UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
or
For the transition period from __________ to __________
Commission File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock Purchase Warrants | CRTDW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | 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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No
As of November 15, 2021, the registrant had
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
| Page | |||
| Special Note Regarding Forward-Looking Statements and Other Information Contained in this Report | ii | ||
| PART I – FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements | 1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 42 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 53 | |
| Item 4. | Controls and Procedures | 53 | |
| PART II – OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 54 | |
| Item 1A. | Risk Factors | 54 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 54 | |
| Item 3. | Defaults Upon Senior Securities | 55 | |
| Item 4. | Mine Safety Disclosures | 55 | |
| Item 5. | Other Information | 55 | |
| Item 6. | Exhibits | 55 | |
i
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS AND
OTHER INFORMATION CONTAINED IN THIS REPORT
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
| ● | our ability to continue as a going concern; |
| ● | our operating expenses exceed our revenues and will likely continue to do so for the foreseeable future; |
| ● | our ability to obtain additional capital, which may be difficult to raise as a result of our limited operating history or any number of other reasons; |
| ● | our ability to provide digital content that is useful to users; |
| ● | our ability to retain existing users or add new users; |
| ● | competition from traditional media companies; |
| ● | general economic conditions and events and the impact they may have on us and our users; and |
| ● | other factors discussed in this Form 10-Q. |
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.
You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Unless otherwise stated or the context otherwise requires, the terms “Creatd,” “we,” “us,” “our” and the “Company” refer collectively to Creatd, Inc. and its subsidiaries.
ii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Creatd, Inc.
September 30, 2021
Index to the Condensed Consolidated Financial Statements
1
Creatd, Inc.
Condensed Consolidated Balance Sheets
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Deposits and other assets | ||||||||
| Marketable securities | ||||||||
| Minority investment in businesses | ||||||||
| Equity method investment | ||||||||
| Operating lease right of use asset | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Derivative liabilities | ||||||||
| Convertible Notes, net of debt discount and issuance costs | ||||||||
| Current portion of operating lease payable | ||||||||
| Note payable - related party, net of debt discount | ||||||||
| Note payable, net of debt discount and issuance costs | ||||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Non-current Liabilities: | ||||||||
| Note payable | ||||||||
| Convertible Notes | ||||||||
| Operating lease payable | ||||||||
| Total Non-current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Series E Preferred stock, $ | ||||||||
| Common stock par value $ | ||||||||
| Additional paid in capital | ||||||||
| Subscription receivable | ( | ) | ||||||
| Less: Treasury stock, | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ( | ) | ( | ) | ||||
| Total Creatd, Inc. Stockholders’ Equity | ||||||||
| Non-controlling interest in consolidated subsidiaries | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Creatd, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
| For the Three Months Ended | For the Three Months Ended | For the Nine Months Ended | For the Nine Months Ended | |||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross margin (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Marketing | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Accretion of debt discount and issuance cost | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Derivative expense | ( | ) | ||||||||||||||
| Change in derivative liability | ( | ) | ( | ) | ||||||||||||
| Impairment of investment | ( | ) | ||||||||||||||
| Settlement of vendor liabilities | ( | ) | ||||||||||||||
| Loss on marketable securities | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Gain on forgiveness of debt | - | |||||||||||||||
| Other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income tax provision and equity in net loss from unconsolidated investments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Equity in net loss from equity method investment | ( | ) | - | ( | ) | - | ||||||||||
| Income tax provision | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-controlling interest in net loss | ( | ) | ( | ) | ||||||||||||
| Net Loss attributable to Creatd, Inc. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deemed dividend | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Comprehensive loss | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Currency translation gain (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Per-share data | ||||||||||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Creatd, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended September 30, 2021 (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, July 1, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||
| Conversion of warrants to stock | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for acquisition | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Cash received for common stock | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of notes payable | - | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred series E to stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Non-controlling interest in consolidated subsidiary from acquisition | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2021 | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 610 | $ | 1 | 14,033,197 | $ | 14,032 | (5,657 | ) | $ | (62,406 | ) | $ | 98,264,091 | $ | (97,341,964 | ) | $ | 1,306,910 | $ | (53,533 | ) | $ | 2,127,131 | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Creatd, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Nine Months Ended September 30, 2021 (Unaudited)
