, social media pages, search engine marketing, and other various tools and sales channels utilized by e-commerce sellers for sales and growth optimization. Contracts are broken into three categories: Partners, Monthly Services, and Projects. Contract amounts for Partner and Monthly Services clients range from approximately $500-$7,500 per month while Project amounts vary depending on the scope of work. Partner and Monthly clients are billed monthly for the work completed within that month. Partner Clients may or may not have an additional billing component referred to as Sales Performance Fee, which is a fee based upon a previously agreed upon percentage point of the client’s total sales for the month. Some Partners may also have projects within their contracts that get billed and recognized as agreed upon project milestones are achieved. Revenue is recognized over time as service obligations and milestones in the contract are met.
Branded Content
Branded content represents the revenue recognized from the Company’s obligation to create and publish branded articles and/or branded challenges for clients on the Vocal platform and promote said stories, tracking engagement for the client. In the case of branded articles, 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. In the case of branded challenges, the performance obligation is satisfied when the Company successfully closes the challenge and winners have been announced. The Company utilizes the completed contract method when revenue is recognized over time as the services are performed and any required milestones are met. Certain contracts contain separate milestones whereas the Company separates its performance obligations and utilizes the stand-alone selling price method and residual method to determine the estimate of the allocation of the transaction price.
Below are the significant components of a typical agreement pertaining to branded content revenue:
● | The Company collects fixed fees ranging from $10,000 to $110,000, with branded challenges ranging from $10,000 to $25,000 and branded articles ranging from $2,500 to $7,500 per article. | |
● | Branded articles are created and published, and challenges are completed, within three months of the signed agreement, or as previously negotiated with the client. |
● | Branded articles and challenges are promoted per the contract and engagement reports are provided to the client. | |
● | Most contracts include provisions for clients to acquire content rights at the end of the campaign for a flat fee. |
Talent Management Services
Talent Management represents the revenue recognized by WHE Agency, Inc. (“WHE”) from the Company’s obligation to manage and oversee influencer-led campaigns from the contract negotiation stage through content creation and publication. WHE acts in an agent capacity for influencers and collects a management fee of 20% of the value of an influencer’s contract with a brand. Revenue is recognized net of the 80% of the contract that is collected by the influencer and is recognized when performance obligations of the contract are met. Performance obligations are complete when milestones and deliverables of contracts are delivered to the client.
Below are the significant components of a typical agreement pertaining to talent management revenue:
● | Total gross contracts range from $500-$50,000. |
● | The Company collects fixed fees in the amount of 20% of the gross contract amount, ranging from $100 to $20,000 in net revenue per contract. |
● | The campaign is created and made live by the influencer within one month of the signed agreement, or as previously negotiated with the client. |
● | Campaigns are promoted per the contract and the customer is provided a link to the live deliverables on the influencer’s social media channels. |
● | Most billing for contracts occur 100% at execution of the performance obligation. Net payment terms vary by client. |
Platform Revenue
Creator Subscriptions
Vocal+ is a premium subscription offering for Vocal creators. In addition to joining for free, Vocal creators now have the option to sign up for a Vocal+ membership for either $9.99 monthly or $99 annually, though these amounts are subject to promotional discounts and free trials. Vocal+ subscribers receive access to value-added features such as increased rate of cost per mille (thousand) (“CPM”) monetization, a decreased minimum withdrawal threshold, a discount on platform processing fees, member badges for their profiles, access to exclusive Vocal+ Challenges, and early access to new Vocal features. Subscription revenues stem from both monthly and annual subscriptions, the latter of which is amortized over a twelve-month period. Any customer payments received are recognized over the subscription period, with any payments received in advance being deferred until they are earned.
The transaction price for any given subscriber could decrease based on any payments made to that subscriber. A subscriber may be eligible for payment through one or more of the monetization features offered to Vocal creators, including earnings through reads (on a cost per mille basis) and cash prizes offered to Challenge winners. Estimates are utilized for payments made for earnings through reads, by establishing the lifetime a subscriber has had a Vocal account, determining the percentage of that lifetime that the subscriber has been a paying customer, and applying that percentage to payments for earnings through reads in the relevant reporting period.
Affiliate Sales Revenue
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, Amazon, and Tune, 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.
E-Commerce Revenue
The Company’s e-commerce businesses are housed under Creatd Ventures, and currently consists of three majority-owned e-commerce companies, Camp (previously Plant Camp), Dune Glow Remedy (“Dune”), and Basis. The Company generates revenue through the sale of Camp, Dune, and Basis’ consumer products through its e-commerce distribution channels. The Company satisfies its performance obligation upon shipment of product to its customers and recognizes shipping and handling costs as a fulfillment cost. Customers have 30 days from receipt of an item to return unopened, unused, or damaged items for a full refund. All returns are processed within the relevant recording period and accounted for as a reduction in revenue. The Company runs discounts from time to time to promote sales, improve market penetration, and increase customer retention. Any discounts are run as coupon codes applied at the time of transaction and accounted for as a reduction in gross revenue. The Company assesses variable consideration using the most likely amount method.
Deferred Revenue
Deferred revenue consists of billings and payments from clients in advance of revenue recognition. The Company has two types of deferred revenue, subscription revenue whereas the revenue is recognized over the subscription period and contract liabilities where the performance obligation was not satisfied. The Company will recognize the deferred revenue over the next year. As of March 31, 2022, the Company had deferred revenue of $211,676.
Accounts Receivable and Allowances
Accounts receivable are recorded and carried when the Company has performed the work in accordance with managed services, project, partner, consulting and branded content agreements. For example, we bill a managed service client monthly when we have updated their Amazon store, modified SEO or completed the other services listed in the agreement. For projects and branded content, we will bill the client and record the receivable once milestones are reached that are set in the agreement. 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. During the three months ended March 31, 2022, the Company recorded $92,987, as a bad debt expense. As of March 31, 2022, the Company has an allowance for doubtful accounts of $279,133.
Inventory
Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. Inventories are periodically evaluated to identify obsolete or otherwise impaired products and are written off when management determines usage is not probable. The Company estimates the balance of excess and obsolete inventory by analyzing inventory by age using last used and original purchase date and existing sales pipeline for which the inventory could be used. As of March 31, 2022, the Company has no valuation allowance.
Stock-Based Compensation
The Company recognizes compensation expense for all equity–based payments granted in accordance with Accounting Standards Codification (“ASC”) 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation over the requisite service period of the award. The company has a relatively low forfeiture rate of stock based compensation and forfeitures are recognized as they occur.
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.
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 volatility is derived from the Company’s historical data 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. Forfeitures are recognized as they occur.
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. The Company issues awards of equity instruments, such as stock options and restricted stock units, to employees and certain non-employee directors. Compensation expense related to these awards is based on the fair value of the underlying stock on the award date and is amortized over the service period, defined as the vesting period. The vesting period is generally one to three years. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock units. Compensation expense is reduced for actual forfeitures as they occur.
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 three months ended March 31, 2022 and 2021 presented in these condensed consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
The Company had the following common stock equivalents at March 31, 2022 and 2021:
March 31, | ||||||||
2022 | 2021 | |||||||
Options | 1,891,348 | 2,350,062 | ||||||
Warrants | 8,591,206 | 6,273,778 | ||||||
Convertible notes | - | 49,629 | ||||||
Totals | 10,482,554 | 8,673,469 |
Reclassifications
Certain prior year amounts in the condensed consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year’s presentation. These reclassifications did not affect the prior period’s total assets, total liabilities, stockholders’ deficit, net loss or net cash used in operating activities. During the year ended December 31, 2021, we adopted a change in presentation on our condensed consolidated statements of operations and comprehensive loss in order to present a gross profit line, the presentation of which is consistent with our peers. Under the new presentation, we began allocating payroll and related expenses, professional services and creator payouts. Prior periods have been revised to reflect this change in presentation.
Recently Adopted Accounting Guidance
In May 2021, the FASB issued authoritative guidance intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. (ASU 2021-04), “Derivatives and Hedging Contracts in Entity’s Own Equity (Topic 815). This guidance’s amendments provide measurement, recognition, and disclosure guidance for an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The updated guidance, which became effective for fiscal years beginning after December 15, 2021, did not have a material impact on the Company’s condensed consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”). ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both Subtopics. ASU 2020-6 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
In July 2021, the FASB issued ASU No. 2021-05, Lessors—Certain Leases with Variable Lease Payments (Topic 842), Which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate (hereafter referred to as “variable payments”) as an operating lease on the commencement date of the lease if specified criteria are met. ASU 2021-05 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company expects that there would be no material impact on the Company’s condensed consolidated financial statements upon the adoption of this ASU.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations — Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805), Which aims to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in recognition and payment terms that effect subsequent revenue recognition. ASU 2021-08 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company expects that there would be no material impact on the Company’s condensed consolidated financial statements upon the adoption of this ASU.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying condensed consolidated financial statements.
Note 3 – Going Concern
The Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the condensed consolidated financial statements, as of March 31, 2022, the Company had an accumulated deficit of $116 million, a net loss of $6.9 million and net cash used in operating activities of $5.1 million for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements.
On January 30, 2020, the World Health Organization declared the COVID-19 novel coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial impact will be to the Company, capital raising efforts and our operations may be negatively affected.
The Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private offering of its debt or equity securities, there can be no assurance that it will be able to do so on reasonable terms, or at all. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds by way of a public or private offering.
The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 – Inventory
Inventory was comprised of the following at March 31, 2022 and December 31, 2021:
March 31, 2022 | December 31, 2021 | |||||||
Raw Materials | $ | 16,904 | $ | - | ||||
Packaging | 20,342 | 2,907 | ||||||
Finished goods | 399,735 | 103,496 | ||||||
$ | 436,981 | $ | 106,403 |
Note 5 – Property and Equipment
Property and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
March 31, 2022 | December 31, 2021 | |||||||
Computer Equipment | $ | 376,436 | $ | 353,880 | ||||
Furniture and Fixtures | 124,787 | 102,416 | ||||||
Leasehold Improvements | 11,456 | 11,457 | ||||||
512,679 | 467,753 | |||||||
Less: Accumulated Depreciation | (373,200 | ) | (364,814 | ) | ||||
$ | 139,479 | $ | 102,939 |
Depreciation expense was $8,386 and $10,047 for the three months ended March 31, 2022 and 2021, respectively.
Note 6 – Notes Payable
Notes payable as of March 31, 2022 and December 31, 2021 is as follows:
Outstanding Principal as of | ||||||||||||||
March 31, 2022 | December 31, 2021 | Interest Rate | Maturity Date | |||||||||||
Seller’s Choice Note | $ | - | $ | 660,000 | 30 | % | September 2020 | |||||||
The April 2020 PPP Loan Agreement | 198,577 | 198,577 | 1 | % | May 2022 | |||||||||
The First December 2021 Loan Agreement | 140,931 | 185,655 | 10 | % | June 2023 | |||||||||
The Second December 2021 Loan Agreement | 323,094 | 313,979 | 14 | % | June 2022 | |||||||||
The First February 2022 Loan Agreement | 337,163 | - | - | % | June 2023 | |||||||||
The Second February 2022 Loan Agreement | 164,123 | - | 14 | % | June 2022 | |||||||||
First Denver Bodega LLC Loan | 50,000 | - | ||||||||||||
Second Denver Bodega LLC Loan | 15,724 | - | ||||||||||||
1,229,612 | 1,358,211 | |||||||||||||
Less: Debt Discount | (42,620 | ) | (15,547 | ) | ||||||||||
Less: Debt Issuance Costs | - | - | ||||||||||||
1,186,992 | 1,342,664 | |||||||||||||
Less: Current Debt | (1,151,087 | ) | (1,278,672 | ) | ||||||||||
Total Long-Term Debt | $ | 35,905 | $ | 63,992 |
Seller’s Choice Note
On September 11, 2019, the Company entered into Seller’s Choice Purchase Agreement with Home Revolution LLC. As a part of the consideration provided pursuant to the Seller’s Choice Acquisition, the Company issued the Seller’s Choice Note to the Seller in the principal amount of $660,000. The Seller’s Choice Note bears interest at a rate of 9.5% per annum and is payable on March 11, 2020 (the “Seller’s Choice Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts become due. Upon maturity the Company utilized an automatic extension up to 6 months. This resulted in a 5% increase in the interest rate every month the Seller’s Choice Note is outstanding. As of December 31, 2021, the Company is in default on the Seller’s Choice note.
On March 3, 2022, after substantial motion practice, Creatd successfully settled the dispute with Home Revolution, LLC for a total of $799,000, which includes $660,000 of note principal and $139,000 of accrued interest. The matter has been dismissed. As part of the settlement the Company recorded a Gain on extinguishment of debt of $147,256.
The April 2020 PPP Loan Agreement
On April 30, 2020, the Company was granted a loan with a principal amount of $282,432 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated April 30, 2020, matures on April 30, 2022, and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on October 30, 2020. The Note may be prepaid by the Company at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.
During the three months ended March 31, 2022, the Company accrued interest of $490.
The Company is in the process of returning the funds received from the Loan.
The First December 2021 Loan Agreement
On December 3, 2021, the Company entered into a loan agreement (the “First December 2021 Loan Agreement”) with a lender (the “First December 2021 Lender”) whereby the First December 2021 Lender issued the Company a promissory note of $191,975 (the “First December 2021 Note”). Pursuant to the First December 2021 Loan Agreement, the First December 2021 Note has an effective interest rate of 9%. The maturity date of the First December 2021 Note is June 3, 2023 (the “First December 2021 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First December 2021 Note are due.
During the three months ended March 31, 2022, the Company repaid $44,725 in principal.
The Second December 2021 Loan Agreement
On December 14, 2021, the Company entered into a secured loan agreement (the “Second December 2021 Loan Agreement”) with a lender (the “Second December 2021 Lender”), whereby the Second December 2021 Lender issued the Company a secured promissory note of $438,096 AUD or $329,127 United States Dollars (the “Second December 2021 Note”). Pursuant to the Second December 2021 Loan Agreement, the Second December 2021 Note has an effective interest rate of 14%. The maturity date of the Second December 2021 Note is June 30, 2022 (the “Second December 2021 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second December 2021 Loan Agreement are due. The loan is secured by the Australian research & development credit.
During the three months ended March 31, 2022, the Company accrued $15,123 AUD in interest.
The First February 2022 Loan Agreement
On February 22, 2022, the Company entered into a secured loan agreement (the “First February 2022 Loan Agreement”) with a lender (the “First February 2022 Lender”), whereby the First February 2022 Lender issued the Company a secured promissory note of $222,540 AUD or $159,223 United States Dollars (the “First February 2022 Note”). Pursuant to the First February 2022 Loan Agreement, the First February 2022 Note has an effective interest rate of 14%. The maturity date of the First February 2022 Note is June 30, 2022 (the “First February 2022 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First February 2022 Loan Agreement are due. The loan is secured by the Australian research & development credit.
During the three months ended March 31, 2022, the Company accrued $3,158 AUD in interest.
The Second February 2022 Loan Agreement
On February 22, 2022, the Company entered into a loan agreement (the “Second February 2022 Loan Agreement”) with a lender (the “Second February 2022 Lender”), whereby the Second February 2022 Lender issued the Company a promissory note of $337,163 (the “Second February 2022 Note”). Pursuant to the Second February 2022 Loan Agreement, the Second February 2022 Note has an effective interest rate of 11%. The maturity date of the Second February 2022 Note is February 22, 2023 (the “Second February 2022 Maturity Date”). The Company is required to make 10 monthly payment of $37,425.
The Company recorded a $37,163 debt discount relating to an original issue discount. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.
Denver Bodega LLC Notes payable
On March 7, 2022, The Company acquired five note payable agreements from the acquisition of Denver Bodega LLC. See note 12. The total liabilities of these notes amounted to $293,888. During the three months ended March 31, 2022, the Company repaid $228,164. As of March 31, 2022, the Company has two notes outstanding. The First Denver Bodega LLC Loan has a principal balance of $50,000, bears interest at 5%, and requires 36 monthly payments of $1,496. The second Denver Bodega LLC Loan has a principal balance of $15,724 and has a maturity date of April 16, 2022.
Note 7 – Convertible Notes Payable
The July 2021 Convertible Loan Agreement
On July 6, 2021, the Company entered into a loan agreement (the “July 2021 Loan Agreement”) with an individual (the “July 2021 Lender”), whereby the July 2021 Lender issued the Company a promissory note of $168,850 (the “July 2021 Note”). Pursuant to the July 2021 Loan Agreement, the July 2021 Note has interest of six percent (6%). The July 2021 Note matures on the first (12th) month anniversary of its issuance date.
Upon default or 180 days after issuance the July 2021 Note is convertible into shares of the Company’s common stock, par value $0.001 per share (“Conversion Shares”) equal to 75% of average the lowest three trading prices of the Company’s common stock on the fifteen-trading day immediately preceding the date of the respective conversion.
The Company recorded a $15,850 debt discount relating to an original issue discount and $3,000 of debt issuance costs related to fees paid to vendors relating to the offering. The debt discount and debt issuance costs are being accreted over the life of the note to accretion of debt discount and issuance cost.
During the three months ended March 31, 2022, the July 2021 Note became convertible. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Binomial model at the conversion date. The conversion feature of July 2021 Note gave rise to a derivative liability of $100,532. The Company recorded this as a debt discount. The debt discount is charged to accretion of debt discount over the remaining term of the convertible note.
During the three months ended March 31, 2022, the note holder converted $168,850 of principal and $4,605 of interest into 109,435 shares of the Company’s common stock. The unamortized debt discount of $96,803 was recorded to extinguishment of debt due to conversion.
Note 8 – Related Party
Equity raises
During the three months ended March 31, 2022, the company conducted two equity raises in which officers, directors, employees, and an affiliate of an officer cumulatively invested $421,001 for 240,571 shares of common stock and 240,571 warrants to purchase common stock.
Officer compensation
During the three months ended March 31, 2022 and 2021, the Company paid $35,637 and $20,082, respectively for living expenses for officers of the Company.
Note 9 – Derivative Liabilities
The Company has identified derivative instruments arising from convertible notes that have an option to convert at a variable number of shares in the Company’s convertible notes payable during the three months ended March 31, 2022. For the terms of the conversion features see Note 7. The Company had no derivative assets measured at fair value on a recurring basis as of March 31, 2022.
The Company utilizes a binomial option model for convertible notes that have an option to convert at a variable number of shares 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 inputs utilized in the application of the Binomial model included a stock price on valuation date, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate. The Company records the change in the fair value of the derivative as other income or expense in the condensed consolidated statements of operations.
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note adjusted to be on a continuous return basis to align with the Monte Carlo simulation model and binomial model.
Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
Volatility: The Company calculates the expected volatility based on the company’s historical stock prices with a look back period commensurate with the period to maturity.
Expected term: The Company’s remaining term is based on the remaining contractual maturity of the convertible notes.
The following are the changes in the derivative liabilities during the three months ended March 31, 2022.
Three Months Ended March 31, 2022 | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Derivative liabilities as January 1, 2022 | $ | - | $ | - | $ | - | ||||||
Addition | - | - | 100,532 | |||||||||
Changes in fair value | - | - | (3,729 | ) | ||||||||
Extinguishment | - | - | (96,803 | ) | ||||||||
Derivative liabilities as March 31, 2022 | $ | - | $ | - | $ | - |
Note 10 – Stockholders’ Equity
Shares Authorized
The Company is authorized to issue up to one hundred and twenty million (120,000,000) shares of capital stock, of which one hundred million (100,000,000) shares are designated as common stock, par value $0.001 per share, and twenty million (20,000,000) are designated as preferred stock, par value $0.001 per share.
Preferred Stock
Series E Convertible Preferred Stock
The Company has designated 8,000 shares of Series E Convertible Preferred stock and has 500 shares issued and outstanding as of March 31, 2022.
The shares of Series E Preferred Stock have a stated value of $1,000 per share and are convertible into Common Stock at the election of the holder of the Series E Preferred Stock, at any time following the Original Issue Date at a price of $4.12 per share, subject to adjustment. Each holder of Series E Preferred Stock shall be entitled to receive, with respect to each share of Series E Preferred Stock then outstanding and held by such holder, dividends on an as-converted basis in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock.
The holders of Series E Preferred Stock shall be paid pari passu with the holders of Common Stock with respect to payment of dividends and rights upon liquidation and shall have no voting rights. In addition, as further described in the Series E Designation, as long as any of the shares of Series E Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of Series E Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series E Preferred Stock or alter or amend this Series E Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of the Series E Preferred Stock, (c) increase the number of authorized shares of Series E Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Each share of Series E Preferred Stock shall be convertible, at any time and from time to time at the option of the holder of such shares, into that number of shares of Common Stock determined by dividing the Series E Stated Value by the Conversion Price, subject to certain beneficial ownership limitations.
Common Stock
On January 1, 2022, the Company issued 8,590 shares of its restricted common stock to settle outstanding vendor liabilities of $20,297. In connection with this transaction the Company also recorded a gain on settlement of vendor liabilities of $369.
On January 6, 2022, the Company issued 8,850 shares of its restricted common stock to consultants in exchange for services at a fair value of $19,736.
On February 24, 2022, the Company issued 50,000 shares of its restricted common stock to consultants in exchange for four months of services at a fair value of $69,000. These shares were recorded as common stock issued for prepaid services and will be expensed over the life of the consulting contract to share based payments. During the three months ended March 31, 2022 the Company recorded $33,110 to share based payments.
On March 1, 2022, the Company entered into securities purchase agreements with twenty-eight (28) accredited investors whereby, at the closing, such investors purchased from the Company an aggregate of 1,401,457 shares of the Company’s common stock and (ii) 1,401,457 warrants to purchase shares of common stock, for an aggregate purchase price of $2,452,550. Such warrants are exercisable for a term of five-years from the date of issuance, at an exercise price of $1.75 per share. The Company has recorded $40,000 to stock issuance costs, which are part of Additional Paid-in Capital.
On March 7, 2022, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with thirteen accredited investors resulting in the raise of $2,659,750 in gross proceeds to the Company. Pursuant to the terms of the Purchase Agreement, the Company agreed to sell in a registered direct offering an aggregate of 1,519,857 shares of the Company’s common stock together with warrants to purchase an aggregate of 1,519,857 shares of Common Stock at an exercise price of $1.75 per share. The warrants are immediately exercisable and will expire on March 9, 2027. The Company has recorded $75,000 to stock issuance costs, which are part of Additional Paid-in Capital.
On March 30, 2022, the Company issued 731 shares of its restricted common stock to consultants in exchange for services at a fair value of $863.
Stock Options
The following is a summary of the Company’s stock option activity:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
Balance – January 1, 2022 – outstanding | 2,902,619 | 7.07 | 4.71 | |||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Forfeited/Cancelled | (19,093 | ) | 15.36 | - | ||||||||
Balance – March 31, 2022 – outstanding | 2,883,526 | 7.02 | 4.48 | |||||||||
Balance – March 31, 2022 – exercisable | 1,891,348 | 7.60 | 4.27 |
Option Outstanding | Option Exercisable | |||||||||||||||||||||
Exercise price | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Remaining Contractual Life (in years) | |||||||||||||||||
$ | 7.02 | 2,883,526 | 4.48 | 7.60 | 1,891,348 | 4.27 |
During the year ended December 31, 2018 the Company granted options of 11,667 to consultants that has a fair value of $57,123. As of the date of this filing the company has not issued these options and they are recorded as an accrued liability on the Condensed Consolidated Balance Sheet.
Stock-based compensation for stock options has been recorded in the condensed consolidated statements of operations and totaled $1,027,083, for the three months ended March 31, 2022.
As of March 31, 2022, there was $1,649,068 of total unrecognized compensation expense related to unvested employee options granted under the Company’s share-based compensation plans that is expected to be recognized over a weighted average period of approximately 0.89 year.
Warrants
The Company applied fair value accounting for all share-based payments awards. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model.
Warrant Activities
The following is a summary of the Company’s warrant activity:
Warrant | Weighted Average Exercise Price | |||||||
Balance – January 1, 2022 – outstanding | 5,658,830 | 4.98 | ||||||
Granted | 2,988,487 | 2.12 | ||||||
Exercised | - | - | ||||||
Forfeited/Cancelled | (13,611 | ) | 12.00 | |||||
Balance – December 31, 2021 – outstanding | 8,633,706 | 3.82 | ||||||
Balance – December 31, 2021 – exercisable | 8,591,206 | $ | 3.81 |
Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
Exercise price | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
$ | 3.82 | 8,633,706 | 4.01 | 3.81 | 8,591,206 | 4.01 |
During the three months ended March 31, 2022, some of the Company’s warrants had a down-round provision triggered that also resulted in an additional 67,173 warrants to be issued. A deemed dividend of $81,728 was recorded to the Statements of Comprehensive Loss.
Note 11 – Commitments and Contingencies
Litigation
On or about June 25, 2020, Home Revolution, LLC (“Home Revolution”) filed a lawsuit in the United States District Court for the District of New Jersey, Home Revolution, LLC, et al. v. Jerrick Media Holdings, Inc. et al., Case No. 2:20-cv-07775-JMV-MF. The Complaint alleges, among other things, that Creatd, Inc. breached the Membership Interest Purchase Agreement, as modified, and ancillary transaction documents in connection with the acquisition of Seller’s Choice, LLC, from Home Revolution in September 2019. The Complaint additionally alleges violation of the New Jersey Uniform Securities Law, violations of the Exchange Act and Rule 10b-5 thereunder, fraud, equitable accounting, breach of fiduciary duty, conversion and unjust enrichment. Plaintiff also sought to have a receiver appointed by the Court to take over Creatd’s operations. After substantial motion practice, Creatd successfully settled this dispute from June 2020 for a total of $799,000, which includes $660,000 of note principal and $139,000 of accrued interest. The matter has been dismissed as of March 3, 2022.
On or about August 30, 2021, Robert W. Monster and Anonymize, Inc. (“Monster”) filed a lawsuit in the United States District Court for the Western District of Washington at Seattle, Robert W. Monster, et al. v. Creatd, Inc., et al. (Western District of Washington at Seattle 2:21-CV-1177). The Complaint alleges, among other things, that action for Declaratory Judgment under 28 U.S.C. § 2201 that Monster’s registration and use of the internet domain name VOCL.COM (the “Domain Name”) does not violate Creatd’s rights under the Anticybersquatting Consumer Protection Act (“ACPA”), 15 U.S.C. § 1125(d), or otherwise under the Lanham Act, 15 U.S.C. § 1051 et seq. Creatd claims trademark rights and certain other rights with respect to the term and the domain name VOCL.COM. Monster seeks a determination by the Court that Monster’s registration and/or use of VOCL.COM is not, and has not been in violation of the ACPA, and that Plaintiffs’ use of VOCL.COM constitutes neither a violation of the ACPA nor trademark infringement or dilution under the Lanham Act. Creatd believes the lawsuit lacks merit and will vigorously challenge the action. At this time, we are unable to estimate potential damage exposure, if any, related to the litigation.
Appointment of New Directors
On February 17, 2022, the Board of Directors (the “Board”) of the Company appointed Joanna Bloor, Brad Justus, and Lorraine Hendrickson to serve as members of the Board. Ms. Bloor has been nominated to, and will serve as, chair of the Compensation Committee, and to be a member of the Audit Committee and Nominating & Corporate Governance Committee. Mr. Justus has been nominated, and will serve as, chair of the Nominating & Corporate Governance Committee, and to be a member of the Compensation Committee and Audit Committee. Ms. Hendrickson has been nominated to, and will serve as, chair of the Audit Committee and to be a member of the Compensation and Nominating & Corporate Governance Committee.
Departure of Directors
On February 17, 2022, the Board received notice that effective immediately, Mark Standish resigned as Chair of the Board, Chair of the Audit Committee and as a member of the Compensation Committee and Nominating & Corporate Governance Committee; Leonard Schiller resigned as member of the Board, Chair of the Compensation Committee and as a member of the Audit Committee and Nominating & Corporate Governance Committee; and LaBrena Martin resigned as a member of the Board, Chair of the Nominating & Corporate Governance Committee and as a member of the Audit Committee and Compensation Committee. Such resignations are not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
Management Restructuring
On February 17, 2022, the Board of the Company approved the restructuring of the Company’s senior management team to eliminate the Co-Chief Executive Officer role, appointing Jeremy Frommer as Executive Chairman and Founder, and appointing Laurie Weisberg as Chief Executive Officer (the “Second Restructuring”). Prior to the Second Restructuring, Mr. Frommer and Ms. Weisberg served as the Company’s co-Chief Executive Officers and Ms. Weisberg served as the Company’s Chief Operating Officer. The Second Restructuring does not impact the role or functions of the Company’s Chief Financial Officer, Chelsea Pullano, or the role or functions of the Company’s President and Chief Operating Officer, Justin Maury.
Nasdaq Notice of Delisting
On January 4, 2021, the Company received a letter from the staff of The Nasdaq Capital Market (the “Exchange”) notifying the Company that the Exchange had determined to delist the Company’s common stock and warrants from the Exchange based on the Company’s non-compliance with the Exchange’s (i) $5 million stockholders’ equity requirement for initial listing pursuant to Nasdaq Listing Rule 5505(b), (ii) the $2.5 million stockholders’ equity requirement or any of the alternatives for continued listing pursuant to Nasdaq Listing Rule 5550(b), and (iii) the Company’s failure to provide material information to the Exchange pursuant to Nasdaq Listing Rule 5250(a)(1).
On February 11, 2021, the Company met with the Exchange’s Hearings Panel (the “Panel”) with respect to such determination, in accordance with the Exchange’s rules and, pursuant to such request by the Company to appeal, the delisting of the Company’s securities and the Form 25 Notification of Delisting filing was stayed pending the Panel’s decision.
On March 9, 2021, the Exchange notified the Company that the Panel had determined to continue the listing of the Company on the Exchange. Notwithstanding the Panel’s determination to continue the listing of the Company’s securities on the Exchange, the Panel issued a public reprimand letter to the Company, pursuant to Listing Rule 5815(c)(1)(D), based on its finding “that the Company failed to meet the initial listing criteria with respect to stockholders’ equity and failed to provide Nasdaq with material information with respect to that deficiency.” Specifically, the Panel found that the Company failed to comply with Listing Rule 5250(a)(1), requiring it to notify Nasdaq of certain significant developments that led to the Company’s prior representations about its ability to satisfy the initial listing requirements being inaccurate. In reaching its determination to continue the listing of the Company on Nasdaq, the Panel acknowledged that the Company has since demonstrated compliance with the initial listing requirement for stockholders’ equity and all other applicable initial listing requirements. The Panel also determined that the violations were inadvertent and that the Company had relied on advice of counsel at the time in its interactions with the Nasdaq staff (“Staff”). The Panel also acknowledged the Company’s efforts to implement structural changes within the Company to avoid similar misstatements in the future and that would allow for proper accounting and disclosure on an ongoing basis.
On March 1, 2022, the Company received a letter (the “Letter”) from the staff of The Nasdaq Capital Market (the “Exchange”) notifying the Company that the Exchange has determined to delist the Company’s common stock from the Exchange based on the Company’s Market Value of Listed Securities for the 30-consecutive day period between January 15, 2022 and February 25, 2022 falling short of the requirements under Listing Rule 5550(b)(2) (the “Rule”). Although a 180-day period is typically allowed for an issuer to regain compliance, the Company is not eligible to use such compliance period, as the Exchange had instituted a Panel Monitor through March 9, 2022.
The Company pursued an appeal to the Nasdaq Hearings Panel (the “Panel”) of such determination, in accordance with the Exchange’s rules and, pursuant to such request by the Company to appeal, the delisting of the Company’s securities and the Form 25 Notification of Delisting filing was stayed pending the Panel’s decision.
On April 22, 2022, the Exchange notified the Company that the Panel has determined to continue the listing of the Company on the Exchange, subject to the following conditions: (i) on or before May 16, 2022, the Company will file its Quarterly Report on Form 10-Q for the period ended March 31, 2022 demonstrating compliance with Nasdaq Listing Rule 550(b)(1) requiring shareholders’ equity of $2.5 million and (ii) on or before August 29, 2022, the Company will file a Form 8-K documenting the successful completion of any fund-raising activity that has taken place since April 14, 2022 and the Company’s long-term compliance with the continued listing requirements of the Nasdaq Capital Market.
The Panel has advised that August 29, 2022 represents the full extent of the Panel’s discretion to grant continued listing during the time the Company is non-compliant and should the Company fail to demonstrate compliance by such date, the Panel will issue a final delist determination and the Company will be suspended from trading on the Exchange.
Note 12 – Acquisitions
Denver Bodega, LLC d/b/a Basis
On March 7, 2022, the Company entered into a Membership Interest Purchase (the “Agreement”) with Henry Springer and Kyle Nowak (collectively the “Sellers”), whereby the Company purchased a majority stake in Denver Bodega, LLC, a Colorado limited liability company whose product is Basis, a direct-to-consumer functional beverage brand that makes high-electrolyte mixes meant to aid hydration. Pursuant to the Agreement, Creatd acquired all of the issued and outstanding membership interests of Denver Bodega, LLC for consideration of one dollar ($1.00), as well as the Company’s payoff, assumption, or satisfaction of certain debts and liabilities.
The following sets forth the components of the purchase price:
Purchase price: | ||||
Cash paid to seller | $ | 1 | ||
Total purchase price | 1 | |||
Assets acquired: | ||||
Cash | 44,977 | |||
Accounts Receivable | 2,676 | |||
Inventory | 194,365 | |||
Total assets acquired | 242,018 | |||
Liabilities assumed: | ||||
Accounts payable and accrued expenses | 127,116 | |||
Notes payable | 293,888 | |||
Total liabilities assumed | 421,004 | |||
Net liabilities acquired | (178,986 | ) | ||
Excess purchase price | $ | 178,987 |
The excess purchase price amounts are provisional and may be adjusted during the one-year measurement period as required by U.S. GAAP. The following table provides a summary of the preliminary allocation of the excess purchase price.
Goodwill | $ | 8,950 | ||
Trade Names & Trademarks | 8,949 | |||
Know-How and Intellectual Property | 107,392 | |||
Website | 8,949 | |||
Customer Relationships | 44,747 | |||
Excess purchase price | $ | 178,987 |
The goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition.
The following presents the unaudited pro-forma combined results of operations of the Company with Plant Camp, WHE, Dune, and Denver Bodega as if the entities were combined on January 1, 2021.
Three Months Ended | ||||
March 31, | ||||
2022 | ||||
Revenues | $ | 1,482,270 | ||
Net loss attributable to common shareholders | $ | (6,352,445 | ) | |
Net loss per share | $ | (0.36 | ) | |
Weighted average number of shares outstanding | 17,707,951 |
Three Months Ended | ||||
March 31, | ||||
2021 | ||||
Revenues | $ | 1,143,732 | ||
Net loss attributable to common shareholders | $ | (6,592,675 | ) | |
Net loss per share | $ | (0.66 | ) | |
Weighted average number of shares outstanding | 10,060,946 |
Note 13 – Segment Information
We operate in three reportable segments: Creatd Labs, Creatd Ventures, and Creatd Partners. Our segments were determined based on the economic characteristics of our products and services, our internal organizational structure, the manner in which our operations are managed and the criteria used by our Chief Operating Decision Maker (CODM) to evaluate performance, which is generally the segment’s operating losses.
Operations of: | Products and services provided: | |
Creatd Labs | Creatd Labs is the segment focused on development initiatives. Creatd Labs houses the Company’s proprietary technology, including its flagship platform, Vocal, as well as oversees the Company’s content creation framework, and management of its digital communities. Creatd Labs derives revenues from Vocal creator subscriptions, platform processing fees and technology licensing fees. | |
Creatd Ventures | Creatd Ventures builds, develops, and scales e-commerce brands. This segment generates revenues through product sales of its two majority-owned direct-to-consumer brands, Camp and Dune Glow Remedy. | |
Creatd Partners | Creatd Partners fosters relationships between brands and creators through its suite of agency services, including content marketing (Vocal for Brands), performance marketing (Seller’s Choice), and influencer marketing (WHE Agency). Creatd Partners derives revenues in the form of brand fees and talent management commissions. |
The following tables present certain financial information related to our reportable segments and Corporate:
As of March 31, 2022 | ||||||||||||||||||||
Creatd Labs | Creatd Ventures | Creatd Partners | Corporate | Total | ||||||||||||||||
Accounts receivable, net | $ | - | $ | 7,649 | $ | 382,956 | $ | - | $ | 390,605 | ||||||||||
Prepaid expenses and other current assets | 45,815 | - | - | 229,025 | 274,840 | |||||||||||||||
Deposits and other assets | 839,114 | - | - | 75,586 | 914,700 | |||||||||||||||
Intangible assets | - | 1,733,673 | 724,459 | 62,241 | 2,520,373 | |||||||||||||||
Goodwill | - | 34,089 | 1,349,696 | - | 1,383,785 | |||||||||||||||
Inventory | - | 436,981 | - | - | 436,981 | |||||||||||||||
All other assets | - | - | - | 3,419,106 | 3,419,106 | |||||||||||||||
Total Assets | $ | 884,929 | $ | 2,212,392 | $ | 2,457,111 | $ | 3,785,958 | $ | 9,340,390 | ||||||||||
Accounts payable and accrued liabilities | $ | 22,784 | $ | 1,129,605 | $ | 19,985 | $ | 3,659,729 | $ | 4,832,103 | ||||||||||
Note payable, net of debt discount and issuance costs | 487,217 | 65,724 | - | 634,051 | 1,186,992 | |||||||||||||||
Deferred revenue | 161,112 | 43,545 | 7,019 | - | 211,676 | |||||||||||||||
All other Liabilities | - | - | - | - | ||||||||||||||||
Total Liabilities | $ | 671,113 | $ | 1,238,874 | $ | 27,004 | $ | 4,293,780 | $ | 6,230,771 |
As of December 31, 2021 | ||||||||||||||||||||
Creatd Labs | Creatd Ventures | Creatd Partners | Corporate | Total | ||||||||||||||||
Accounts receivable, net | $ | - | $ | 2,884 | $ | 334,556 | $ | - | $ | 337,440 | ||||||||||
Prepaid expenses and other current assets | 48,495 | - | - | 188,170 | 236,665 | |||||||||||||||
Deposits and other assets | 626,529 | - | - | 92,422 | 718,951 | |||||||||||||||
Intangible assets | - | 1,637,924 | 783,676 | 11,241 | 2,432,841 | |||||||||||||||
Goodwill | - | 25,139 | 1,349,696 | - | 1,374,835 | |||||||||||||||
Inventory | - | 106,403 | - | - | 106,403 | |||||||||||||||
All other assets | - | - | - | 3,966,124 | 3,966,124 | |||||||||||||||
Total Assets | $ | 675,024 | $ | 1,772,350 | $ | 2,467,928 | $ | 4,257,957 | $ | 9,173,259 | ||||||||||
Accounts payable and accrued liabilities | $ | 9,693 | $ | 766,253 | $ | 6,232 | $ | 2,948,362 | $ | 3,730,540 | ||||||||||
Note payable, net of debt discount and issuance costs | 313,979 | - | - | 1,028,685 | 1,342,664 | |||||||||||||||
Deferred revenue | 161,112 | 13,477 | 59,570 | - | 234,159 | |||||||||||||||
All other Liabilities | - | - | - | 177,644 | 177,644 | |||||||||||||||
Total Liabilities | $ | 484,784 | $ | 779,730 | $ | 65,802 | $ | 4,154,691 | $ | 5,485,007 |
For the three months ended March 31, 2022 | ||||||||||||||||||||
Creatd Labs | Creatd Ventures | Creatd Partners | Corporate | Total | ||||||||||||||||
Net revenue | $ | 508,268 | $ | 254,690 | $ | 585,780 | $ | - | $ | 1,348,738 | ||||||||||
Cost of revenue | 706,196 | 409,969 | 456,005 | - | 1,572,170 | |||||||||||||||
Gross margin (loss) | (197,928 | ) | (155,279 | ) | 129,775 | - | (223,432 | ) | ||||||||||||
Research and development | 134,876 | - | 91,778 | - | 226,654 | |||||||||||||||
Marketing | 970,484 | 1,013,706 | - | 107,831 | 2,092,021 | |||||||||||||||
Stock based compensation | 251,907 | 226,298 | 248,548 | 354,039 | 1,080,792 | |||||||||||||||
General and administrative not including depreciation, amortization, or Impairment | 218,766 | 288,272 | 378,492 | 2,358,963 | 3,244,493 | |||||||||||||||
Depreciation and amortization | - | 71,271 | 31,599 | 39,022 | 141,892 | |||||||||||||||
Total operating expenses | $ | 1,576,033 | $ | 1,599,547 | $ | 750,417 | $ | 2,859,855 | $ | 6,785,852 | ||||||||||
Interest expense | (13,229 | ) | - | - | (667 | ) | (13,896 | ) | ||||||||||||
All other expenses | - | - | - | 142,132 | 142,132 | |||||||||||||||
Other expenses, net | (13,229 | ) | 141,465 | 128,236 | ||||||||||||||||
Loss before income tax provision | $ | (1,787,190 | ) | $ | (1,754,826 | ) | $ | (728,474 | ) | $ | (2,610,558 | ) | $ | (6,881,048 | ) |
For the three months ended March 31, 2021 | ||||||||||||||||
Creatd Labs | Creatd Partners | Corporate | Total | |||||||||||||
Net revenue | $ | 167,983 | $ | 575,930 | $ | - | $ | 743,913 | ||||||||
Cost of revenue | 242,134 | 625,016 | - | 867,150 | ||||||||||||
Gross margin | (74,151 | ) | (49,086 | ) | - | (123,237 | ) | |||||||||
Research and development | 195,691 | 133,161 | - | 328,852 | ||||||||||||
Marketing | 1,736,257 | 204,266 | 102,132 | 2,042,655 | ||||||||||||
Stock based compensation | 365,985 | 361,105 | 843,149 | 1,570,239 | ||||||||||||
General and administrative not including depreciation, amortization, or Impairment | 124,053 | 214,627 | 1,501,135 | 1,932,552 | ||||||||||||
Depreciation and amortization | 2,753 | 9,175 | 29,271 | 41,199 | ||||||||||||
Total operating expenses | $ | 2,424,740 | $ | 922,333 | $ | 2,475,687 | $ | 5,822,760 | ||||||||
Interest expense | (24,596 | ) | - | (174,075 | ) | (198,671 | ) | |||||||||
All other expenses | - | - | (498,569 | ) | (498,569 | ) | ||||||||||
Other expenses, net | (24,596 | ) | - | (672,644 | ) | (697,240 | ) | |||||||||
Loss before income tax provision | $ | (2,523,487 | ) | $ | (971,419 | ) | $ | (3,148,331 | ) | $ | (6,643,237 | ) |
Note 14 – Subsequent Events
Employment Agreements
On April 5, 2022, upon the recommendation of the Compensation Committee of the Board, the Board approved employment agreements with, and equity issuances for, (i) Jeremy Frommer, Executive Chairman, who will receive (a) an signing award of $80,000, (b) an annual salary of $420,000; (c) 121,000 options, to vest immediately with a strike price of $1.75, and (d) 50,000 shares of the Company’s restricted common stock; (ii) Laurie Weisberg, Chief Executive Officer, who will receive (a) an annual salary of $475,000; (b) 121,000 options, to vest immediately with a strike price of $1.75, and (c) 50,000 shares of the Company’s restricted common stock; (iii) Justin Maury, Chief Operating Officer & President, who will receive (a) an annual salary of $475,000 (b) 81,000 options, to vest immediately with a strike price of $1.75, and (c) 50,000 shares of the Company’s restricted common stock; and (iv) Chelsea Pullano, Chief Financial Officer, who will receive (a) an annual salary of $250,000; (b) 37,000 options, to vest immediately with a strike price of $1.75, and (c) 35,000 shares of the Company’s restricted common stock (collectively, the “Executive Employment Arrangements”).
Pursuant to the Executive Employment Arrangements, the Company entered into executive employment agreements with each of the respective executives as of April 5, 2022 (the “Executive Employment Agreements”). The Executive Employment Agreements contain customary terms, conditions and rights.
Creatd, Inc.
December 31, 2021 and 2020
Index to the Consolidated Financial Statements
www.rrbb.com | |
ROSENBERG RICH BAKER BERMAN & COMPANY | |
265 Davidson Avenue, Suite 210 ● Somerset, NJ 08873-4120 ● PHONE 908-231-1000 ● FAX 908-231-6894 | |
111 Dunnell Road, Suite 100 ● Maplewood, NJ 07040 ● PHONE 973-763-6363 ● FAX 973-763-4430 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Jerrick Media Holdings,Creatd, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Jerrick Media Holdings,Creatd, Inc. and Subsidiaries (the Company) as of December 31, 20192021 and 2018,2020, and the related statements of income, comprehensive income, (loss), changes in stockholders’ equity, (deficit), and cash flows for each of the years in the two-year periodthen ended, December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the years in the two-year periodthen ended, December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had an accumulated deficit at December 3 1, 2019, and a net loss and net cash used in operating activities for the year then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS ● CENTER FOR AUDIT QUALITY ● PRIVATE COMPANIES PRACTICE SECTION ● PRIME GLOBAL ● REGISTERED WITH THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
ROSENBERG RICH BAKER BERMAN & COMPANY |
To the Board of Directors and
Stockholders of Creatd, Inc. and Subsidiaries
Revenue Recognition
As described in Note 2 to the consolidated financial statements, the Company recognizes revenue in accordance with FASB Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires the Company to apply the following steps: (1) identify the contract with the customers; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies the performance obligations.
For subscription revenue recognized by the Company, the transaction price is reduced for consideration payable to customers. Because such consideration is paid to both customers and “freemium” subscribers, it requires significant estimates as to the allocation and timing of these reductions in the transaction price. These estimates required auditor judgment and consideration of some subjective factors in evaluating the estimates.
How the Critical Matter Was Addressed in the Audit
The primary audit procedures we performed to address this critical audit matter included:
● | Gained detailed understanding of processes related to subscription revenue, including evaluation of controls within the Company and the results of an audit of internal controls at the external payment processing organization. |
● | Verified the validity of customer payment data by testing the completeness and accuracy of the population of customer payments and by subscriber type. |
● | Critically evaluated management’s estimated allocations based on supportable information, including refined methodologies and estimates based on historical data for consideration paid to customers. |
Evaluation of Variable Interest Entities for Consolidation
As described in Note 2 to the consolidated financial statements, the Company’s management performs an ongoing assessment of its noncontrolling interests from investments in unrelated entities to determine if those entities are variable interest entities (VIEs), and if so, whether the Company is the primary beneficiary. If an entity in such a transaction, by design, meets the definition of a VIE and the Company determines that it, or a consolidated subsidiary is the primary beneficiary, the Company will include the VIE in its consolidated financial statements. If such an entity is deemed to not be consolidated, the Company records only its investment in equity securities as a marketable security or investment under the equity method, as applicable.
We identified management’s accounting for variable interest entities as a critical audit matter because there is significant judgment required by management to evaluate the contractual arrangements under the variable interest entity consolidation model. Auditing such considerations involved especially challenging auditor judgment in evaluating the appropriateness of the Company’s assessment and an increased audit effort.
ROSENBERG RICH BAKER BERMAN & COMPANY |
To the Board of Directors and
Stockholders of Creatd, Inc. and Subsidiaries
How the Critical Matter Was Addressed in the Audit
The primary audit procedures we performed to address this critical audit matter included:
● | Evaluating the reasonableness and appropriateness of management’s evaluation of each VIE and determination of primary beneficiary of the VIE through a decision-making workflow. |
● | Reading pertinent supporting organizational documents and agreements associated with each VIE and relevant business plans and documentation to agree key terms with those used in management’s evaluation of each VIE. |
● | Performed corroborative interviews with personnel involved in each entity analyzed to determine the business purpose of the transactions in the time frame the initial equity interests were acquired. |
Rosenberg Rich Baker Berman, P.A.
We have served as the Company’s auditor since 2018.
Somerset, New Jersey
March 30, 2020
April 6, 2022
F-2
Creatd, Inc.
Consolidated Balance Sheets
December 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 11,637 | $ | - | ||||
Prepaid expenses | 4,127 | - | ||||||
Accounts receivable | 50,849 | 6,500 | ||||||
Note receivable – related party | 11,450 | - | ||||||
Current portion of operating lease right of use asset | 105,763 | - | ||||||
Total Current Assets | 183,826 | 6,500 | ||||||
Property and equipment, net | 42,363 | 42,443 | ||||||
Intangible assets | 1,087,278 | - | ||||||
Goodwill | 1,035,795 | - | ||||||
Deferred offering costs | - | 143,146 | ||||||
Security deposit | 16,836 | 16,836 | ||||||
Operating lease right of use asset | 205,948 | - | ||||||
Total Assets | $ | 2,572,046 | $ | 208,925 | ||||
Liabilities and Stockholders’ Deficit | ||||||||
Current Liabilities | ||||||||
Cash overdraft | $ | - | $ | 33,573 | ||||
Accounts payable and accrued liabilities | 1,763,222 | 1,246,207 | ||||||
Demand loan | 225,000 | - | ||||||
Convertible Notes - related party, net of debt discount | 20,387 | - | ||||||
Convertible Notes, net of debt discount and issuance costs | 2,896,425 | - | ||||||
Current portion of operating lease payable | 105,763 | - | ||||||
Note payable - related party, net of debt discount | 5,129,342 | 1,223,073 | ||||||
Note payable, net of debt discount and issuance costs | 660,000 | 49,926 | ||||||
Unrecognized tax benefit | 68,000 | - | ||||||
Deferred revenue | 50,691 | 9,005 | ||||||
Warrant liability | 10,000 | - | ||||||
Deferred rent | - | 7,800 | ||||||
Total Current Liabilities | 10,928,830 | 2,569,584 | ||||||
Non-current Liabilities: | ||||||||
Operating lease payable | 201,944 | - | ||||||
Deferred rent | - | 6,150 | ||||||
Convertible Notes - related party, net of debt discount | - | 314 | ||||||
Convertible Notes, net of debt discount and issuance costs | - | 123,481 | ||||||
Total Non-current Liabilities | 201,944 | 129,945 | ||||||
Total Liabilities | 11,130,774 | 2,699,529 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Deficit | ||||||||
Common stock par value $0.001: 15,000,000 shares authorized; 9,178,937 issued and 9,019,087 outstanding as of December 31, 2019 and 6,475,340 issued and 6,447,673 outstanding as of December 31, 2018 | 9,179 | 6,475 | ||||||
Additional paid in capital | 36,385,699 | 34,100,327 | ||||||
Accumulated deficit | (44,580,437 | ) | (36,545,065 | ) | ||||
Accumulated other comprehensive income | (5,995 | ) | - | |||||
Less: Treasury stock, 159,850 and 27,667 shares, respectively | (367,174 | ) | (52,341 | ) | ||||
(8,558,728 | ) | (2,490,604 | ) | |||||
Total Liabilities and Stockholders’ Deficit | $ | 2,572,046 | $ | 208,925 |
December 31, 2021 | December 31, 2020 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 3,794,734 | $ | 7,906,782 | ||||
Accounts receivable, net | 337,440 | 90,355 | ||||||
Inventory | 106,403 | - | ||||||
Prepaid expenses and other current assets | 236,665 | 23,856 | ||||||
Total Current Assets | 4,475,242 | 8,020,993 | ||||||
Property and equipment, net | 102,939 | 56,258 | ||||||
Intangible assets | 2,432,841 | 960,611 | ||||||
Goodwill | 1,374,835 | 1,035,795 | ||||||
Marketable securities | - | 62,733 | ||||||
Deposits and other assets | 718,951 | 191,836 | ||||||
Minority investment in businesses | 50,000 | 217,096 | ||||||
Operating lease right of use asset | 18,451 | 239,158 | ||||||
Total Assets | $ | 9,173,259 | $ | 10,784,480 | ||||
Liabilities and Stockholders’ Deficit | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 3,730,540 | $ | 2,638,688 | ||||
Derivative liabilities | - | 42,231 | ||||||
Convertible Notes, net of debt discount and issuance costs | 159,193 | 897,516 | ||||||
Current portion of operating lease payable | 18,451 | 79,816 | ||||||
Note payable, net of debt discount and issuance costs | 1,278,672 | 1,221,539 | ||||||
Deferred revenue | 234,159 | 88,637 | ||||||
Total Current Liabilities | 5,421,015 | 4,968,427 | ||||||
Non-current Liabilities: | ||||||||
Note payable | 63,992 | 213,037 | ||||||
Operating lease payable | - | 157,820 | ||||||
Total Non-current Liabilities | 63,992 | 370,857 | ||||||
Total Liabilities | 5,485,007 | 5,339,284 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity | ||||||||
Series E Preferred stock, $0.001 par value, 500 and 7,738 shares issued and outstanding, respectively | - | 8 | ||||||
Common stock par value $0.001: 100,000,000 shares authorized; 16,691,170 issued and 16,685,513 outstanding as of December 31, 2021 and 8,736,378 issued and 8,727,028 outstanding as of December 31, 2020 | 16,691 | 8,737 | ||||||
Additional paid in capital | 111,563,618 | 77,505,013 | ||||||
Subscription receivable | - | (40,000 | ) | |||||
Less: Treasury stock, 5,657 and 5,657 shares, respectively | (62,406 | ) | (62,406 | ) | ||||
Accumulated deficit | (109,632,574 | ) | (71,928,922 | ) | ||||
Accumulated other comprehensive income | (78,272 | ) | (37,234 | ) | ||||
Total Creatd, Inc. Stockholders’ Equity | 1,807,057 | 5,445,196 | ||||||
Non-controlling interest in consolidated subsidiaries | 1,881,195 | - | ||||||
3,688,252 | 5,445,196 | |||||||
Total Liabilities and Stockholders’ Equity | $ | 9,173,259 | $ | 10,784,480 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Creatd, Inc.
Consolidated Statements of Comprehensive Income (Loss)Loss
For the Year Ended | For the Year Ended | |||||||
December 31, 2021 | December 31, 2020 | |||||||
Net revenue (related party of $80,000 and $0) | $ | 4,299,717 | $ | 1,212,870 | ||||
Cost of revenue | 5,300,037 | 1,495,042 | ||||||
Gross loss | (1,000,320 | ) | (282,172 | ) | ||||
Operating expenses | ||||||||
Research and development | 983,528 | 257,431 | ||||||
Marketing | 9,626,982 | 2,854,904 | ||||||
Stock based compensation | 9,661,168 | 6,861,163 | ||||||
Impairment of goodwill | 1,035,795 | - | ||||||
General and administrative | 11,060,927 | 6,027,665 | ||||||
Total operating expenses | 32,368,400 | 16,001,163 | ||||||
Loss from operations | (33,368,720 | ) | (16,283,335 | ) | ||||
Other income (expenses) | ||||||||
Other income | 396,223 | 512,071 | ||||||
Interest expense | (372,106 | ) | (1,376,902 | ) | ||||
Accretion of debt discount and issuance cost | (3,612,669 | ) | (4,303,072 | ) | ||||
Derivative expense | (100,502 | ) | - | |||||
Change in derivative liability | (1,096,287 | ) | 3,019,457 | |||||
Impairment of investment | (589,461 | ) | (11,450 | ) | ||||
Impairment of debt security | - | (50,000 | ) | |||||
Settlement of vendor liabilities | 59,792 | (126,087 | ) | |||||
Loss on marketable securities | - | (7,453 | ) | |||||
Gain (loss) on extinguishment of debt | 1,025,555 | (5,586,482 | ) | |||||
Gain on forgiveness of debt | 279,022 | 470 | ||||||
Other expenses, net | (4,010,433 | ) | (7,929,448 | ) | ||||
Loss before income tax provision and equity in net loss from unconsolidated investments | (37,379,153 | ) | (24,212,783 | ) | ||||
- | - | |||||||
Equity in net loss from equity method investment Income tax provision | - | - | ||||||
Net loss | (37,379,153 | ) | (24,212,783 | ) | ||||
Non-controlling interest in net loss | 86,251 | - | ||||||
Net Loss attributable to Creatd, Inc. | (37,292,902 | ) | (24,212,783 | ) | ||||
Deemed dividend | (410,750 | ) | (3,135,702 | ) | ||||
Inducement expense | - | - | ||||||
Net loss attributable to common shareholders | $ | (37,703,652 | ) | $ | (27,348,485 | ) | ||
Comprehensive loss | ||||||||
Net loss | (37,379,153 | ) | (24,212,783 | ) | ||||
Currency translation gain (loss) | (41,038 | ) | (31,239 | ) | ||||
Comprehensive loss | $ | (37,420,191 | ) | $ | (24,244,022 | ) | ||
Per-share data | ||||||||
Basic and diluted loss per share | $ | (2.98 | ) | $ | (5.68 | ) | ||
Weighted average number of common shares outstanding | 12,652,470 | 4,812,153 |
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Net revenue | $ | 453,006 | $ | 80,898 | ||||
Gross margin | 453,006 | 80,898 | ||||||
Operating expenses | ||||||||
Compensation | 2,204,265 | 2,378,664 | ||||||
Consulting fees | 1,624,786 | 1,086,557 | ||||||
Research and development | 1,131,180 | 636,180 | ||||||
General and administrative | 2,709,753 | 1,665,752 | ||||||
Total operating expenses | 7,669,984 | 5,767,153 | ||||||
Loss from operations | (7,216,978 | ) | (5,686,255 | ) | ||||
Other expenses | ||||||||
Other income | 292,387 | - | ||||||
Interest expense | (612,830 | ) | (923,008 | ) | ||||
Accretion of debt discount and issuance cost | (348,665 | ) | (2,090,286 | ) | ||||
Settlement of vendor liabilities | 13,574 | 122,886 | ||||||
Loss on extinguishment of debt | (162,860 | ) | (3,453,137 | ) | ||||
Gain (loss) on settlement of debt | - | 16,258 | ||||||
Other expenses, net | (818,394 | ) | (6,327,287 | ) | ||||
Loss before income tax provision | (8,035,372 | ) | (12,013,542 | ) | ||||
Income tax provision | - | - | ||||||
Net loss | (8,035,372 | ) | (12,013,542 | ) | ||||
Deemed dividend | - | 174,232 | ||||||
Inducement expense | - | 2,016,634 | ||||||
Net loss attributable to common shareholders | (8,035,372 | ) | (14,204,408 | ) | ||||
Other comprehensive income | ||||||||
Currency translation loss | (5,995 | ) | - | |||||
Comprehensive loss | $ | (8,041,367 | ) | $ | (14,204,408 | ) | ||
Per-share data | ||||||||
Basic and diluted loss per share | $ | (0.98 | ) | $ | (4.16 | ) | ||
Weighted average number of common shares outstanding | 8,223,410 | 3,418,491 |
The accompanying notes are an integral part of these consolidated financial statements.
Creatd, Inc.
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Years Ended December 31, 20192021 and 20182020
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Treasury stock | Additional Paid In | Accumulated | Other Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | 31,581 | 31 | 8,063 | $ | 8 | 1,976,034 | $ | 1,976 | (27,667 | ) | $ | (19,007 | ) | $ | 14,424,831 | $ | (21,775,107 | ) | $ | - | $ | (7,367,307 | ) | |||||||||||||||||||||||||
Common stock issued to settle vendor liabilities | - | - | - | - | 938 | 1 | - | - | 3,374 | - | - | 3,375 | ||||||||||||||||||||||||||||||||||||
Stock based compensation | - | - | - | - | 81,849 | 81 | - | - | 547,224 | - | - | 547,305 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock and warrants in exchange for Series A and accrued dividend | (31,581 | ) | (31 | ) | - | - | 1,112,488 | 1,112 | - | - | 2,199,011 | - | - | 2,200,092 | ||||||||||||||||||||||||||||||||||
Issuance of common stock and warrants in exchange for series B and accrued dividend | - | - | (8,063 | ) | (8 | ) | 230,842 | 231 | - | - | 468,953 | - | - | 469,176 | ||||||||||||||||||||||||||||||||||
Cash received for common stock and warrants | - | - | - | - | 557,492 | 557 | - | - | 2,786,905 | - | - | 2,787,462 | ||||||||||||||||||||||||||||||||||||
Common stock and warrants issued upon conversion of notes payable | - | - | - | - | 2,256,448 | 2,256 | - | - | 11,938,507 | - | - | 11,940,763 | ||||||||||||||||||||||||||||||||||||
Stock issuance cost | - | - | - | - | 210,000 | 210 | - | - | (161,613 | ) | - | - | (161,403 | ) | ||||||||||||||||||||||||||||||||||
Stock warrants issued with note payable | - | - | - | - | - | - | - | - | 1,660,986 | - | - | 1,660,986 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock for prepaid services | - | - | - | - | 30,500 | 31 | - | - | 116,269 | - | - | 116,300 | ||||||||||||||||||||||||||||||||||||
Common stock issued with note payable | - | - | - | - | 18,750 | 19 | - | - | 77,468 | - | - | 77,487 | ||||||||||||||||||||||||||||||||||||
BCF issued with note payable | - | - | - | - | - | - | - | - | 38,413 | - | - | 38,413 | ||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | - | - | - | - | - | - | - | (33,334 | ) | - | - | - | (33,334 | ) | ||||||||||||||||||||||||||||||||||
Inducement expense | - | - | - | - | - | - | - | - | - | (2,016,635 | ) | - | (2,016,635 | ) | ||||||||||||||||||||||||||||||||||
Dividends | - | - | - | - | - | - | - | - | - | (739,782 | ) | - | (739,782 | ) | ||||||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2018 | - | - | - | - | - | - | - | - | - | (12,013,542 | ) | - | (12,013,542 | ) | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | - | - | - | - | 6,475,340 | 6,475 | (27,667 | ) | (52,341 | ) | 34,100,327 | (36,545,065 | ) | - | (2,490,604 | ) | ||||||||||||||||||||||||||||||||
Stock based compensation | - | - | - | - | 125,227 | 126 | - | - | 436,980 | - | - | 437,106 | ||||||||||||||||||||||||||||||||||||
Cash received for common stock and warrants | - | - | - | - | 129,966 | 130 | - | - | 649,699 | - | - | 649,829 | ||||||||||||||||||||||||||||||||||||
Tender offering | - | - | - | - | 2,100,173 | 2,100 | - | - | (2,100 | ) | - | - | - | |||||||||||||||||||||||||||||||||||
Stock issuance cost | - | - | - | - | - | - | - | - | (178,146 | ) | - | - | (178,146 | ) | ||||||||||||||||||||||||||||||||||
Stock warrants issued with note payable | - | - | - | - | - | - | - | - | 427,692 | - | - | 427,692 | ||||||||||||||||||||||||||||||||||||
Purchase of treasury stock and warrants | - | - | - | - | - | - | (132,183 | ) | (314,833 | ) | (271,658 | ) | - | - | (586,491 | ) | ||||||||||||||||||||||||||||||||
Shares issued for acquisition | - | - | - | - | 333,334 | 333 | - | - | 1,166,336 | - | - | 1,166,669 | ||||||||||||||||||||||||||||||||||||
BCF issued with note payable | - | - | - | - | - | - | - | - | 4,444 | - | - | 4,444 | ||||||||||||||||||||||||||||||||||||
Shares issued to settle vendor payable | - | - | - | - | 14,897 | 15 | - | - | 52,125 | - | - | 52,140 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | - | - | - | - | - | (5,995 | ) | (5,995 | ) | ||||||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2019 | - | - | - | - | - | - | - | - | - | (8,035,372 | ) | - | (8,035,372 | ) | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | - | $ | - | - | $ | - | 9,178,937 | $ | 9,179 | (159,850 | ) | $ | (367,174 | ) | $ | 36,385,699 | $ | (44,580,437 | ) | $ | (5,995 | ) | $ | (8,558,728 | ) |
Series E Preferred Stock | Common Stock | Treasury stock | Additional Paid In | Subscription | Accumulated | Non-Controlling | Other Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Interest | Income | Equity | |||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | - | $ | - | 3,059,646 | $ | 3,059 | (53,283 | ) | $ | (367,174 | ) | $ | 36,391,819 | $ | - | $ | (44,580,437 | ) | $ | - | $ | (5,995 | ) | $ | (8,558,728 | ) | ||||||||||||||||||||||
Shares issued with notes payable | - | - | 59,774 | 60 | - | - | 243,685 | - | - | - | - | 243,745 | ||||||||||||||||||||||||||||||||||||
Stock based compensation | - | - | 169,800 | 170 | - | - | 5,743,970 | - | - | - | - | 5,744,140 | ||||||||||||||||||||||||||||||||||||
Shares issued to settle vendor liabilities | - | - | 23,565 | 24 | - | - | 235,607 | - | - | - | - | 235,631 | ||||||||||||||||||||||||||||||||||||
Conversion of warrants to stock | - | - | 7,239 | 7 | - | - | (4,236 | ) | - | - | - | - | (4,229 | ) | ||||||||||||||||||||||||||||||||||
Conversion of options to stock | - | - | 229,491 | 229 | - | - | 1,116,802 | - | - | - | - | 1,117,031 | ||||||||||||||||||||||||||||||||||||
Stock warrants issued with note payable | - | - | - | - | - | - | 1,078,501 | - | - | - | - | 1,078,501 | ||||||||||||||||||||||||||||||||||||
Cancellation of Treasury stock | - | - | (50,650 | ) | (50 | ) | 54,343 | 374,184 | (374,134 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Purchase of treasury stock | - | - | - | - | (6,717 | ) | (69,416 | ) | - | - | - | - | - | (69,416 | ) | |||||||||||||||||||||||||||||||||
Recognition of intrinsic value of beneficial conversion features – convertible notes | - | - | - | - | - | - | 3,099,837 | - | - | - | - | 3,099,837 | ||||||||||||||||||||||||||||||||||||
Cash received for common stock and warrants | - | - | 1,725,000 | 1,725 | - | - | 7,028,355 | - | - | - | - | 7,030,080 | ||||||||||||||||||||||||||||||||||||
Cash received for preferred series E and warrants | 7,738 | 8 | - | - | - | - | 6,710,417 | (40,000 | ) | - | - | - | 6,670,425 | |||||||||||||||||||||||||||||||||||
Common stock and warrants issued upon conversion of notes payable | - | - | 768,225 | 769 | - | - | 3,182,898 | - | - | - | - | 3,183,667 | ||||||||||||||||||||||||||||||||||||
Common stock and warrants issued upon extinguishment of notes payable | 2,744,288 | 2,744 | - | - | 9,915,790 | - | - | - | - | 9,918,534 | ||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | - | - | - | - | - | (31,239 | ) | (31,239 | ) | ||||||||||||||||||||||||||||||||||
Dividends | - | - | - | - | - | - | 3,135,702 | - | (3,135,702 | ) | - | - | - | |||||||||||||||||||||||||||||||||||
Net loss for the year ended December 31, 2020 | - | - | - | - | - | - | - | - | (24,212,783 | ) | - | - | (24,212,783 | ) | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | 7,738 | $ | 8 | 8,736,378 | $ | 8,737 | (5,657 | ) | $ | (62,406 | ) | $ | 77,505,013 | $ | (40,000 | ) | $ | (71,928,922 | ) | $ | - | $ | (37,234 | ) | $ | 5,445,196 | ||||||||||||||||||||||
Stock based compensation | - | - | 388,411 | 388 | - | - | 9,446,687 | - | - | - | - | 9,447,075 | ||||||||||||||||||||||||||||||||||||
Shares issued for prepaid services | - | - | 50,000 | 50 | - | - | 226,450 | - | - | - | - | 226,500 | ||||||||||||||||||||||||||||||||||||
Shares issued to settle vendor liabilities | - | - | 294,895 | 295 | - | - | 791,091 | - | - | - | - | 791,386 | ||||||||||||||||||||||||||||||||||||
Common stock issued upon conversion of notes payable | - | - | 1,128,999 | 1,129 | - | - | 5,155,865 | - | - | - | - | 5,156,994 | ||||||||||||||||||||||||||||||||||||
Exercise of warrants to stock | - | - | 2,250,691 | 2,251 | - | - | 9,484,972 | - | - | - | - | 9,487,223 | ||||||||||||||||||||||||||||||||||||
Cash received for common stock and warrants | - | - | 1,687,500 | 1,687 | - | - | 5,665,263 | - | - | - | - | 5,666,950 | ||||||||||||||||||||||||||||||||||||
Cash received for preferred series E and warrants | 40 | - | - | - | - | - | (4,225 | ) | 40,000 | - | - | - | 35,775 | |||||||||||||||||||||||||||||||||||
Conversion of preferred series E to stock | (7,278 | ) | (8 | ) | 1,766,449 | 1,766 | - | - | (1,758 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Stock warrants issued with note payable | - | - | - | - | - | - | 1,665,682 | - | - | - | - | 1,665,682 | ||||||||||||||||||||||||||||||||||||
Shares issued for acquisition | - | - | 387,847 | 388 | - | - | 1,217,828 | - | - | 1,967,446 | - | 3,185,662 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | - | - | - | - | - | (41,038 | ) | (41,038 | ) | ||||||||||||||||||||||||||||||||||
Dividends | - | - | - | - | - | - | 410,750 | - | (410,750 | ) | - | - | - | |||||||||||||||||||||||||||||||||||
Net loss for the year months ended December 31, 2021 | - | - | - | - | - | - | - | - | (37,292,902 | ) | (86,251 | ) | - | (37,379,153 | ) | |||||||||||||||||||||||||||||||||
Balance, December 31, 2021 | 500 | $ | - | 16,691,170 | $ | 16,691 | (5,657 | ) | $ | (62,406 | ) | $ | 111,563,618 | $ | - | $ | (109,632,574 | ) | $ | 1,881,195 | $ | (78,272 | ) | $ | 3,688,252 |
SeeThe accompanying notes to theare an integral part of these consolidated financial statementsstatements.
Creatd, Inc.
Condensed Consolidated Statements of Cash Flows
For the Year Ended | For the Year Ended | |||||||
December 31, 2021 | December 31, 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (37,379,153 | ) | $ | (24,162,783 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 397,440 | 157,760 | ||||||
Impairment of investments | 589,461 | 11,450 | ||||||
Impairment of intangible assets | 1,727,032 | - | ||||||
Accretion of debt discount and issuance cost | 3,612,669 | 4,303,072 | ||||||
Share-based compensation | 9,661,174 | 6,861,163 | ||||||
Bad debt expense | 110,805 | 53,692 | ||||||
Change in fair value of derivative liabilities | - | (3,019,457 | ) | |||||
Gain on marketable securities | - | 7,453 | ||||||
Gain on Forgiveness of debt | (279,022 | ) | - | |||||
Settlement of vendor liabilities | (59,692 | ) | 126,087 | |||||
Change in fair value of derivative liability | 1,096,287 | - | ||||||
Derivative Expense | 100,502 | - | ||||||
(Gain) loss on extinguishment of debt | (1,025,655 | ) | 5,586,012 | |||||
Non cash lease expense | 82,511 | 72,553 | ||||||
Equity interest granted for other income | (123,710 | ) | - | |||||
Equity in net loss from unconsolidated investment | 16,413 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses | (174,819 | ) | (19,729 | ) | ||||
Inventory | (39,182 | ) | - | |||||
Accounts receivable | (80,407 | ) | (93,198 | ) | ||||
Deposits and other assets | (527,115 | ) | (4,829 | ) | ||||
Deferred revenue | 144,851 | 37,946 | ||||||
Accounts payable and accrued expenses | 1,714,902 | 2,880,392 | ||||||
Unrecognized tax benefit | - | (68,000 | ) | |||||
Operating lease liability | (84,099 | ) | (70,071 | ) | ||||
Net Cash Used In Operating Activities | (20,518,807 | ) | (7,340,487 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Issuance of note receivable | - | - | ||||||
Cash paid for property and equipment | (95,935 | ) | (44,988 | ) | ||||
Deposits | - | (175,000 | ) | |||||
Cash paid for minority investment in business | (325,000 | ) | - | |||||
Cash paid for equity method investment | (510,000 | ) | (115,000 | ) | ||||
Cash paid for investments in marketable securities | - | (248,272 | ) | |||||
Sale of marketable securities | - | 36,048 | ||||||
Cash consideration for acquisition | (225,947 | ) | - | |||||
Purchases of digital assets | (11,241 | ) | - | |||||
Net Cash Used In Investing Activities | (1,168,123 | ) | (547,212 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from the exercise of warrant | 9,487,223 | - | ||||||
Net proceeds from issuance of notes | 747,937 | 1,501,661 | ||||||
Repayment of notes | (456,233 | ) | (492,665 | ) | ||||
Proceeds from issuance of demand loan | - | 440,000 | ||||||
Repayment of demand Loan | - | (90,000 | ) | |||||
Proceeds from issuance of convertible note | 3,610,491 | 3,650,835 | ||||||
Repayment of convertible notes | (941,880 | ) | (1,658,001 | ) | ||||
Proceeds from issuance of convertible notes - related party | - | 50,000 | ||||||
Proceeds from issuance of note payable - related party | - | 152,989 | ||||||
Repayment of note payable - related party | (538,574 | ) | (983,752 | ) | ||||
Proceeds from issuance of common stock and warrants | 5,666,951 | 6,662,015 | ||||||
Cash received for preferred series E and warrants | - | 6,670,417 | ||||||
Purchase of treasury stock and warrants | - | (89,416 | ) | |||||
Net Cash Provided By Financing Activities | 17,615,915 | 15,814,083 | ||||||
Effect of exchange rate changes on cash | (41,038 | ) | (31,239 | ) | ||||
Net Change in Cash | (4,112,048 | ) | 7,895,145 | |||||
Cash - Beginning of Year | 7,906,782 | 11,637 | ||||||
Cash - End of year | $ | 3,794,734 | $ | 7,906,782 | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
Cash Paid During the Year for: | ||||||||
Income taxes | $ | - | $ | - | ||||
Interest | $ | 60,073 | $ | 178,461 | ||||
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Settlement of vendor liabilities | $ | 168,667 | $ | 475,220 | ||||
Conversion of marketable debt securities into equity securities | $ | - | $ | 102,096 | ||||
Beneficial conversion feature on convertible notes | $ | - | $ | 3,099,837 | ||||
Warrants issued with debt | $ | 1,665,682 | $ | 1,078,500 | ||||
Shares issued with debt | $ | - | $ | 243,741 | ||||
Issuance of common stock for prepaid services | $ | 226,500 | $ | 585,000 | ||||
Cancellation of Treasury stock | $ | - | $ | 374,184 | ||||
Conversion of note payable and interest into convertible notes | $ | - | $ | 385,000 | ||||
Conversion of Demand loan into notes payable | $ | - | $ | 200,000 | ||||
Deferred offering costs | $ | 4,225 | $ | - | ||||
Common stock and warrants issued upon conversion of notes payable | $ | 5,156,994 | $ | 11,217,362 | ||||
Shares issued for acquisition | $ | 1,318,218 | $ | - | ||||
Conversion of note payable and interest into convertible notes | $ | - | $ | 385,000 | ||||
Reduction of ROU asset related to re-measurement of lease liability | $ | 135,086 | $ | - | ||||
Repayment of promissory notes from Australian R&D credits | $ | 146,630 | $ | - |
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (8,035,372 | ) | $ | (12,013,542 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 57,492 | 42,218 | ||||||
Accretion of debt discount and issuance cost | 348,665 | 2,090,286 | ||||||
Share-based compensation | 437,106 | 346,954 | ||||||
Bad debt expense | 33,503 | - | ||||||
Gain (loss) on settlement of vendor liabilities | (13,574 | ) | (122,886 | ) | ||||
Gain (loss) on settlement of debt | - | (16,257 | ) | |||||
Gain on extinguishment of debt | 162,860 | 3,610,049 | ||||||
Amortization of ROU Asset | 60,764 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Operating Lease liability | (56,240 | ) | ||||||
Prepaid expenses | (3,458 | ) | 40,680 | |||||
Accounts receivable | (54,174 | ) | (5,175 | ) | ||||
Security deposit | - | 164 | ||||||
Deferred revenue | 41,686 | 9,005 | ||||||
Accounts payable and accrued expenses | 985,716 | 1,039,690 | ||||||
Unrecognized tax benefit | 68,000 | - | ||||||
Warrant liability | 10,000 | |||||||
Deferred rent | - | 6,000 | ||||||
Net Cash Used In Operating Activities | (5,957,027 | ) | (4,972,814 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Issuance of note receivable | (11,450 | ) | - | |||||
Cash paid for property and equipment | (27,887 | ) | (27,605 | ) | ||||
Cash consideration for acquisition | (340,000 | ) | - | |||||
Net cash received in business combination | 16,049 | - | ||||||
Net Cash Used In Investing Activities | (363,288 | ) | (27,605 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Cash overdraft | (33,573 | ) | 33,573 | |||||
Net proceeds from issuance of notes | - | 791,833 | ||||||
Repayment of notes | (50,000 | ) | (264,939 | ) | ||||
Proceeds from issuance of demand loan | 250,000 | 50,000 | ||||||
Repayment of demand Loan | (25,000 | ) | - | |||||
Proceeds from issuance of convertible note | 2,472,525 | 1,525,154 | ||||||
Repayment of convertible notes | - | (226,250 | ) | |||||
Proceeds from issuance of convertible notes - related party | - | 299,852 | ||||||
Proceeds from issuance of note payable - related party | 4,186,500 | 465,000 | ||||||
Repayment of note payable - related party | (501,500 | ) | (205,000 | ) | ||||
Proceeds from issuance of common stock and warrants | 684,829 | 2,787,462 | ||||||
Repayment of line of credit | - | (44,996 | ) | |||||
Cash paid to preferred holder | - | (87,111 | ) | |||||
Cash paid for debt issuance costs | - | (166,761 | ) | |||||
Cash paid for stock issuance costs | (35,000 | ) | (35,115 | ) | ||||
Purchase of treasury stock and warrants | (575,834 | ) | (33,334 | ) | ||||
Net Cash Provided By Financing Activities | 6,337,947 | 4,889,368 | ||||||
Effect of exchange rate changes on cash | (5,995 | ) | - | |||||
Net Change in Cash | 11,637 | (111,051 | ) | |||||
Cash - Beginning of Year | - | 111,051 | ||||||
Cash - End of Year | $ | 11,637 | $ | - | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
Cash Paid During the Year for: | ||||||||
Income taxes | $ | - | $ | - | ||||
Interest | $ | 55,987 | $ | 64,892 | ||||
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Settlement of vendor liabilities | $ | 32,500 | $ | 123,750 | ||||
Deferred offering costs | $ | 143,146 | $ | 143,146 | ||||
Beneficial conversion feature on convertible notes | $ | 4,444 | $ | 38,413 | ||||
Accrued dividends | $ | - | $ | 174,232 | ||||
Warrants issued with debt | $ | 427,692 | $ | 1,133,820 | ||||
Issuance of common stock for prepaid services | $ | - | $ | 116,300 | ||||
Operating Lease liability | $ | 349,997 | $ | - | ||||
Conversion of note payable and interest into convertible notes | $ | - | $ | 341,442 | ||||
Warrants with amendment to notes payable | $ | - | $ | 135,596 | ||||
Issuance of common stock and warrants in exchange for Series A and accrued dividend | $ | - | $ | 2,200,123 | ||||
Issuance of common stock and warrants in exchange for series B and accrued dividend | $ | - | $ | 469,184 | ||||
Common stock and warrants issued upon conversion of notes payable | $ | - | $ | 11,940,763 | ||||
Promissory Note issued for acquisition | $ | 660,000 | $ | - | ||||
Shares issued for acquisition | $ | 1,166,669 | $ | - | ||||
Conversion of note payable - related party and interest into convertible notes - related party | $ | 4,119 | $ | - | ||||
Conversion of accounts payable and interest into convertible notes | $ | 318,678 | $ | - | ||||
Conversion of interest into note payable - related party | $ | 128,992 | $ | - | ||||
Leasehold improvements reclassified to right-of-use asset | $ | 22,478 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
Creatd, Inc.
December 31, 2019 and 20182021
Notes to the Consolidated Financial Statements
Note 1 – Organization and Operations
Creatd, Inc., formerly Jerrick Media Holdings, Inc. (“we,” “us,” the “Company,” or “Jerrick Media” or “Jerrick”“Creatd”), is a technology company focused on the development of digital communities, marketing branded digital content,providing economic opportunities for creators, which it accomplishes through its four main business pillars: Creatd Labs, Creatd Partners, Creatd Ventures, and e-commerce opportunities. Jerrick’s content distribution platform,Creatd Studios. Creatd’s flagship product, Vocal, delivers a robust long-form, digital publishing platform organized into highly engaged niche-communities capable of hosting all forms of rich media content. Through Jerrick’sCreatd’s proprietary algorithm dynamics, Vocal enhances the visibility of content and maximizes viewership, providing advertisers access to target markets that most closely match their interests.
The Company was originally incorporated under the laws of the State of Nevada on December 30, 1999 under the name LILM, Inc. The Company changed its name on December 3, 2013 to Great Plains Holdings, Inc. as part of its plan to diversify its business.
On February 5, 2016 (the “Closing Date”), GTPH, GPH Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of GTPH (“Merger Sub”), and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), entered into an Agreement and Plan of Merger (the “Merger”) pursuant to which the Merger Sub was merged with and into Jerrick, with Jerrick surviving as a wholly-owned subsidiary of GTPH (the “Merger”). GTPH acquired, pursuant to the Merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick Shareholders”), pro-rata, a total of 1,425,000475,000 shares of GTPH’s common stock. In connection therewith, GTPH acquired 33,415 shares of Jerrick’s Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred Stock (the “Jerrick Series B Preferred”).
In connection with the Merger, on the Closing Date, GTPH and Kent Campbell entered into a Spin-Off Agreement (the “Spin-Off Agreement”), pursuant to which Mr. Campbell purchased from GTPH (i) all of GTPH’s interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all of GTPH’s interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 39,091 shares of GTPH’s Common Stock held by Mr. Campbell. In addition, Mr. Campbell assumed all debts, obligations and liabilities of GTPH, including any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.
Upon closing of the Merger on February 5, 2016, the Company changed its business plan to that of Jerrick Media.Jerrick.
Effective February 28, 2016, GTPH entered into an Agreement and Plan of Merger (the “Statutory Merger Agreement”) with Jerrick, pursuant to which GTPH became the parent company of Jerrick Ventures, LLC, a wholly-owned operating subsidiary of Jerrick (the “Statutory Merger”) and GTPH changed its name to Jerrick Media Holdings, Inc. to better reflect its new business strategy.
On September 11, 2019, the Company acquired 100% of the membership interests of Seller’s Choice, LLC, a New Jersey limited liability company (“Seller’s Choice”). Seller’s Choice is a digital e-commerce agency based in New Jersey (see Note 4).Jersey.
On September 9, 2020, the Company filed a certificate of amendment with the Secretary of State of the State of Nevada to change our name to “Creatd, Inc.”, which became effective on September 10, 2020.
On June 4, 2021, the Company acquired 89% of the membership interests of Plant Camp, LLC, a Delaware limited liability company (“Plant Camp”), which the Company subsequently rebranded as Camp. Plant Camp is a direct-to-consumer (DTC) food brand which creates healthy upgrades to classic comfort food favorites. The results of Plant Camp’s operations have bene included since the date of acquisition in the Statements of Operations.
On July 20, 2021, the Company acquired 44% of the membership interests of WHE Agency, Inc,. WHE Agency, Inc, is a talent management and public relations agency based in New York. WHE Agency, Inc, has been consolidated due to the Company’s ownership of 55% voting control, and the results of operations have been included since the date of acquisition in the Statements of Operations.
On August 16, 2021, the Company acquired 16% of the membership interests of Dune, Inc. bring our total membership interests to 21%.
On October 3, 2021, the Company acquired 29% of the membership interests of Dune, Inc. bring our total membership interests to 50%. Dune, Inc. is a direct-to-consumer brand focused on promoting wellness through its range of health-oriented beverages. Dune, Inc, has been consolidated due to the Company’s ownership of 50% voting control, and the results of operations have been included since the date of acquisition in the Statements of Operations.
Note 2 – Significant and Critical Accounting Policies and Practices
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 the accounting principles generally accepted in the United States of America.
F-7
Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with U.S. 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:
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. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, stock-based compensation, income tax provisions, excess and obsolete inventory reserve, and impairment of intellectual property.
During the fourth quarter of 2021, management changed its estimates for cost of revenues. This change in estimates did not result in a change to loss from operations or net loss.
Actual results could differ from those estimates.
Presentation
During 2021, we adopted a change in presentation on our Consolidated Statements of Comprehensive Loss in order to present a gross profit line and allocate certain overhead expenses, the presentation of which is consistent with our peers. Under the new presentation, we began allocating overhead expenses related to cost of goods sold. Prior periods have been revised to reflect this change in presentation.
Principles of consolidation
The Company consolidates all majority-owned subsidiaries, if any, in which the parent’s power to control exists.
As of December 31, 2019,2021, the Company’s consolidated subsidiaries and/or entities are as follows:
Name of combined affiliate | State or other jurisdiction of incorporation or organization | Company Ownership Interest | |||||
Jerrick Ventures LLC | Delaware | 100 | % | ||||
Abacus Tech Pty Ltd | Australia | % | |||||
Seller’s Choice, LLC | New Jersey | % | |||||
Delaware | % | ||||||
Delaware | % | ||||||
Delaware | % | ||||||
Delaware | % | ||||||
Plant Camp LLC | Delaware | 89 | % | ||||
Sci-Fi Shop, LLC | Delaware | 100 | % | ||||
OG Collection LLC | Delaware | % | |||||
VMENA LLC | Delaware | % | |||||
Vocal For Brands, LLC | Delaware | % | |||||
Vocal Ventures LLC | Delaware | % | |||||
What to Buy, LLC | Delaware | % | |||||
WHE Agency, Inc. | Delaware | 44 | % |
All inter-company balances and transactions have been eliminated.
Variable Interest Entities
Management performs an ongoing assessment of its noncontrolling interests from investments in unrelated entities to determine if those entities are variable interest entities (VIEs), and if so, whether the Company is the primary beneficiary. If an entity in such a transaction, by design, meets the definition of a VIE and the Company determines that it, or a consolidated subsidiary is the primary beneficiary, the Company will include the VIE in its consolidated financial statements. If such an entity is deemed to not be consolidated, the Company records only its investment in equity securities as a marketable security or investment under the equity method, as applicable
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 tomeasurement disclosures are grouped into three levels based on valuation factors:
● | Level 1 – quoted prices
The Company’s Level The Company’s Level 3 assets/liabilities include goodwill, intangible assets, marketable debt securities, equity investments at cost, and derivative liabilities. Inputs to determine fair value are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow
The Fair Value Measurements as December 31, 2020
Fair Value Measurements as of December 31, 2021
The following table shows the valuation methodology and
The following tables provides a summary of the Fair Value Measurements as of December 31, 2021
Fair Value Measurements as of December 31, 2020
The following table shows the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on non-recurring basis as of December 31, 2021:
The Company recognizes impairment on loans or notes receivable (that do not
The change in net realized depreciation on equity trading securities that has been included in other expenses for the year ended December 31, 2021 and 2020 was $0 and $(7,453), respectively. The Company valued the initial value of debt securities, which are investments in convertible notes receivable, by assessing the separate values of the debt and equity components for similar instruments convertible into private company equity (Level 3). The investment was initially measured at cost, which was determined to approximate fair value due to the lack of marketability of the conversion shares underlying these convertible instruments and the expected recoverability of the note principal. The key assumption affecting the level 3 fair values would be observable price changes to the equity investments. The Company monitors for impairment indicators at each balance sheet date. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At times, cash balances may exceed the Federal Deposit Insurance Corporation (“FDIC”) or Financial Claims Scheme (“FCS”) insurable limits . The Company Concentration of Credit Risk and Other Risks and Uncertainties The Company provides credit in the normal course of business. The Company maintains allowances for credit losses on factors surrounding the credit The 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:
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. Long-lived Assets Including Goodwill and Other Acquired We evaluate the recoverability of property and equipment and acquired finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. We routinely review the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If we change the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life. The remaining weighted average life of the intangible assets are 7.26 years.
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment” (“ASC Topic 350”). The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company has four reporting units. The Company uses an income-based approach to determine the fair value of the reporting units. This approach uses a discounted cash flow methodology and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units. During the year ended December 31, 2021, the Company completed its annual impairment test of goodwill. The Company performed the qualitative assessment as permitted by ASC 350-20 and determined for three of its reporting units that the fair value of those reporting units was more likely than not greater than their carrying value, including Goodwill. However, based on this qualitative assessment, the Company determined that the carrying value of the Seller’s Choice reporting unit was more likely than not greater than its carrying value, including Goodwill. Based on completion of the annual impairment test, the Company recorded an impairment charge of $1,035,795 for goodwill. The following table sets forth a summary of the changes in goodwill for the years ended December 31, 2020 and 2021.
Investments Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt securities not classified as held-to-maturity or as trading are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders’ equity. The Company accounts for its investments in available-for-sale debt securities, in accordance with sub-topic 320-10 of the FASB ASC (“Sub-Topic 320-10”). Accrued interest on these securities is included in fair value and amortized cost. Pursuant to Paragraph 320-10-35, investments in debt securities that are classified as available for sale shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income until realized. The Company follows FASB ASC 320-10-35 to assess whether an investment in debt securities is impaired in each reporting period. An investment in debt securities is impaired if the fair value of the investment is less than its amortized cost. If the Company intends to sell the debt security (that is, it has decided to sell the security), an other-than-temporary impairment shall be considered to have occurred. If the Company more likely than not will be required to sell the security before recovery of its amortized cost basis or it otherwise does not expect to recover the entire amortized cost basis of the security, an other-than-temporary impairment shall be considered to have occurred. The Company considers the expected cash flows from the investment based on reasonable and supportable forecasts as well as several other factors to estimate whether a credit loss exists. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The following table sets forth a summary of the changes in marketable securities - available-for-sale debt securities that are measured at fair value on a recurring basis:
We invest in debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in securities with maturities of two years or less and maintain a weighted average maturity of one year or less. As of December 31, 2021, all of our investments had maturities between one and three years. The marketable debt security investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. During the years ended December 31, 2021 and 2020, the Company recognized a $62,733 and $50,000 respectively from the impairment of the debt security. The following table sets forth a summary of the changes in equity investments, at cost that are measured at fair value on a non-recurring basis:
The Company has elected to measure its equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An election to measure an equity security in accordance with this paragraph shall be made for each investment separately. The Company performed a qualitative assessment considering impairment indicators to evaluate whether these investments were impaired. Impairment indicators that the Company considered included the following: a) a significant deterioration in the earnings performance, credit rating, asset quality or business prospects of the investee; b) a significant adverse change in the regulatory, economic or technology environment of the investee; c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates; d) a bona fide offer to purchase or an offer by the investee to sell the investment; e) factors that raise significant concerns about the investee’s ability to continue as a going concern. During the year ended December 31, 2021 the Company recognized a $102,096 impairment of the equity security. Equity Method Investments Investments in unconsolidated entities over which we have significant influence are accounted for under the equity method of accounting. Under the equity method of accounting, the Company does not consolidate the investment’s financial statements within its consolidated financial statements. Equity method investments are initially recorded at cost, then our proportional share of the underlying net income or loss is recorded as equity in net loss from equity method investments in our statement of operations, with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce our carrying value of the investment and are recorded in the consolidated statements of cash flows using the cumulative earnings approach. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. There were indicators of impairment related to our equity method investments for the year ended December 31, 2021. During the year ended December 31, 2021, the Company recorded an impairment charge of $487,365 for investments. Commitments and Contingencies The Company follows subtopic 450-20 of the FASB 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. Foreign Currency Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at our Consolidated Balance Sheet dates. Results of operations and cash flows are translated using the average exchange rates throughout the periods. The effect of exchange rate fluctuations on the translation of assets and liabilities is included as a component of Derivative Liability
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 The Company utilizes a Monte Carlo simulation model for the make whole feature and a binomial option model for convertible notes that have an option to convert at a variable number of shares 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 inputs utilized in the application of the Monte Carlo model included a starting stock price, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, drift, and a risk-free rate. The inputs utilized in the application of the Binomial model included a stock price on valuation date, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations. Shipping and Handling Costs The Company classifies freight billed to customers as sales revenue and the related freight costs as cost or revenue. Revenue Recognition 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:
Revenue disaggregated by revenue source for the years ended December 31,
The Company utilizes the output method to measures the results achieved and value transferred to a customer over time. Timing of revenue recognition for the years ended December 31, 2021 and 2020 consists of the following:
Agency Revenue Managed Services The Company provides Studio/Agency Service offerings to business-to-business (B2B) and business-to-consumer (B2C) product and service brands which encompasses a full range of digital marketing and e-commerce solutions. The Company’s services include the setup and ongoing management of clients’ websites, Amazon and Shopify storefronts and listings, social media pages, search engine marketing, and other various tools and sales channels utilized by e-commerce sellers for sales and growth optimization. Contracts are broken into three categories: Partners, Monthly Services, and Projects. Contract amounts for Partner and Monthly Services clients range from approximately $500-$7,500 per month while Project amounts vary depending on the scope of work. Partner and Monthly clients are billed monthly for the work completed within that month. Partner Clients may or may not have an additional billing component referred to as Sales Performance Fee, which is a fee based upon a previously agreed upon percentage point of the client’s total sales for the month. Some Partners may also have projects within their contracts that get billed and recognized as agreed upon project milestones are achieved. Revenue is recognized over time as service obligations and milestones in the contract are met. Branded Content Branded content represents the revenue recognized from the Company’s obligation to create and publish branded articles and/or branded challenges for clients on the Vocal platform and promote said stories, tracking engagement for the client. Below are the significant components of a typical agreement pertaining to branded content revenue:
Talent Management Services Talent Management represents the revenue recognized by WHE Agency, Inc. (“WHE”) from the Company’s obligation to manage and oversee influencer-led campaigns from the contract negotiation stage through content creation and publication. WHE acts in an agent capacity for influencers and collects a management fee of 20% of the value of an influencer’s contract with a brand. Revenue is recognized net of the 80% of the contract that is collected by the influencer and is recognized when performance obligations of the contract are met. Performance obligations are complete when milestones and deliverables of contracts are delivered to the client. Below are the significant components of a typical agreement pertaining to talent management revenue:
Platform Revenue Creator Subscriptions Vocal+ is a premium subscription offering for Vocal creators. In addition to joining for free, Vocal creators now have the option to sign up for a Vocal+ membership for either $9.99 monthly or $99 annually, though these amounts are subject to promotional discounts and free trials. Vocal+ subscribers receive access to value-added features such as increased rate of cost per mille (thousand) (“CPM”) monetization, a decreased minimum withdrawal threshold, a discount on platform processing fees, member badges for their profiles, access to exclusive Vocal+ Challenges, and early access to new Vocal features. Subscription revenues stem from both monthly and annual subscriptions, the latter of which is amortized over a twelve-month period. Any customer payments received are recognized over the subscription period, with any payments received in advance being deferred until they are earned. The transaction price for any given subscriber could decrease based on any payments made to that subscriber. A subscriber may be eligible for payment through one or more of the monetization features offered to Vocal creators, including earnings through reads (on a cost per mille basis) and cash prizes offered to Challenge winners. Estimates are utilized for payments made for earnings through reads, by establishing the lifetime a subscriber has had a Vocal account, determining the percentage of that lifetime that the subscriber has been a paying customer, and applying that percentage to payments for earnings through reads in the relevant reporting period. Affiliate Sales Revenue 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, Amazon, and Tune, 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. E-Commerce Revenue
. The Company Deferred Revenue Deferred revenue consists of billings and payments from clients in advance of revenue recognition. The Company has two types of deferred revenue, subscription revenue whereas the revenue is recognized over the subscription period and contract liabilities where the performance obligation was not satisfied. The Company will recognize the deferred revenue over the next year. As of December 31, Accounts Receivable and Allowances Accounts receivable are recorded and carried when the Company Inventory Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. Inventories are periodically evaluated to identify obsolete or otherwise impaired products and are written off when management determines usage is not probable. The Company estimates the balance of excess and obsolete inventory by analyzing inventory by age using last used and original purchase date and existing sales pipeline for which the inventory could be used. As of December 31, 2021 and 2020, the Company has no valuation allowance. Stock-Based Compensation The Company recognizes compensation expense for all equity–based payments granted in accordance with 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 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 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. 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. During the year ended December 31, 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 years ended December 31, The Company had the following common stock equivalents at December 31,
Reclassifications
Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current Recently Adopted Accounting Guidance In
Recent Accounting Guidance Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU-2016-13”). ASU 2016-13 affects loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. ASU 2016-13 is effective for the fiscal year beginning after December 15, 2022, including interim periods within that fiscal year. The Company is currently evaluating the impact of the In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2021, and interim periods within those annual periods and early adoption is permitted. The Company is currently evaluating the impact of the new In In July 2021, the FASB issued ASU No. 2021-05, Lessors—Certain Leases with Variable Lease Payments (Topic 842), Which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate (hereafter referred to as “variable payments”) as an operating lease on the commencement date of the lease if specified criteria are met. ASU 2021-05 is effective for the fiscal In
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. Note 3 – Going Concern The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the consolidated financial statements, as of December 31, 2021, the Company had an accumulated deficit On January 30, 2020, the World Health Organization declared the COVID-19 novel coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial impact will be to the Company, capital raising efforts and our operations may be negatively affected. The Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private offering of its debt or equity securities, there can be no assurance that it will be able to do so on reasonable terms, or at all. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds by way of a public or private offering. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Note 4 –
Note 5 – Property and Equipment Property and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
Depreciation expense was $49,254 and $31,094 for the year ended December 31, 2021 and 2020, respectively. Note 6 – Equity investments, at cost The Company has elected to measure its equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An election to measure an equity security in accordance with this paragraph shall be made for each investment separately. The Company performed a qualitative assessment considering impairment indicators to evaluate whether these investments were impaired. Impairment indicators that the Company considered included the following: a) a significant deterioration in the earnings performance, credit rating, asset quality or business prospects of the investee; b) a significant adverse change in the regulatory, economic or technology environment of the investee; c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates; d) a bona fide offer to purchase or an offer by the investee to sell the investment; e) factors that raise significant concerns about the investee’s ability to continue as a going concern. On October 2, 2020, the Company converted $102,096 of its marketable debt security into 119,355 shares of preferred stock or a 1.3% equity investment in a private company. During the year ended December 31, On October 23, 2020, the Company entered into an equity interest purchase agreement whereas the Company purchased 3.8% ownership of
On February 17, 2021, the Company entered into a membership interest purchase agreement whereas the Company purchased another 3.3% ownership of a private On May 21, 2021, the Company entered into
Note During the year ended December 31, 50.41%. During the year ended December 31, Note 8 – Notes Payable Notes payable as of
Seller’s Choice Note On September 11, 2019, the Company entered into Seller’s Choice Purchase Agreement with Home Revolution During the year ended December 31, On March 3, 2022, the Company settled the Seller’s Choice Note for a cash payment of $799,000. The First March 2020 Loan Agreement On March 23, 2020, the Company entered into a loan agreement (the “First March 2020 Loan Agreement”) with an individual (the “First March 2020 Lender”) whereby the First March 2020 Lender issued the Company a promissory note of $11,000 (the “First March 2020 Note”). Pursuant to the First March 2020 Loan Agreement, the First March 2020 Note has an effective interest rate of 25%. The maturity date of the First March 2020 Note was September 23, 2020 (the “First March 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First March 2020 Note were due. During the year ended December 31, 2020, the Company repaid The Second March 2020 Loan Agreement On March 26, 2020, the Company entered into a loan agreement (the “Second March 2020 Loan Agreement”) with an individual (the “Second March 2020 Lender”), whereby the Second March 2020 Lender issued the Company a promissory note of $17,000 (the “Second March 2020 Note”). Pursuant to the Second March 2020 Loan Agreement, the Second March 2020 Note has an effective interest rate of 19%. The maturity date of the Second March 2020 Note was September 17, 2020 (the “Second March 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second March 2020 Note were due. During the year ended December 31, 2020, the Company repaid $17,000 in principal and $1,398 in interest. The April 2020 PPP Loan Agreement On April 30, 2020, the Company was granted a loan with a principal amount of $282,432 (the “Loan”), pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020. The Loan, which was in the form of a Note dated April 30, 2020, matures on April 30, 2022, and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on October 30, 2020. The Note may be prepaid by the Company at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. During the year ended December 31, 2021, the Company accrued interest of $1,637. During the year ended December 31, 2021, the Company repaid $83,855 in principal. The Company is in the process of returning the funds received from the Loan. When the applications for PPP first opened up, there was limited available funding and much confusion surrounding the application process. The Company initially submitted its application for the May 2020 PPP Loan in early April but received no response in the aftermath of submitting the application. After consulting multiple advisors, the Company made the decision to apply elsewhere, due to the rampant media coverage of institutions running out of funding and the Company’s need for the capital and belief that if 2 separate loans were approved, the remaining application could simply be withdrawn. Therefore, in late April, the company proceeded with applying for the April 2020 PPP Loan. After some conflicting communications regarding acceptance, the Company attempted to contact the lender to clarify but got no response. After continued attempts to follow up with both lenders, the Company received approval for the May 2020 PPP Loan and funding for the April 2020 PPP Loan on the same day, followed the next day by the funding of the May 2020 PPP Loan. The Company immediately separated the funds for the April 2020 PPP Loan into a separate reserved bank account with the intention of returning the funds. However, after several attempts to contact the lender with no response, the Company was faced with difficulty raising funds in the early-Covid economy and made the decision to utilize the funds for operations and pursue an installment repayment plan when they were able to reach the lender. As of the date of this filing, the Company has begun making repayments on the loan, absent a formal installment agreement due to difficulties reaching the lender. As each company is only permitted one loan under the CARES Act, there is a possibility the loan may be called by the SBA and the Company would have to repay the loan in full at such time. The May 2020 PPP Loan Agreement On May 4, 2020, Jerrick Ventures, LLC (“Jerrick Ventures”), the Company’s wholly-owned subsidiary, was granted a loan from PNC Bank, N.A. with a principal amount of $412,500, pursuant to the Paycheck Protection Program (the “PPP”). The Loan, which was in the form of a Note dated May 4, 2020, matures on May 4, 2022, and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing on November 4, 2020. The Note may be prepaid by Jerrick Ventures at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. Jerrick Ventures intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. During the year ended December 31, 2021, the Company accrued interest of $396. During the year ended December 31, 2021, the Company repaid $136,597 in principal and was forgiven $275,903 of principal and $3,119 of accrued interest. The June 2020 Loan Agreement On June 30, 2020, the Company entered into a loan agreement (the “June 2020 Loan Agreement”) with a banking institution (the “June 2020 Lender”), whereby the June 2020 Lender issued the Company a promissory note of A$510,649 Australian dollar (“AUD”) or $351,692 United States Dollar (the “June 2020 Note”). Pursuant to the June 2020 Loan Agreement, the June 2020 Note has an effective interest rate of 15%. The maturity date of the June 2020 Note was July 31, 2020 (the “June 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the June 2020 Note were due in AUD currency. This loan was secured by the Australian research & development credit. During the year ended December 31, 2020 the Company repaid A$510,649 in principal and A$14,814 in interest. The October 2020 Loan Agreement On October 6, 2020, the Company entered into a secured loan agreement (the “October 2020 Loan Agreement”) with a lender (the “October 2020 Lender”), whereby the October 2020 Lender issued the Company a secured promissory note of $74,300 AUD or $54,412 United States Dollars (the “October 2020 Note”). Pursuant to the October 2020 Loan Agreement, the October 2020 Note has an effective interest rate of 14%. The maturity date of the October 2020 Note is September 30, 2021 (the “October 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the October 2020 Loan Agreement are due. The loan is secured by the Australian research & development credit. During the year ended December 31, 2021, the Company accrued $4,850 AUD in interest. During the year ended December 31, 2021, the Company’s repaid $111,683 in principal and $6,408 in interest
The November 2020 Loan Agreement On November 24, 2020, the Company entered into a loan agreement (the “November 2020 Loan Agreement”) with a lender (the “November 2020 Lender”) whereby the November 2020 Lender issued the Company a promissory note of $34,000 (the “November 2020 Note”). Pursuant to the November 2020 Loan Agreement, the November 2020 Note During the year ended December 31, 2020, the Company repaid $10,284 in principal. During the year ended December 31, 2021, the Company repaid $23,716 in principal and $4,736 of accrued interest. The February 2021 Loan Agreement On February 24, 2021, the Company entered into a secured loan agreement (the “February 2021 Loan Agreement”) with a lender (the “February 2021 Lender”), whereby the February 2021 Lender issued the Company a secured promissory note of $111,683 AUD or $81,789 United States Dollars (the “February 2021 Note”). Pursuant to the February 2021 Loan Agreement, the February 2021 Note has an effective interest rate of 14%. The maturity date of the February 2021 Note is July 31, 2021 (the “February 2021 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the February 2021 Loan Agreement are due. The loan is secured by the Australian research & development credit. During the year ended December 31, 2021, the Company accrued $9,339 AUD in interest. The April 2021 Loan Agreement On April 9, 2021, the Company entered into a loan agreement (the “April 2021 Loan Agreement”) with a lender (the “April 2021 Lender”) whereby the April 2021 Lender issued the Company a promissory note of $128,110 (the “April 2021 Note”). Pursuant to the April 2021 Loan Agreement, the April 2021 Note has an effective interest rate of 11%. The maturity date of the April 2021 Note is October 8, 2022 (the “April 2021 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the April 2021 Note are due. During the year ended December 31, 2021, the Company repaid $92,140 in principal and converted $35,970 into the July 2021 Loan Agreement. As part of the conversion the Company recorded $8,341 as extinguishment expense. The July 2021 Loan Agreement On July 2, 2021, the Company entered into a loan agreement (the “July 2021 Loan Agreement”) with a lender (the “July 2021 Lender”) whereby the July 2021 Lender issued the Company a promissory note of $137,625 (the “July 2021 Note”). Pursuant to the July 2021 Loan Agreement, the July 2021 Note has an effective interest rate of 10%. The maturity date of the July 2021 Note is December 31, 2022 (the “July 2021 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the July 2021 Note are due. During the year ended December 31, 2021, the Company repaid $113,606 in principal and converted $24,019 into the Second December 2021 Loan. As part of the conversion the Company recorded $7,109 as extinguishment expense. The First December 2021 Loan Agreement On December 3, 2021, the Company entered into a loan agreement (the “First December 2021 Loan Agreement”) with a lender (the “First December 2021 Lender”) whereby the First December 2021 Lender issued the Company a promissory note of $191,975 (the “First December 2021 Note”). Pursuant to the First December 2021 Loan Agreement, the First December 2021 Note has an effective interest rate of 9%. The maturity date of the First December 2021 Note is June 3, 2023 (the “First December 2021 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First December 2021 Note are due. During the year ended December 31, 2021, the Company repaid $6,320 in principal. The Second December 2021 Loan Agreement On December 14, 2021, the Company entered into a secured loan agreement (the “Second December 2021 Loan Agreement”) with a lender (the “Second December 2021 Lender”), whereby the Second December 2021 Lender issued the Company a secured promissory note of $438,096 AUD or $329,127 United States Dollars (the “Second December 2021 Note”). Pursuant to the Second December 2021 Loan Agreement, the Second December 2021 Note has an effective interest rate of 14%. The maturity date of the Second December 2021 Note is June 30, 2022 (the “Second December 2021 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second December 2021 Loan Agreement are due. The loan is secured by the Australian research & development credit. During the year ended December 31, 2021, the Company accrued $2,857 AUD in interest. Note 9 – Convertible Convertible notes payable as of December 31,
The February 2018 Convertible Note Offering
During the three months ended March 31, 2018, the Company conducted multiple closings of a private placement offering to accredited investors (the “February 2018 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “February 2018 Investors”) for aggregate gross proceeds of $725,000. In addition, $250,000 of the Company’s short-term debt along with accrued but unpaid interest of $40,675 was exchanged for convertible debt in the February 2018 Offering. These conversions resulted in the issuance of
The February 2018 Convertible Note Offering consisted of a maximum of $750,000 of units of the Company’s securities (each, a “February 2018 Unit” and collectively, the “February 2018 Units”), with each February 2018 Unit consisting of (a) a 15% Convertible Secured Promissory Note (each a “February 2018 Convertible Note” and together the “February 2018 Convertible Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“February 2018 Conversion Shares”) at a conversion price of The February 2018 Note Conversion Price and the February 2018 Offering Warrant Exercise Price are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase price, subject to carve-outs as described therein.
The conversion feature of the February 2018 Convertible Note Offering provides for an effective conversion price that is below market value on the date of issuance. Such feature is normally characterized as a beneficial conversion feature (“BCF”). When the Company records a BCF the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The Company recorded a BCF and related debt discount of $37,350, the discount is being accreted over the life of the first Debenture to accretion of debt discount and issuance cost.
The Company recorded a $316,875 debt discount relating to
In connection with the February 2018 Convertible Note Offering, the Company retained a placement agent (the “Placement
During the year ended December 31, 2018, the Company converted $940,675 of principal and $86,544 of unpaid interest into the August 2018 Equity
During the year ended December 31, 2019 the
During the year ended December 31, 2020 the Company repaid $75,000 in principal and $781 in interest, and the February 2018 Convertible Notes are no longer outstanding. The March 2018 Convertible Note Offering
During the three months ended March 31, 2018, the Company conducted multiple closings of a private placement offering to accredited investors (the “March 2018 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “March 2018 Investors”) for aggregate gross proceeds of $770,000. In addition, $50,000 of the Company’s short-term debt, $767 accrued but unpaid interest and $140,600 of the Company’s vendor liabilities was exchanged for convertible debt within the March 2018 Convertible Note Offering. These conversions resulted in the issuance of
The March 2018 Convertible Note Offering consisted of a maximum of $900,000, with an over-allotment option of an additional $300,000 of units of the Company’s securities (each, a “March 2018 Unit” and collectively, the “March 2018 Units”), with each March 2018 Unit consisting of (a) a 14% Convertible Secured Promissory Note (each a “March 2018 Note” and together the “March 2018 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion price of
The Conversion Price of the March 2018 Note and the Exercise Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase price, subject to carve-outs as described therein.
The Company recorded a $254,788 debt discount relating to
During the year ended December 31, 2018, the Company converted $886,367 of principal and $51,293 of unpaid interest pursuant to the August 2018 Equity
During the year ended December 31, 2020, the Company converted $50,000 of principal and $17,949 of unpaid interest into the September 2020 Equity Raise. During the year ended December 31, 2020, the Company repaid $25,000 in principal and $9,364 in interest. The February 2019 Convertible Note Offering
During the The February 2019 Convertible Note Offering consisted of (a) a 10% Convertible Promissory Note (each a “February 2019 Note” and together, the “February 2019 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to
The February 2019 Notes mature on the first (1st) anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates, the principal and interest evidenced by the Note shall be mandatorily converted upon the earlier of (i) the listing of the Common Stock onto a national securities exchange, or (ii) upon a Qualified Offering.
The Conversion Price of the February 2019 Note and the Exercise Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase price, subject to carve-outs as described therein.
The Company recorded a $222,632 debt discount relating to
During the year ended December 31,
During the year ended December 31,
The November 2019 Convertible Note Offering
During the year ended December 31, 2019, the Company conducted an offering to accredited investors (the “November 2019 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “November 2019 Investors”) for aggregate gross proceeds of $479,500. In addition, the Company converted $318,678 in Accounts Payable into this offering.
The November 2019 Convertible Note Offering consisted of (a) a 10% Convertible Promissory Note (each a “November 2019 Note” and together, the “November 2019 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a fixed conversion price equal to
The November 2019 Notes mature six months after the anniversary of their issuance dates. At any time on or after the
The Company recorded a $84,377 debt discount relating to an original issue discount equal to $79,933 and a beneficial conversion feature of $4,444. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.
During the year ended December 31, 2020, the Company converted $559,433 of principal and $77,785 of unpaid interest into the September 2020 Equity Raise. The January 2020 Convertible Note Offering During the three months ended March 31, 2020, the Company conducted an offering to accredited investors (the “January 2020 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “January 2020 Investors”) for aggregate gross proceeds of $87,473. The January 2020 Convertible Note Offering consisted of (a) a 12% Convertible Promissory Note (each a “January 2020 Note” and together, the “January 2020 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $13.50 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”). The January 2020 Notes mature on the first (6th) month anniversary of their issuance dates. If an event of default occurs and is not cured within 30 days of the Company receiving notice, the notes will be convertible at 80% multiplied by the lowest VWAP of the common stock during the five (5) consecutive trading day period immediately preceding the date of the respective conversion, and a default interest rate of 24% will become effective. The Conversion Price of the January 2020 Note are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price being reduced to such lower purchase price, subject to carve-outs as described therein. The Company recorded a $12,473 debt discount relating to original issue discount associated with these notes. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company converted $87,473 of principal and $8,275 of unpaid interest into the September 2020 Equity Raise. The First February 2020 Convertible Loan Agreement On February 4, 2020, the Company entered into a loan agreement (the “First February 2020 Loan Agreement”) with an individual (the “First February 2020 Lender”), whereby the First February 2020 Lender issued the Company a promissory note of $85,000 (the “First February 2020 Note”). Pursuant to the First February 2020 Loan Agreement, the First February 2020 Note has interest of ten percent (10%). The First February 2020 Note are convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $12.00 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”). The First February 2020 Notes mature on the first (6th) month anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates and the Notes have not been repaid or an event of default occurs as defined in the Notes, the notes will be convertible at the lesser of the fixed conversion price or 65% multiplied by the lowest trade of the common stock during the twenty (20) consecutive trading day period immediately preceding the date of the respective conversion and a default interest rate of 15% will be applied. The Conversion Price of the First February 2020 Note are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price being reduced to such lower purchase price, subject to carve-outs as described therein. The Company recorded a $8,000 debt discount relating to original issue discount associated with these notes. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company repaid $158,065 in principal and $0 in interest. The Second February 2020 Convertible Loan Agreement On February 11, 2020, the Company entered into a loan agreement (the “Second February 2020 Loan Agreement”) with an individual (the “Second February 2020 Lender”), whereby the Second February 2020 Lender issued the Company a promissory note of $200,000 (the “Second February 2020 Note”). Pursuant to the Second February 2020 Loan Agreement, the Second February 2020 Note has interest of twelve percent (12%). As additional consideration for entering in the Second February 2020 convertible Loan Agreement, the Company issued a five-year warrant to purchase 6,666 shares of the Company’s common stock at a purchase price of $15.00 per share. The Second February 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $13.50 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”). The Second February 2020 Note matures on the first (12th) month anniversary of its issuance date. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Date and the Note is unpaid, the note will be convertible at the lesser of the fixed conversion price or 75% multiplied by the lowest trade of the common stock during the twenty (20) consecutive trading day period immediately preceding the date of the respective conversion. The Conversion Price of the First February 2020 Note is subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price being reduced to such lower purchase price, subject to carve-outs as described therein. The Company recorded a $33,340 debt discount relating to original issue discount associated with this note. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company converted $125,000 of principal and $0 of unpaid interest into the September 2020 Equity Raise. The Company recorded a Loss on extinguishment of debt of $136,115. During the year ended December 31, 2020, the Company repaid $175,000 in principal and $0 in interest. The Third February 2020 Convertible Loan Agreement On February 25, 2020, the Company entered into a loan agreement (the “Third February 2020 Loan Agreement”) with an individual (the “Third February 2020 Lender”), whereby the Third February 2020 Lender issued the Company a promissory note of $1,500,000 (the “Third February 2020 Note”). The Company received proceeds of $864,950 and converted notes payable of $385,000 in exchange for the note (see Note 5). Pursuant to the Third February 2020 Loan Agreement, the Second February 2020 Note has interest of twelve percent (12%). The Third February 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $4.50 per share or (ii) the price provided to investors in connection with (a) any private placement offerings or one or more registered public offerings by the Company under the Securities Act, pursuant to which the Company receives monies in the amount greater than $1,500,000 in exchange for securities of the Company, or (b) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”). The Third February 2020 Note matures on the first (12th) month anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates and the note is unpaid, the notes will be convertible at the lower of the fixed conversion price or 75% multiplied by the lowest trade of the common stock during the twenty (20) consecutive trading day period immediately preceding the date of the respective conversion. The Conversion Price of the Third February 2020 Note are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price being reduced to such lower purchase price, subject to carve-outs as described therein. In accordance with ASC 470-50, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the note exchange as described above as a debt extinguishment. The Company recorded a loss on debt extinguishment of $535,041. This represents the fair value of the warrants issued $445,705 and a debt premium of $89,336. The note has an effective interest rate of 24%. The Company recorded a debt discount of $160,714. This is made up of an original issue discount of $250,050 less a debt premium of $89,336. During the year ended December 31, 2020, the Company converted $1,500,000 of principal and $100,603 of unpaid interest into the September 2020 Equity Raise. The April 2020 Convertible Note Offering During April of 2020, the Company conducted multiple closings of a private placement offering to accredited investors (the “April 2020 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “April 2020 Investors”) for aggregate gross proceeds of $350,010. The April 2020 Convertible Note Offering accrues interest at a rate of twelve percent per annum (12%). The April 2020 Convertible Note Offering mature on the six (6th) month anniversary of their issuance dates. The April 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $13.50 per share after the maturity date or (ii) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”). The Company recorded a $50,010 debt discount relating to original issue discount associated with these notes. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company converted $350,010 of principal and $16,916 of unpaid interest into the September 2020 Equity Raise. The June 2020 Convertible Loan Agreement On June 19, 2020, the Company entered into a loan agreement (the “June 2020Loan Agreement”) with an individual (the “June 2020 Lender”), whereby the June 2020 Lender issued the Company a promissory note of $550,000 (the “June 2020 Note”). Pursuant to the June 2020 Loan Agreement, the June 2020 Note has interest of twelve percent (12%). As additional consideration for entering in the June 2020 convertible Loan Agreement, the Company issued a five-year warrant to purchase 49,603 shares of the Company’s common stock at a purchase price of $11.55 per share. The June 2020 Note matures on the first (12th) month anniversary of its issuance date. Upon default the June 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to the closing bid price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The Company recorded a $67,500 debt discount relating to original issue discount associated with this note. The Company recorded a $274,578 debt discount relating to 49,603 warrants and 5,424 shares issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the lender converted $59,200 of principal into the Second July 2020 Convertible Loan Agreement During the year ended December 31, 2020, the Company repaid $490,800 in principal and $16,944 in interest. The First July 2020 Convertible Loan Agreement On July 01, 2020, the Company entered into a loan agreement (the “First July 2020 Loan Agreement”) with an individual (the “First July 2020 Lender”), whereby the First July 2020 Lender issued the Company a promissory note of $68,000 (the “First July 2020 Note”). Pursuant to the First July 2020 Loan Agreement, the First July 2020 Note has interest of ten percent (10%). The First July 2020 Note matures on June 29, 2021. Upon default or 180 days after issuance the First July 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to 61% multiplied by the lowest trade of the common stock during the twenty (15) consecutive trading day period immediately preceding the date of the respective conversion. During the year ended December 31, 2021, the First July 2020 Note became convertible. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Binomial model at the conversion date and the period end. The conversion feature of First July 2020 Note gave rise to a derivative liability of $112,743. The Company recorded $68,000 as a debt discount and $44,743 was recorded to derivative expense. The debt discount is charged to accretion of debt discount over the remaining term of the convertible note. During the year ended December 31, 2021, the Company converted $68,000 in principal and $3,400 in interest into 35,469 shares of the Company’s common stock. The Second July 2020 Convertible Loan Agreement On July 17, 2020, the Company entered into a loan agreement (the “Second July 2020 Loan Agreement”) with an individual (the “Second July 2020 Lender”), whereby the Second July 2020 Lender issued the Company a promissory note of $250,000 (the “Second July 2020 Note”). Pursuant to the Second July 2020 Loan Agreement, the Second July 2020 Note has interest of twelve percent (12%). The Second July 2020 Note matures on July 17, 2021. Upon default the Second July 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to the closing bid price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The Company recorded a $46,750 debt discount relating to original issue discount associated with this note. The Company recorded a $71,329 debt discount relating to 6,667 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company repaid $250,000 in principal and $0 in interest. The July 2020 Convertible Note Offering From July 2020 to September 2020, the Company conducted multiple closings of a private placement offering to accredited investors (the “July 2020 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “July 2020 Investors”) for aggregate gross proceeds of $390,000. The July 2020 Convertible Note Offering accrues interest at a rate of twelve percent per annum (12%). The July 2020 Convertible Note Offering mature on the six (6th) month anniversary of their issuance dates. The July 2020 Note Offering is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $12.75 per share after the maturity date or (ii) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”). Upon default the July 2020 Convertible Note Offering is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to 61% multiplied by the lowest trade of the common stock during the twenty (15) consecutive trading day period immediately preceding the date of the respective conversion. The conversion feature of the July 2020 Convertible Note Offering provides for an effective conversion price that is below market value on the date of issuance. Such feature is normally characterized as a beneficial conversion feature. When the Company records a BCF the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The Company recorded a BCF and related debt discount of $38,215, the discount is being accreted over the life of the Debenture to accretion of debt discount and issuance cost. The Company recorded a $158,078 debt discount relating to 30,589 July 2020 Convertible Note Offering issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company converted $390,000 of principal and $3,436 of unpaid interest into the September 2020 Equity Raise. The August 2020 Convertible Loan Agreement On August 17, 2020, the Company entered into a loan agreement (the “August 2020 Loan Agreement”) with an individual (the “August 2020 Lender”), whereby the August 2020 Lender issued the Company a promissory note of $68,000 (the “August 2020 Note”). Pursuant to the August 2020 Loan Agreement, the August 2020 Note has interest of twelve percent (12%). The August 2020 Note matures on August 17, 2021. Upon default or 180 days after issuance the August 2020 Convertible Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to 61% multiplied by the lowest trade of the common stock during the twenty (15) consecutive trading day period immediately preceding the date of the respective conversion. The Company recorded a $3,000 debt discount relating to original issue discount associated with this note. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.t During the year ended December 31, 2021, the August 2020 Note became convertible. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Binomial model at the conversion date and the period end. The conversion feature of August 2020 Note gave rise to a derivative liability of $120,759. The Company recorded $65,000 was recorded as a debt discount and $55,759 was recorded to derivative expense. The debt discount is charged to accretion of debt discount over the remaining term of the convertible note. During the year ended December 31, 2021, the Company converted $68,000 in principal and $3,400 in interest into 29,859 shares of the Company’s common stock. The September 2020 Convertible Loan Agreement On September 23, 2020, the Company entered into a loan agreement (the “September 2020 Loan Agreement”) with an individual (the “September 2020 Lender”), whereby the September 2020 Lender issued the Company a promissory note of $385,000 (the “September 2020 Note”). Pursuant to the September 2020 Loan Agreement, the September 2020 Note has interest of twelve percent (12%). The September 2020 Note matures on September 23, 2021. Upon default or 180 days after issuance the Second July 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share equal to the closing bid price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The Company recorded a $68,255 debt discount relating to original issue discount associated with this note. The Company recorded a $146,393 debt discount relating to 85,555 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2021, the Company repaid $341,880 in principal and $46,200 in interest. The October 2020 Convertible Loan Agreement On October 2, 2020, the Company entered into a loan agreement (the “October 2020 Loan Agreement”) with an individual (the “October 2020 Lender”), whereby the October 2020 Lender issued the Company a promissory note of $169,400 (the “October 2020 Note”). Pursuant to the October 2020 Loan Agreement, the October 2020 Note has interest of six percent (6%). The October 2020 Note matures on the first (12th) month anniversary of its issuance date. Upon default or 180 days after issuance the October 2020 Note is convertible into shares of the Company’s common stock, par value $0.001 per share (“Conversion Shares”) equal to 75% of average the lowest three trading prices of the Company’s common stock on the fifteen-trading day immediately preceding the date of the respective conversion. The Company recorded a $19,400 debt discount relating to original issue discount associated with this note. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2021, the Second July 2020 Note became convertible. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Binomial model at the conversion date and the period end. The conversion feature of Second July 2020 Note gave rise to a derivative liability of $74,860. The Company recorded this as a debt discount. The debt discount is charged to accretion of debt discount over the remaining term of the convertible note. During the year ended December 31, 2021, the Company converted $169,400 in principal and $4,620 in interest into 55,631 shares of the Company’s common stock. The First December 2020 convertible Loan Agreement On December 9, 2020, the Company entered into a loan agreement (the “First December 2020 Loan Agreement”) with an individual (the “First December 2020 Lender”), whereby the First December 2020 Lender issued the Company a promissory note of $600,000 (the “First December 2020 Note”). Pursuant to the First December 2020 Loan Agreement, the First December 2020 Note has interest of twelve percent (12%). As additional consideration for entering in the First December 2020 convertible Loan Agreement, the Company issued 45,000 shares of the Company’s common stock. The First December 2020 Note matures on the first (12th) month anniversary of its issuance date. Upon default the First December 2020 Note is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to the closing bid price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The Company recorded a $110,300 debt discount relating to original issue discount associated with this note. The Company recorded a $113,481 debt discount relating to 45,000 shares issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2021 the Company repaid $600,000 in principal and $4,340 in interest. The Second December 2020 Convertible Loan Agreement On December 30, 2020, the Company entered into a loan agreement (the “Second December 2020 Loan Agreement”) with an individual (the “Second December 2020 Lender”), whereby the Second December 2020 Lender issued the Company a promissory note of $169,400 (the “Second December 2020 Note”). Pursuant to the Second December 2020 Loan Agreement, the Second December 2020 Note has interest of six percent (6%). The Second December 2020 Note matures on the first (12th) month anniversary of its issuance date. Upon default the Second December 2020 Note is convertible into shares of the Company’s common stock, par value $0.001 per share (“Conversion Shares”) equal to 75% of average the lowest three trading prices of the Company’s common stock on the fifteen-trading day immediately preceding the date of the respective conversion. The Company recorded a $18,900 debt discount relating to original issue discount associated with this note. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2021, the Second December 2020 Note became convertible. Due to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Binomial model at the conversion date and the period end. The conversion feature of Second December 2020 Note gave rise to a derivative liability of $108,880. The Company recorded this as a debt discount. The debt discount is charged to accretion of debt discount over the remaining term of the convertible note. During the year ended December 31, 2021, the Company converted $168,900 in principal and $4,605 in interest into 74,706 shares of the Company’s common stock. The May 2021 Convertible Note Offering On May 14, 2021, the Company conducted multiple closings of a private placement offering to accredited investors (the “May 2021 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “May 2021 Investors”) for aggregate gross proceeds of $3,690,491. The May 2021 convertible notes are convertible into shares of the Company’s common stock, par value $.001 per share at a conversion price of $5.00 per share. As additional consideration for entering in the May 2021 Convertible Note Offering, the Company issued 1,090,908 warrants of the Company’s common stock. The May 2021 Convertible Note matures on November 14, 2022. The Company recorded a $1,601,452 debt discount relating to 1,090,908 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost. The Company recorded a $666,669 debt discount relating to an original issue discount and $539,509 of debt issuance costs related to fees paid to vendors relating to the offering. The debt discount and debt issuance costs are being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2021, the Company converted $4,666,669 in principal into 933,334 shares of the Company’s common stock. The July 2021 Convertible Loan Agreement On July 6, 2021, the Company entered into a loan agreement (the “July 2021 Loan Agreement”) with an individual (the “July 2021 Lender”), whereby the July 2021 Lender issued the Company a promissory note of $168,850 (the “July 2021 Note”). Pursuant to the July 2021 Loan Agreement, the July 2021 Note has interest of six percent (6%). The July 2021 Note matures on the first (12th) month anniversary of its issuance date. Upon default or 180 days after issuance the July 2021 Note is convertible into shares of the Company’s common stock, par value $0.001 per share (“Conversion Shares”) equal to 75% of average the lowest three trading prices of the Company’s common stock on the fifteen-trading day immediately preceding the date of the respective conversion. The Company recorded a $15,850 debt discount relating to an original issue discount and $3,000 of debt issuance costs related to fees paid to vendors relating to the offering. The debt discount and debt issuance costs are being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2021, the Company accrued $4,941 in interest. Note
Note receivable
October 2019 Cacher Loan Agreement
On October 28, 2019, the Company entered into a loan agreement with Cacher Studios LLC (the “October 2019 Cacher Loan Agreement”) whereby Cacher Studios issued the Company a promissory note in the principal amount of $11,450 (the “October 2019 Cacher Note”). The October 2019 Cacher Note has a maturity date of October 28, 2020. Repayment is due from Cacher Studios LLC’s revenues, with 100% of net revenues due to the Company until $2,500 in principal has been repaid, and 50% of net revenues due to the Company thereafter. Cacher Studios LLC is owned and operated by Alexandra Frommer, daughter of Jeremy Frommer, the Company’s CEO.
such assets may not be recoverable. During the year ended December 31,
The March 2018 Convertible Note Offering
During the year ended December 31, 2018, the Company conducted multiple closings of a private placement offering to accredited investors (the “March 2018 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “Investors”) for aggregate gross proceeds of $239,400.
The March 2018 Convertible Note Offering consisted of a maximum of $900,000, with an over-allotment option of an additional $300,000, of units of the Company’s securities (each, a “March 2018 Unit” and collectively, the “March 2018 Units”), with each March 2018 Unit consisting of (a) a 14% Convertible Secured Promissory Note (each a “March 2018 Note” and together the “March 2018 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion price of
The Conversion Price of the Note and the Exercise Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase price, subject to carve-outs as described therein.
The Company recorded a $84,854 debt discount relating to
During the year ended December 31, 2018, the Company converted $239,000 of principal and $15,401 of unpaid interest into the August 2018 Equity During the year ended December 31, 2020 the lender forgave $400 of principal and $70 of unpaid interest. This was recorded as a gain on settlement of debt on the Consolidated Statements of Comprehensive Income (Loss).
The February 2019 Convertible Note Offering
During the The February 2019 Convertible Note Offering consisted of (a) a 10% Convertible Promissory Note (each a “February 2019 Note” and together, the “February 2019 Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to
The February 2019 Notes mature on the first (1st) anniversary of their issuance dates. In the event that the Offering’s Purchasers do not choose to convert the Notes into the Common Stock on or prior to the Maturity Dates, the principal and interest evidenced by the Note shall be mandatorily converted upon the earlier of (i) the listing of the Common Stock onto a national securities exchange, or (ii) upon a Qualified Offering.
The Company recorded a $2,465 debt discount relating to
During the year ended December 31, 2019, $20,000
The July 2020 Convertible Note Offering From July 2020 to September 2020, the Company conducted multiple closings of a private placement offering to accredited investors (the “July 2020 Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited investors” (the “July 2020 Investors”) for aggregate gross proceeds of $50,000. The July 2020 Convertible Note Offering accrues interest at a rate of twelve percent per annum (12%). The July 2020 Convertible Note Offering mature on the six (6th) month anniversary of their issuance dates. The July 2020 Note Offering is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at the lesser of (i) a fixed conversion price equal to $12.75 per share after the maturity date or (ii) any private placement offerings or one or more registered public offerings by the Company under the Securities Act in connection with its listing onto a national securities exchange (a “Qualified Offering”). Upon default the July 2020 Convertible Note Offering is convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) equal to 61% multiplied by the lowest trade of the common stock during the twenty (15) consecutive trading day period immediately preceding the date of the respective conversion. The conversion feature of the July 2020 Convertible Note Offering provides for an effective conversion price that is below market value on the date of issuance. Such feature is normally characterized as a beneficial conversion feature. When the Company records a BCF the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The Company recorded a BCF and related debt discount of $9,812, the discount is being accreted over the life of the Debenture to accretion of debt discount and issuance cost. The Company recorded a $21,577 debt discount relating to 3,922 July 2020 Convertible Note Offering issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company converted $50,000 of principal and $630 of unpaid interest into the September 2020 Equity Raise. Notes payable Notes payable – related party as of December 31,
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 and director 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
During the year ended December 31,
The 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
During the year ended December 31, 2019 $4,137 in principal was converted into the February 2019 Convertible Note Offering.
During the year ended December 31,
The June 2019 Loan Agreement
On June 3, 2019, the Company entered into a loan agreement (the “June 2019 Loan Agreement”), pursuant to which the Company was to be indebted in the amount of $2,400,000, of which $1,200,000 was funded by September 30, 2019 and $1,200,000 was exchanged from the May 2016 Rosen Loan Agreement dated May 26, 2016 in favor of Rosen for a joint and several interest in the Term Loan pursuant to the Debt Exchange Agreement. The June 2019 Loan Agreement, the June 2019 Loan bears interest at a rate of 12.5% per annum, compounded annually and payable on the maturity date of December 3, 2019 (the “June 2019 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the June 2019. In connection with the conversion of the May 2016 Rosen Loan Agreement the Company recorded a debt discount of $92,752. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.
On July 29, 2019, the Company entered into the First Amendment Agreement to the June 2019 Loan Agreement pursuant to which the parties agreed to amend the June 2019 Loan Agreement and the June 2019 Security Agreement so as to (i) increase the principal aggregate amount of the June 2019 Loan to $2,500,000, and (ii) amend the provisions regarding the ranking of interest of such loan.
On August 12, 2019, the Company entered into the Second Amendment Agreement to the June 2019 Loan Agreement pursuant to which the parties agreed to further amend the June 2019 Loan Agreement and the June 2019 Security Agreement so as to (i) increase the principal aggregate amount of the June 2019 Loan to $3,000,000, and (ii) amend the provisions regarding the ranking of interest of such loan.
On September 16, 2019, the Company entered into the Third Amendment Agreement to the June 2019 Loan Agreement pursuant to which the parties agreed to further amend the June 2019 Loan Agreement and the June 2019 Security Agreement so as to (i) increase the principal amount of the June 2019 Loan to $4,000,000; and (ii) amend the provisions therein with regard to the ranking of security interests.
On October 10, 2019 the Company and investors entered into the Fourth Amendment Agreement to the June 2019 Loan Agreement, whereby the parties thereto agreed to (i) increase the principal amount of the June 2019 Loan to $4,825,000; and (ii) amend the interest, conversion terms, and other covenants of the note.
On February 27, 2020, the Company entered into a fifth amendment agreement to the June 2019 Loan Agreement, whereby the parties agreed to amend Section 2.6 of the June 2019 Loan Agreement and provide for: (i) an additional 10% of shares to be issued at the time of conversion in the event that the price per share (or unit, as applicable) of securities issued in a Qualified Public Offering (as such term is defined in the Fifth Amendment) is below
During year ended December 31, 2020, the Company converted $4,325,000 of principal and $752,346 of unpaid interest into the September 2020 Equity Raise. During the year ended December 31, 2020 the Company repaid $500,000 in principal and $0 in interest. The December 2019 Gravitas Loan Agreement
On December 23, 2019, the Company entered into a loan agreement (the “December 2019 Gravitas Loan Agreement”), whereby the Company issued Gravitas a promissory note in the principal amount of $300,000 (the “December 2019 Gravitas Note”). Pursuant to the December 2019 Gravitas Loan Agreement, the December 2019 Gravitas Note has a flat interest payment of $20,000.
During the
The First January 2020 Loan Agreement On January 3, 2020, the Company entered into a loan agreement (the “First January 2020 Loan Agreement”) with an individual (the “First January 2020 Lender”) whereby the First January 2020 Lender issued the Company a promissory note of $250,000 (the “First January 2020 Note”). Pursuant to the First January 2020 Loan Agreement, the First January 2020 Note has an effective interest rate of 6%. As additional consideration for entering in the First January 2020 Loan Agreement, the Company issued the First January 2020 Lender 1,333 shares of the Company’s common stock. The maturity date of the First January 2020 Note was January 15, 2020 (the “First January 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the First January 2020 Note were due. The Company recorded a $16,000 debt discount relating to the 1,333 shares issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company converted $250,000 in principal to the Third February 2020 Note (as defined in Note 8). The Second January 2020 Loan Agreement On January 14, 2020, the Company entered into a loan agreement (the “Second January 2020 Loan Agreement”) with an individual (the “Second January 2020 Lender”), whereby the Second January 2020 Lender issued the Company a promissory note of $10,000 (the “Second January 2020 Note”). Pursuant to the Second January 2020 Loan Agreement, the Second January 2020 Note has an effective interest rate of 5%. The maturity date of the Second January 2020 Note was January 24, 2020 (the “Second January 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Second January 2020 Note were due. As additional consideration for entering in the Second January Loan Agreement, the Company issued a five-year warrant to purchase 50 shares of the Company’s common stock at a purchase price of $18.00 per share. The Company recorded a $580 debt discount relating to 50 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company repaid $10,000 in principal and $500 in interest. The Third January 2020 Loan Agreement On January 22, 2020, the Company entered into a loan agreement (the “Third January 2020 Loan Agreement”) with an individual (the “Third January 2020 Lender”), whereby the Third January 2020 Lender issued the Company a promissory note of $15,000 (the “Third January 2020 Note”). Pursuant to the Third January 2020 Loan Agreement, the Third January 2020 Note has an effective interest rate of 10%. The maturity date of the Third January 2020 Note was January 29, 2020 (the “Third January 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Third January 2020 Note were due. As additional consideration for entering in the Third January Loan Agreement, the Company issued a five-year warrant to purchase 75 shares of the Company’s common stock at a purchase price of $18.00 per share. The Company recorded a $892 debt discount relating to 75 warrants issued to the Third January 2020 Lender based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company repaid $15,000 in principal and $1,500 in interest. The Fourth January 2020 Loan Agreement On January 23, 2020, the Company entered into a loan agreement (the “Fourth January 2020 Loan Agreement”) with an individual (the “Fourth January 2020 Lender”) whereby the Fourth January 2020 Lender issued the Company a promissory note of $135,000 (the “Fourth January 2020 Note”). Pursuant to the Fourth January 2020 Loan Agreement, the Fourth January 2020 Note has an effective interest rate of 7%. As additional consideration for entering in the First January 2020 Loan Agreement, the Company issued the Fourth January 2020 Lender 750 shares of the Company’s common stock. The maturity date of the Fourth January 2020 Note was February 23, 2020 (the “Fourth January 2020 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the Fourth January 2020 Note were due. During the year ended December 31, 2020, the Company converted $135,000 in principal to the Second February 2020 Note (as defined below). The January 2020 Rosen Loan Agreement
On January 14, 2020, the Company entered into a loan agreement (the “January 2020 Rosen Loan Agreement”), whereby the Company issued a promissory note in the principal amount of $150,000 (the “January 2020 Rosen Note”). Pursuant to the January 2020 Rosen Loan Agreement, the January 2020 Rosen Note accrues interest at a fixed amount of $2,500 for the duration of the note.
During the
The February Banner 2020 Loan Agreement
On February 15, 2020, the Company entered into a loan agreement (the “February 2020 Banner Loan Agreement”), whereby the Company issued a promissory note in the principal amount of $9,900 (the “February 2020 Note”) for expenses paid on behalf of the Company by an employee. Pursuant to the February 2020 Loan Agreement, the February 2020 Note bears interest at a rate of $495. As additional consideration for entering in the February 2020 Loan Agreement, the Company issued a five-year warrant to purchase
During the
The February 2020 Frommer Loan Agreement
On February 18, 2020, the Company entered into a loan agreement (the “February 2020 Frommer Loan Agreement”) with Jeremy Frommer, an officer of the Company, whereby the Company issued Frommer a promissory note in the principal amount of $2,989 (the “February 2020 Frommer Note”). As additional consideration for entering in the June 2018 Frommer Note Loan Agreement, the Company issued Frommer a five-year warrant to purchase
During the
On During the year ended December 31, The July 2020 Loan Agreement On July 30, 2020, the Company entered into a loan agreement (the “July 2020 Loan Agreement”) with an individual (the “July 2020 Lender”), whereby the July 2020 Lender issued the Company a promissory note of $5,000 (the “July 2020 Note”). Pursuant to the July 2020 Loan Agreement, the July 2020 Note has an effective interest rate of 5%. The maturity date of the July 2020 Note was August 06, 2020 (the “July 2020 Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the July 2020 Note were due. As additional consideration for entering in the July 2020 Loan Agreement, the Company issued a five-year warrant to purchase 25 shares of the Company’s common stock at a purchase price of $18.00 per share. The Company recorded a $316 debt discount relating to 25 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost. During the year ended December 31, 2020, the Company repaid $5,000 in principal and $250 in interest. The September 2020 Goldberg Loan Agreement On September 15, 2020, the Company entered into a loan agreement (the “September 2020 Goldberg Loan Agreement”) with Goldberg whereby the Company issued a promissory note of $16,705 (the “September 2020 Goldberg Note”). Pursuant to the September 2020 Goldberg Loan Agreement, the September 2020 Goldberg Note has an interest rate of 7%. The maturity date of the September 2020 Goldberg Note is September 15, 2022 (the “September 2020 Goldberg Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under note are due. The September 2020 Goldberg Loan is secured by the tangible and intangible property of the Company. Since the September 2020 Goldberg Note has a make-whole provision if the shares of the Company’s common stock issued to the lender in accordance with the Lender’s Exchange Agreement (see note 10) have a value equal to or less than $6,463,363 determined by using the lowest VWAP of the last 30 days prior to September 14, 2021. The principal amount of the September 2020 Goldberg Note shall increase by 200% of the difference between the initial consideration and the September 14, 2021, value. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The make-whole feature gave rise to a derivative liability that has been marked to market during the year ended December 31, 2021, and the change in derivative liability is recorded on Consolidated Statements of Comprehensive Loss. See note 10. On September 15, 2021, the make-whole provision was triggered, causing an increase in principal of the September 2020 Goldberg Note by $939,022. During the year ended December 31, 2021, the Company accrued interest of $3,576. During the year ended December 31, 2021, the Company entered into a settlement agreement whereas the Company agreed to pay $200,000 in cash and $150,000 in shares of Common Stock. The September 2020 Rosen Loan Agreement On September 15, 2020, the Company entered into a loan agreement (the “September 2020 Rosen Loan Agreement”) with Rosen whereby the Company issued a promissory note of $3,295 (the “September 2020 Rosen Note”). Pursuant to the September 2020 Rosen Loan Agreement, the September 2020 Rosen Note has an interest rate of 7%. The maturity date of the September 2020 Rosen Note is September 15, 2022 (the “September 2020 Rosen Maturity Date”), at which time all outstanding principal, accrued and unpaid interest and other amounts due under the note are due. The September 2020 Rosen Loan is secured by the tangible and intangible property of the Company. Since the September 2020 Rosen Note has a make-whole provision if the shares of the Company’s common stock issued to the lender in accordance with the Lender’s Exchange Agreement (see note 10) have a value equal to or less than $1,274,553 determined by using the lowest VWAP of the last 30 days prior to September 14, 2021. The principal amount of the September 2020 Rosen Note shall increase by 200% of the difference the initial consideration and the September 14, 2021 value. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The make-whole feature of gave rise to a derivative that has been marked to market during the year ended December 31, 2021, and the change in derivative liability is recorded on Consolidated Statements of Comprehensive Loss. See note 10. On September 15, 2021 the make-whole provision was triggered, causing an increase in principal of the September 2020 Rosen Note by $185,279. During the year ended December 31, 2021, the Company accrued interest of $1,610. During the year ended December 31, 2021, the Company repaid $188,574 in principal and $1,677 in interest. Demand loan During the year ended December 31, 2020 the Company repaid $75,000 of principal.
On December 17, 2019, Standish made non-interest bearing loans of $150,000 to the Company in the form of cash. The loan is due on demand and unsecured.
During the
On March 27, 2020, a lender made non-interest bearing loans of $100,000 to the Company in the form of cash. The loan is due on demand and unsecured.
During the On April 9, 2020, a lender made non-interest bearing loans of $50,000 to the Company in the form of cash. The loan is due on demand and unsecured. During the year ended December 31, 2020, the Company converted $50,000 of principal into the September 2020 Equity Raise. On April 21, 2020, a lender made non-interest bearing loans of $100,000 to the Company in the form of cash. The loan is due on demand and unsecured. During the year ended December 31, 2020, the Company converted $100,000 of principal and $6,707 of unpaid interest into the September 2020 Equity Raise. On July 6, 2020, a lender made non-interest bearing loans of $100,000 to the Company in the form of cash. The loan is due on demand and unsecured. During the year ended December 31, the Company converted $100,000 of principal and $6,707 of unpaid interest into the September 2020 Equity Raise. On August 10, 2020, a lender made non-interest bearing loans of $40,000 to the Company in the form of cash. The loan is due on demand and unsecured. During the year ended December 31, 2020 the Company repaid $40,000 of principal. On September 9, 2020, a lender made non-interest bearing loans of $50,000 to the Company in the form of cash. The loan is due on demand and unsecured. During the year ended December 31, 2020 the Company repaid $50,000 of principal. Officer compensation During the year ended December 31, 2021 and 2020, the Company paid
Revenue During the year ended December 31, 2021 the Company received revenue of $80,000 from Dune for branded content services prior to consolidation but after recognition as an equity method investee. Note The Company has identified derivative instruments arising from a make-whole feature in the Company’s notes payable during the year ended December 31, 2021. For the terms of the make-whole features see the September 2020 Rosen Loan Agreement and the September 2020 Goldberg Loan Agreement in Note 10. The Company has also identified derivative instruments arising from convertible notes that have an option to convert at a variable number of shares in the Company’s convertible notes payable during the year ended December 31, 2021. For the terms of the conversion features see Note 10. The Company had no derivative assets or liabilities measured at fair value on a recurring basis as of December 31, 2021. The Company utilizes a Monte Carlo simulation model for the make whole feature and a binomial option model for convertible notes that have an option to convert at a variable number of shares 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 inputs utilized in the application of the Monte Carlo model included a starting stock price, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, drift, and a risk-free rate. The inputs utilized in the application of the Binomial model included a stock price on valuation date, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility, and a risk-free rate. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations. Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note adjusted to be on a continuous return basis to align with the Monte Carlo simulation model and binomial model. Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future. Volatility: The Company calculates the expected volatility based on the company’s historical stock prices with a look back period commensurate with the period to maturity. Expected term: The Company’s remaining term is based on the remaining contractual maturity of the convertible notes. The following are the changes in the derivative liabilities during the year ended December 31, 2021 and 2020.
Note 12 – Stockholders’
Shares Authorized
On July 13, 2020, the Company filed the Second Amended and Restated Articles of Incorporation with the Secretary of State of the State of Nevada, which authorize the issuance of 100,000,000 shares of common stock, and 20,000,000 shares of preferred stock. On August 17, 2020, following board of director’s approval, the Company filed a Certificate of Change to its Articles of Incorporation (the “Amendment”), with the Secretary of State of the State of Nevada to effectuate a one-for-twenty (1:3) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share, without any change to its par value. The Amendment became effective on August 17, 2020. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share. As a result, all share information in the accompanying consolidated financial statements has been adjusted as if the reverse stock split happened on the earliest date presented.
Series E Convertible Preferred Stock On December 29, 2020, the Company entered into securities purchase agreements with thirty-three accredited investors whereby the Investors have agreed to purchase from the Company an aggregate of 7,778 shares of the Company’s Series E Convertible Preferred Stock, par value $0.001 per share and 2,831,715 warrants to purchase shares of the Company’s common stock, par value $0.001 per share. The Series E Preferred Stock is convertible into a total of 1,887,810 shares of Common Stock. The combined purchase price of one Conversion Share and one and a half warrant was $4.12. The aggregate purchase price for the Series E Preferred Stock and warrants was $7,777,777. The Company has recorded $817,353 to stock issuance costs, which are part of Additional Paid-in Capital. The warrants are exercisable for a term of five-years from the date of issuance, at an exercise price of $4.50 per share. The warrants provide for cashless exercise to the extent that there is no registration statement available for the underlying shares of Common Stock. The placement agent for the transaction and received cash compensation equal to 10% of the aggregate purchase price and warrants to purchase 471,953 shares of the Company’s common stock, at an exercise price of $5.15 per share (the “PA Warrants”). The PA Warrants are exercisable for a term of five-years from the date of issuance. During the year ended December 31, 2021, the Company received the $40,000 of the subscription receivable for the Series E Convertible Preferred Stock. The Company has recorded $4,225 to stock issuance costs, which are part of Additional Paid-in Capital. During the year ended December 31, 2021, investors converted 7,278 shares of the Company’s Series E Convertible Preferred Stock into 1,766,449 shares of the Company’s common stock. Common Stock On January 30, 2020, the Company issued
On January 6, 2020, the Company issued
On March 5, 2020, the Company issued
On March 13, 2020 the Company entered into an exchange agreement with a warrant holder. The company agreed to exchange
On March 19, 2020, the Company issued
On June 18, 2020, the Company issued 50,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $525,000. On June 29, 2020 the Company entered into an exchange agreement with a warrant holder. The company agreed to exchange 5,833 warrants for 2,239 shares of the company common stock and $10,000. On July 3, 2020, the Company issued 15,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $204,300. On July 17, 2020 the Company issued 6,667 shares of its restricted common stock to the Second February 2020 Lender in connection with the Second July 2020 convertible Loan Agreement. On August 15, 2020, the Company issued 6,167 shares of its restricted common stock to consultants in exchange for services at a fair value of $50,693. On August 21, 2020, the Company issued 20,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $180,000. On August 31, 2020, the Company issued 1,866 shares of its restricted common stock to consultants in exchange for services at a fair value of $15,842. On September 11, 2020 the Second February 2020 Lender converted $125,000 of the outstanding principal into 34,722 shares of the Company’s common stock. On September 11, 2020 the February 2019 Convertible Note Lender converted $70,542 of the outstanding principal and $112,888 of the outstanding interest into 64,124 shares of the Company’s common stock.
On September 15, 2020, the Company exchanged $7,325,000 of principal and $967,518 of accrued but unpaid interest of the Company’s debt obligations for $500,000 cash, 2,744,288 shares of Common Stock, and 331,456 warrants (the “Lender’s Exchange Agreement”). The Company also issued the lenders notes totaling $20,000. See note 9 for the September 2020 Goldberg Loan and the September 2020 Rosen Loan. The warrants have an exercise price equal to $4.50 per share, expiring five years from the date of issuance. Since the terms of the original debt were exchanged this was accounted for under extinguishment accounting. The Company determined this debt exchange was a debt extinguishment and the Company recognized a loss on debt extinguishment of $4,915,327, including the derivative liability value. September 2020 Equity Raise Effective September 15, 2020, the Company consummated an underwritten public offering (the “September 2020 Equity Raise”) of 1,725,000 units of securities (the “Units”), with each Unit consisting of (i) one share of common stock, and (ii) one warrant to purchase one share of common stock (the “Warrants”). The September 2020 Equity Raise was conducted pursuant to an Underwriting Agreement, dated September 10, 2020, by and between the Company and The Benchmark Company, LLC, acting as the representative (the “Representative”) of the several underwriters named therein (the “Underwriting Agreement”). In connection with the September 2020 Equity Raise, the Company granted the underwriters a 45-day option to purchase up to 258,750 shares of common stock and/or 258,750 Warrants to purchase common stock to cover over-allotments, if any. The public offering price per Unit was $4.50. The shares of common stock and Warrants were issued separately and were immediately separable upon issuance. Each Warrant represents the right to purchase one share of common stock at an exercise price of $4.50 per share, expiring 5 years from the date of issuance. The gross proceeds to the Company from the September 2020 Equity Raise, before deducting underwriting discounts and commissions and other estimated offering expenses, and excluding the exercise of any Warrants, was approximately $7,762,500. In connection with the September 2020 Equity Raise, the Company converted $3,183,667 of principal and accrued but unpaid interest of the Company’s debt obligations into 768,204 shares of Common Stock and $570,416 warrants. See Notes 7, 8, and 9. The warrants have an exercise price equal to $4.50 per share, expiring five years from the date of issuance. A down-round event was triggered in connection with the September 2020 Equity Raise, resulting in a contingent BCF that had a value of $3,051,810. As these notes were fully converted in the September 2020 Equity Raise, the discount was expensed to accretion of debt discount and issuance cost on the Consolidated Statements of Comprehensive Loss. On September 30, 2020, the Company issued 7,979 shares of its restricted common stock to consultants in exchange for services at a fair value of $21,304. On December 14, 2020, the Company issued 10,417 shares of its restricted common stock to consultants in exchange for services at a fair value of $38,647. On December 21, 2020, the Company issued 8,371 shares of its restricted common stock to employees in exchange for services at a fair value of $31,323. During the year ended December 31, 2020 the Company cancelled 50,650 shares of treasury stock. On January 14, 2021, the Company issued 30,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $133,200. On January 20, 2021, the Company issued 40,000 shares of its restricted common stock to consultants in exchange for a year of services at a fair value of $192,000. On May 24, 2021, the Company amended the contract and issued and additional 10,000 shares of its restricted common stock. these shares had a fair value of $34,500. The shares issued to the consultant were recorded as common stock issued for prepaid services and will be expensed over the life of the consulting contract to share based payments. During the year ended December 31, 2021, the Company recorded $99,908 to stock-based compensation expense related to these shares. On February 1, 2021, the Company issued 50,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $196,000. On February 3, 2021, the Company issued 1,929 shares of its restricted common stock to consultants in exchange for services at a fair value of $8,198. On February 8, 2021, the Company entered into a consulting agreement whereas the Company issued a total of 2,092 shares of common stock in exchange for services at a fair value of $7,502. On February 18, 2021, the Company issued 10,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $48,000. On February 18, 2021, the Company issued 10,417 shares of its restricted common stock to consultants in exchange for services at a fair value of $50,002. On February 26, 2021, the Company issued 291 shares of its restricted common stock to consultants in exchange for services at a fair value of $1,499. On March 17, 2021, the Company issued 9,624 shares of its restricted common stock to consultants in exchange for services at a fair value of $49,371. On March 28, 2021, the Company issued 31,782 shares of its restricted common stock to settle outstanding vendor liabilities of $125,000. On March 31, 2021, the Company issued 13,113 shares of its restricted common stock to settle outstanding vendor liabilities of $43,667. In connection with this transaction the Company also recorded a loss on settlement of vendor liabilities of $12,719. On April 10, 2021, the Company issued 16,275 shares of its restricted common stock to consultants in exchange for services at a fair value of $69,332. On April 21, 2021, the Company entered into a consulting agreement whereas the Company issued a total of 1,048 shares of common stock in exchange for services at a fair value of $3,587. On June 17, 2021, the Company entered into an underwriting agreement with The Benchmark Company LLC, pursuant to which we agreed to sell to the Underwriter in a firm commitment underwritten public offering an aggregate of 750,000 shares of the Company’s common stock, at a public offering price of $3.40 per share. The Company also granted the Underwriter a 30-day option to purchase up to an additional 112,500 shares of Common Stock to cover over-allotments, if any. The Offering closed on June 21, 2021. The net proceeds to the Company from the equity raise was $2,213,500. As part of the underwriting agreement the Company issued 46,667 warrants of the Company’s common stock to Benchmark. The warrants have an exercise price $5.40 and a term of five years. On July 9, 2021, the Representative exercised the over-allotment option to purchase an additional 954,568 shares of Common Stock. On July 20, 2021, the Company issued 2,154 shares of its restricted common stock to consultants in exchange for services at a fair value of $8,570. On July 15, 2021, the Company issued 715 shares of its restricted common stock to consultants in exchange for services at a fair value of $2,500. On August 15, 2021, the Company issued 820 shares of its restricted common stock to consultants in exchange for services at a fair value of $2,500. On August 26, 2021, the Company issued 348 shares of its restricted common stock to consultants in exchange for services at a fair value of $999. On September 15, 2021, the Company issued 793 shares of its restricted common stock to consultants in exchange for services at a fair value of $2,500. On October 25, 2021, the Company entered into a securities purchase agreement with institutional investors resulting in the raise of $3,407,250 in gross proceeds to the Company. Pursuant to the terms of the purchase agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 850,000 shares of the Company’s common stock, par value $0.001 per share, at a purchase price of $4.50 per Share. On November 5, 2021, the Company issued 25,000 shares of its restricted common stock to consultants in exchange for services at a fair value of $85,750. On November 15, 2021, the Company issued 13,392 shares of its restricted common stock to consultants in exchange for services at a fair value of $41,917. On November 29, 2021, the Company issued 250,000 shares of its restricted common stock to settle outstanding vendor liabilities of $576,783. In connection with this transaction the Company also recorded a loss on settlement of vendor liabilities of $33,217. On November 29, 2021, the Company issued 101,097 shares of its restricted common stock to consultants in exchange for services at a fair value of $246,676. On December 3, 2021, the Company issued 194 shares of its restricted common stock to consultants in exchange for services at a fair value of $429. On December 14, 2021, the Company issued 211 shares of its restricted common stock to consultants in exchange for services at a fair value of $452. Stock Options The Company applied fair value accounting for all share-based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The assumptions used for options granted during the years December 31, 2021 and 2020, are as follows:
The following is a summary of the Company’s stock option activity:
During the year ended December 31, 2018 the Company granted options of 11,667 to consultants that has a fair value of $57,123. As of the date of this filing the company has not issued these options and they are recorded as an accrued liability on the Consolidated Balance Sheet. On May 7, 2020, the board of directors approved the Jerrick Media Holdings, Inc. 2020 Omnibus Equity Incentive Plan (the “Plan”). Only employees, non-employee directors and consultants are eligible for awards under the Plan. The Plan provides for awards in the form of options (incentive stock options or nonstatutory stock options) restricted stock grants, and restricted stock unit grants. Up to 2,500,000 shares of common stock may be issued under the Plan and the option exercise price of stock options granted under the Plan shall not be less than 100% of the Fair Market Value (as defined in the Plan) (110% for 10% shareholders in the case of ISOs) of a share of common stock on the date of the grant. The option exercise price may be payable in cash, surrender of stock, cashless exercise or net exercise. Each grant awarded under the Plan shall be evidenced by a grant agreement and may or may not be subject to vesting. The Plan is subject to the approval of the Company’s stockholders within one year of the date of adoption by the Board of Directors. On July 8, 2020, the Company’s stockholders approved the Plan, which terminates on May 7, 2030. The Board of Directors may amend or terminate the Plan at any time and for any reason. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules. On May 13, 2020 the Company entered into an exchange agreement with eight option holders. The company agreed to exchange 152,992 options previously issued under the 2015 Incentive Stock and Award Plan for 229,491 shares of the Company common stock. In connection with this agreement the Company recorded incremental compensation on the exchange of options to stock of $1,117,031. Stock-based compensation for stock options has been recorded in the consolidated statements of operations and totaled $7,616,195 and $4,092,013, for the year ended December 31, 2021 and 2020, respectively. As of December 31, 2021, there was $3,197,018 of total unrecognized compensation expense related to unvested employee options granted under the Company’s share-based compensation plans that is expected to be recognized over a weighted average period of approximately 1.23 year. Warrants The Company applied fair value accounting for all share-based payments awards. The fair value of each warrant granted is estimated on the date of grant using the Black-Scholes option-pricing model.
The assumptions used for warrants granted during the
Warrant Activities
The following is a summary of the Company’s warrant activity:
On October 6, 2020, the underwriters for the September 2020 Equity Raise partially exercised the over-allotment option and on October 8, 2020, purchased an additional 258,750 warrants, generating gross proceeds, before deducting underwriting discounts and commissions, of $2,588. During the
During the
During the
During the year ended December 31, 2020, some of the Company’s warrants had a down-round provision triggered that resulted in a lower exercise price. A deemed dividend of $18,421 was recorded to the Statements of Comprehensive Loss. During the Year ended December 31, 2021, the Company issued 2,250,691 shares of common stock to a certain warrant holder upon the exercise of 2,414,218 warrants. The Company received $9,487,223 in connection with the exercise of the warrant. During the year ended December 31, 2021, a total of 486,516 warrants were issued in connection with the Series E Convertible Preferred Stock raise. During the year ended December 31, 2021, a total of 1,137,575 warrants were issued with convertible notes (See Note 9 above). The warrants have a grant date fair value of $3,258,955 using a Black-Scholes option-pricing model and the above assumptions. During the year ended December 31, 2021, some of the Company’s warrants had a down-round provision triggered that also resulted in an additional 127,801 warrants to be issued. A deemed dividend of $410,750 was recorded to the Statements of Comprehensive Loss. During the year ended December 31, 2021, the Company issued 80,000 warrants in connection with the underwriting agreement. Stock-based compensation for stock warrants of 129,375 has been recorded in the Consolidated Statements of Comprehensive Loss and totaled $480,863, for the year ended December 31, 2021. Share-based awards, restricted stock award (“RSAs”) On February 4, 2021, the Board resolved that, the Company shall pay each member of the Board, for each calendar quarter during which such member continues to serve on the Board, compensation as a group amounts to $62,500 per quarter. The shares vest one year after issuance. A summary of the activity related to RSUs for the year ended December 31, 2021 is presented below:
Stock-based compensation for RSA’s has been recorded in the consolidated statements of operations and totaled $391,035 for the year ended December 31, 2021. Note
In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the
On March 26, 2020 and April 30, 2020, the Company received 2 separate loans pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act. When the applications for PPP first opened up, there was limited available funding and much confusion surrounding the application process. The Company initially submitted its application for the May 2020 PPP Loan in early April but received no response in the aftermath of submitting the application. After consulting multiple advisors, the Company made the decision to apply elsewhere, due to the rampant media coverage of institutions running out of funding and the Company’s need for the capital and belief that if 2 separate loans were approved, the remaining application could simply be withdrawn. Therefore, in late April, the company proceeded with applying for the April 2020 PPP Loan. After some conflicting communications regarding acceptance, the Company attempted to contact the lender to clarify but got no response. After continued attempts to follow up with both lenders, the Company received approval for the May 2020 PPP Loan and funding for the April 2020 PPP Loan on the same day, followed the next day by the funding of the May 2020 PPP Loan. The Company immediately separated the funds for the April 2020 PPP Loan into a separate reserved bank account with the intention of returning the funds. However, after several attempts to contact the lender with no response, the Company was faced with difficulty raising funds in the early-Covid economy and made the decision to utilize the funds for operations and pursue an installment repayment plan when they were able to reach the lender. As of the date of this filing, the Company has begun making repayments on the loan, absent a formal installment agreement due to difficulties reaching the lender. The Company intends to complete repayment before the end of 2021. As each company is only permitted one loan under the CARES Act, there is a possibility the loan may be called by the SBA and the Company would have to repay the loan in full at such time. As of December 31, 2021, the May 2020 PPP Loan is no longer outstanding, as during the year ended December 31, 2021, the Company repaid $136,597 in principal and was forgiven $275,903 of principal and $3,119 of accrued interest. As of December 31, 2021 there was $198,655 in principal outstanding on the April 2020 PPP Loan. Litigation On or about June 25, 2020, Home Revolution, LLC (“Home Revolution”) filed a lawsuit in the United States District Court for the District of New Jersey, Home Revolution, LLC, et al. v. Jerrick Media Holdings, Inc. et al., Case No. 2:20-cv-07775-JMV-MF. The Complaint alleges, among other things, that Creatd, Inc. breached the Membership Interest Purchase Agreement, as modified, and ancillary transaction documents in connection with the acquisition of Seller’s Choice, LLC, from Home Revolution in September 2019. The Complaint additionally alleges violation of the New Jersey Uniform Securities Law, violations of the Exchange Act and Rule 10b-5 thereunder, fraud, equitable accounting, breach of fiduciary duty, conversion and unjust enrichment. Plaintiff also sought to have a receiver appointed by the Court to take over Creatd’s operations. After substantial motion practice, Creatd successfully settled this dispute from June 2020 for a total of $799,000, which includes $660,000 of note principal and $139,000 of accrued interest. The matter has been dismissed as of March 3, 2022. On or about August 30, 2021, Robert W. Monster and Anonymize, Inc. (“Monster”) filed a lawsuit in the United States District Court for the Western District of Washington at Seattle, Robert W. Monster, et al. v. Creatd, Inc., et al. (Western District of Washington at Seattle 2:21-CV-1177). The Complaint alleges, among other things, that action for Declaratory Judgment under 28 U.S.C. § 2201 that Monster’s registration and use of the internet domain name VOCL.COM (the “Domain Name”) does not violate Creatd’s rights under the Anticybersquatting Consumer Protection Act (“ACPA”), 15 U.S.C. § 1125(d), or otherwise under the Lanham Act, 15 U.S.C. § 1051 et seq. Creatd claims trademark rights and certain other rights with respect to the term and the domain name VOCL.COM. Monster seeks a determination by the Court that Monster’s registration and/or use of VOCL.COM is not, and has not been in violation of the ACPA, and that Plaintiffs’ use of VOCL.COM constitutes neither a violation of the ACPA nor trademark infringement or dilution under the Lanham Act. Creatd believes the lawsuit lacks merit and will vigorously challenge the action. At this time, we are unable to estimate potential damage exposure, if any, related to the litigation. Lease Agreements
On May 5, 2018, the Company signed a 5-year lease for approximately 2,300 square feet of office space at 2050 Center Avenue Suite 640, Fort Lee, New Jersey 07024. Commencement date of the lease is June 1, 2018.
On April 1, 2019, the Company signed a 4-year lease for approximately 796 square feet of office space at 2050 Center Avenue Suite 660, Fort Lee, New Jersey 07024. Commencement date of the lease is April 1, 2019.
On July 28, 2021, the Company signed a 3-year lease for approximately 1,364 square feet of office space at 1674 Meridian Avenue, Miami Beach, Florida 33139. The
On February 16, 2022, the company entered into a termination agreement whereas CRTD agrees to pay $115,000 and forfeit the security deposit of $16,836. The lease was terminated as of February 28, 2022 and was determined that the lease agreement was abandoned under ASC 842- 20 -35 -10. The Company updated useful life of the ROU asset and marked the ROU asset and lease liability its single lease cost of $18,451.
Supplemental cash flow and other information related to leases was as follows:
Total Rent expense for the year ended December 31, 2021 and 2020 was $216,845 and $107,737, respectively. Note 14 – Acquisition Plant Camp LLC On June 1, 2021, the Company, entered into a Membership Interest Purchase Agreement (the “MIPA”) with Angela Hein (“Hein”) and Heidi Brown (“Brown”, and together with Hein, the “Sellers”), pursuant to which the Purchaser acquired 490,863 common units (the “Membership Interests”) of Plant Camp LLC, a Delaware limited liability company (“Plant Camp”) from the Sellers, resulting in the Purchaser owning 33% of the issued and outstanding equity of Plant Camp. The Membership Interests were purchased for $175,000. On June 4, 2021, the Company, entered into a MIPA with Sellers, pursuant to which the Purchaser acquired 841,005 common units of Plant Camp from the Sellers, resulting in the Purchaser owning a total of 89% of the issued and outstanding equity of Plant Camp. The additional Membership Interests were purchased for $300,000. The acquisition was accounted for as a step acquisition however there was no change in value of the Company’s existing equity interest. The Company utilized the fair value of the consideration to determine the fair value of the existing equity interest based on the total merger consideration offered. The following sets forth the components of the purchase price:
The excess purchase price amounts are provisional and may be adjusted during the one-year measurement period as required by U.S. GAAP. The following table provides a summary of the preliminary allocation of the excess purchase price.
The goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition. The following presents the unaudited pro-forma combined results of operations of the Company with Plant Camp as if the entities were combined on January 1, 2020.
WHE Agency, Inc. On July 20, 2021, the Company entered into a Stock Purchase Agreement to purchase 44% ownership and 55% of voting power of the issued and outstanding shares of WHE Agency, Inc., (“WHE”). The aggregate closing consideration was $1,038,271, which consists of a combination of $144,750 in cash and $893,521 in the form of 224,503 shares of the Company’s restricted common stock at a price of $3.98 per share. Based on the purchase price of $1,038,271 for 44% ownership, the fair value of the non-controlling interest was estimated to be $1,190,000 based on the consideration from the Company. WHE is a talent management and public relations agency dedicated to the representation and management of family- and lifestyle-focused influencers and digital creators. The following sets forth the components of the purchase price:
The excess purchase price amounts were recorded to goodwill and is provisional and may be adjusted during the one-year measurement period as required by U.S. GAAP. The following table provides a summary of the preliminary allocation of the excess purchase price.
The goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition. The following presents the unaudited pro-forma combined results of operations of the Company with WHE as if the entities were combined on January 1, 2020.
Dune Inc. Prior to October 3, 2021, the Company invested $732,297 into Dune See note 6 & 7. Using step acquisition accounting, the Company decreased the value of its existing equity interest to its fair value based on its purchase price on October 3, 2021, resulting in the recognition of an impairment in investment of $424,632, which was included in within our consolidated statements of operations. The Company utilized the fair value of the consideration to determine the fair value of the existing equity interest based on the total merger consideration offered and the Company’s stock price at acquisition. On October 3, 2021, we, through Creatd Partners, LLC (“Buyer”), entered into a Stock Purchase Agreement (the “Dune Agreement”) with Standard Holdings, Inc. (“SHI”) and Mark De Luca (“De Luca”) (SHI and De Luca, collectively the “Dune Sellers”), and Stephanie Roy Dufault, whereby Buyer purchased a majority stake in Dune, Inc., a Delaware corporation (“Dune”). Pursuant to the Dune Agreement, which closed on October 4, 2021, Buyer acquired a total of 3,905,634 shares of the common stock of Dune (the “Purchased Shares”). The Company issued 163,344 restricted shares of the Company’s common stock to the Dune Sellers. In addition, pursuant to the Dune Agreement, $50,000 worth of the Company’s common stock issuable to the Dune Sellers on a pro rata basis, priced in accordance with the terms and conditions set forth in the Dune Agreement (the “Indemnification Escrow Amount”), shall be held in escrow and reserved in each Dune Seller’s name by the Company’s transfer agent until such time as release is authorized under the Agreement. The following sets forth the components of the purchase price:
Due to the limited amount of time since the acquisition date, the assets and liabilities of Dune Inc. were recorded based primarily on their acquisition date carrying values. Management believes the estimated fair value of these accounts on the acquisition date approximates their carrying value as reflected in the table above due to the short-term nature of these instruments. The remaining assets and liabilities primarily consisted of goodwill, customer relationships, know how, and tradenames. We will adjust the remaining assets and liabilities to fair value as valuations are completed and we obtain information necessary to complete the analyses, but no later than one year from the acquisition data. The excess purchase price amounts are provisional and may be adjusted during the one-year measurement period as required by U.S. GAAP. The following table provides a summary of the preliminary allocation of the excess purchase price.
The goodwill represents the assembled workforce, acquired capabilities, and future economic benefits resulting from the acquisition. The following presents the unaudited pro-forma combined results of operations of the Company with Dune as if the entities were combined on January 1, 2020.
Note 15 – Segment Information We operate in three reportable segments: Creatd Labs, Creatd Ventures, and Creatd Partners. Our segments were determined based on the economic characteristics of our products and services, our internal organizational structure, the manner in which our operations are managed and the criteria used by our Chief Operating Decision Maker (CODM) to evaluate performance, which is generally the segment’s operating losses.
The following tables present certain financial information related to our reportable segments and Corporate:
During the year ended December 31, 2021, Creatd Partners acquired assets from the Purchase of WHE. See note 14 for a list of assets acquired. During the year ended December 31, 2021, Creatd Ventures acquired assets from the Purchase of Dune and Plant Camp. See note 14 for a list of assets acquired. Note 16 –Income Taxes Components of deferred tax assets are as follows:
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:
The following is a reconciliation of the beginning and ending amount of the unrecognized tax benefit for the
Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets of the Company will not be fully realizable for the years ended December 31, 2021 and 2020. Accordingly, management had applied a full valuation allowance against net deferred tax assets as of December 31, 2021 and 2020. As of December 31, 2021, the Company had approximately $54 million of federal net operating loss carryforwards available to reduce future taxable income which will begin to expire in 2034 for both federal and state purposes. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended (the “Code”). The Act reduces the federal corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. ASC 470 requires the Company to remeasure the existing net deferred tax asset in the period of enactment. The Act also provides for immediate expensing of 100% or the costs of qualified property that is incurred and placed in service during the period from September 27, 2017 to December 31, 2022. Beginning January 1, 2023, the immediate expensing provision is phased down by 20% per year until it is completely phased out as of January 1, 2027. Additionally, effective January 1, 2018, the Act imposes possible limitations on the deductibility of interest expense. As a result of the provisions of the Act, the Company’s deduction for interest expense could be limited in future years. The effects of other provisions of the Act are not expected to have a material impact on the Company’s financial statements. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that begins in the reporting period that includes the Act’s enactment date and ends when an entity has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements under ASC 720. However, in no circumstance should the measurement period extend beyond one year from the enactment date. In accordance with SAB 118, a company must reflect in its financial statements the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. SAB 118 provides that to the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. The Company does not reflect a deferred tax asset in its financial statements but includes that calculation and valuation in its footnotes. We are still analyzing the impact of certain provisions of the Act and refining our calculations. The Company will disclose any change in the estimates as it refines the accounting for the impact of the Act. Federal and state tax laws impose limitations on the utilization of net operating losses and credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. Accordingly, the Company’s ability to utilize these carryforwards may be limited as a result of an ownership change which may have already happened or may happen in the future. Such an ownership change could result in a limitation in the use of the net operating losses in future years and possibly a reduction of the net operating losses available. Note
Appointment of New Directors On February 17, 2022, the Board of Directors (the “Board”) of the Company appointed Joanna Bloor, Brad Justus, and Lorraine Hendrickson to serve as members of the Board. Ms. Bloor has been nominated to, and will serve as, chair of the Compensation Committee, and to be a member of the Audit Committee and Nominating & Corporate Governance Committee. Mr. Justus has been nominated, and will serve as, chair of the Nominating & Corporate Governance Committee, and to be a member of the Compensation Committee and Audit Committee. Ms. Hendrickson has been nominated to, and will serve as, chair of the Audit Committee and to be a member of the Compensation and Nominating & Corporate Governance Committee. Departure of Directors On February 17, 2022, the Board received notice that effective immediately, Mark Standish resigned as Chair of the Board, Chair of the Audit Committee and as a member of the Compensation Committee and Nominating & Corporate Governance Committee; Leonard Schiller resigned as member of the Board, Chair of the Compensation Committee and as a member of the Audit Committee and Nominating & Corporate Governance Committee; and LaBrena Martin resigned as a member of the Board, Chair of the Nominating & Corporate Governance Committee and as a member of the Audit Committee and Compensation Committee. Such resignations are not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Management Restructuring On February 17, 2022, the Board of the Company approved the restructuring of the Company’s senior management team to eliminate the Co-Chief Executive Officer role, appointing Jeremy Frommer as Executive Chairman and Founder, and appointing Laurie Weisberg as Chief Executive Officer (the “Second Restructuring”). Prior to the Second Restructuring, Mr. Frommer and Ms. Weisberg served as the Company’s co-Chief Executive Officers and Ms. Weisberg served as the Company’s Chief Operating Officer. The Second Restructuring does not impact the role or functions of the Company’s Chief Financial Officer, Chelsea Pullano, or the role or functions of the Company’s President and Chief Operating Officer, Justin Maury. Securities Purchase Agreement On March Nasdaq Notice of Delisting On March 1, 2022, the Company received a letter (the “Letter”) from the staff of The Nasdaq Capital Market (the “Exchange”) notifying the Company that the Exchange has determined to delist the Company’s common stock from the Exchange based on the Company’s Market Value of Listed Securities for the 30-consecutive day period between January 15, 2022 and February 25, 2022 falling short of the requirements under Listing Rule 5550(b)(2) (the “Rule”). Although a 180-day period is typically allowed for an issuer to regain compliance, the Company is not eligible to use such compliance period, as the Exchange had instituted a Panel Monitor through March 9, 2022. The Company
The Company intends to present to the Panel evidence that the Company has regained compliance with the Rule; however, there can be no assurance that the Panel will grant the Company’s request for continued listing. The Letter has no immediate impact on the listing of the Company’s common stock or warrants, which will continue to be listed and traded on the Exchange, subject to the Company’s compliance with other continued listing requirements. The Company’s receipt of the Letter does not affect the Company’s business, operations or reporting requirements with the Securities and Exchange Commission. Registered Direct Offering On
Acquisition of Denver Bodega, LLC d/b/a Basis On Settlement of Home Revolution Litigation On March 3, 2022, after substantial motion practice, Creatd successfully settled the dispute with Home Revolution, LLC for a total of $799,000, which includes $660,000 of note principal and $139,000 of accrued interest. The Note Conversions Subsequent to December 31, 2021, a total of $168,850 in Promissory Note Subsequent to December 31, 2021, the Company entered into one promissory note agreement with net proceeds of $300,000 and one promissory note agreement with net proceeds of AUD$224,540. Consultant Shares Subsequent to December 31, 2021, the Company issued Employment Agreements On April 5, 2022, upon the Pursuant to the Executive Employment Arrangements, the Company entered into executive employment agreements with each of the respective executives as of April 5, 2022 (the “Executive Employment Agreements”). The Executive Employment Agreements contain customary terms, conditions and rights.
Subscription Rights to Purchase Up to 20,000,000 Units Series B Warrants to Purchase Up to 20,000,000 Shares of Common Stock PROSPECTUS , 2022
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
The following table sets forth the expenses payable by us in connection with the offering of securities described in this registration statement. All
Item 14. Indemnification of Directors and
Each of our Second Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide for indemnification of our directors and officers. Our Amended and Restated Bylaws provide that we will indemnify any person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director or officer of the corporation, against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent will not, without more, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The Company may by action of its Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents of the Company with the same scope and effects as the indemnification provisions for officers and directors.
During the
Debt Conversion During the three months ended March 31, 2022, a lender converted $168,850 in
Consolidated Financial Statement Schedules.
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Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates
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