| 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, January 1, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for prepaid services | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Shares issued to settle vendor liabilities | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued upon conversion of notes payable | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants to stock | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Cash received for common | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Cash received for preferred series E and warrants | - | - | - | - | - | ( | ) | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Conversion of preferred series E to stock | ( | ) | ( | ) | - | - | ( | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Stock warrants issued with note payable | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued for acquisition | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Non-controlling interest in consolidated subsidiary from acquisition | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Dividends | - | - | - | - | - | - | - | ( | ) | - | - | - | ||||||||||||||||||||||||||||||||||||
| Net loss for the nine months ended September 30, 2021 | - | - | - | - | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Creatd,
Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended September 30, 2020 (Unaudited)
| Common Stock | Treasury stock | Additional Paid In | Accumulated | Other Comprehensive | Stockholders | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||||||||
| Balance, July 1, 2020 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Shares Issued with note payable | ||||||||||||||||||||||||||||||||
| Stock warrants issued with note payable | - | - | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | ||||||||||||||||||||||||||||
| Recognition of intrinsic value of beneficial conversion features – convertible notes | - | - | - | - | - | - | ||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
| Cash received for common stock and warrants | - | - | - | - | ||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Common stock and warrants issued upon conversion of notes payable | - | - | - | - | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | ||||||||||||||||||||||||||||||
| Dividends | - | - | - | - | ( | ) | - | - | ||||||||||||||||||||||||
| Net loss for the three months ended September 30, 2020 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2020 | 8,662,745 | $ | 8,663 | (9,350 | ) | $ | (87,560 | ) | $ | 67,423,937 | $ | (67,905,544 | ) | $ | (28,790 | ) | $ | (589,294 | ) | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Creatd,
Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
For the Nine Months Ended September 30, 2020 (Unaudited)
| Common Stock | Treasury stock | Additional Paid In | Accumulated | Other Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||||||||
| Balance, Jan 1, 2019 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Shares issued with notes payable | ||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued for services | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued to settle vendor liabilities | ||||||||||||||||||||||||||||||||
| Conversion of warrants to stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Conversion of options to stock | ||||||||||||||||||||||||||||||||
| Stock warrants issued with note payable | - | - | ||||||||||||||||||||||||||||||
| Cancellation of Treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Purchase of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recognition of intrinsic value of beneficial conversion features – convertible notes | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Cash received for common stock and warrants | - | - | - | - | ||||||||||||||||||||||||||||
| Common stock and warrants issued upon conversion of notes payable | - | - | - | - | ||||||||||||||||||||||||||||
| Dividends | - | - | - | - | ( | ) | - | - | ||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss for the nine months ended September 30, 2020 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Creatd,
Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For
the Nine Months Ended | For
the Nine Months Ended | |||||||
| September 30,
2021 | September 30,
2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment of note receivable | ||||||||
| Impairment of intangible assets | - | |||||||
| Accretion of debt discount and issuance cost | ||||||||
| Share-based compensation | ||||||||
| Bad debt expense | ||||||||
| Gain on marketable securities | ||||||||
| Gain on Forgiveness of debt | ( | ) | ( | ) | ||||
| Settlement of vendor liabilities | ( | ) | ||||||
| Change in fair value of derivative liability | - | |||||||
| Derivative Expense | ||||||||
| Loss on extinguishment of debt | ( | ) | ||||||
| Non cash lease expense | ||||||||
| Equity interest granted for other income | ( | ) | - | |||||
| Equity in net loss from unconsolidated investment | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Inventory | ( | ) | - | |||||
| Accounts receivable | ( | ) | ||||||
| Deposits and other assets | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net Cash Used In Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid for property and equipment | ( | ) | ( | ) | ||||
| Deposits | - | ( | ) | |||||
| Cash paid for minority investment in business | ( | ) | ||||||
| Cash paid for equity method investment | ( | ) | ||||||
| Cash paid for investments in marketable securities | ( | ) | ||||||
| Sale of marketable securities | ||||||||
| Cash acquired in business acquisition | - | |||||||
| Cash consideration for acquisition | ( | ) | ||||||
| Purchases of digital assets | ( | ) | ||||||
| Net Cash Used In Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from the exercise of warrant | ||||||||
| Net proceeds from issuance of notes | ||||||||
| Repayment of notes | ( | ) | ( | ) | ||||
| Proceeds from issuance of demand loan | ||||||||
| Repayment of demand Loan | ( | ) | ||||||
| Proceeds from issuance of convertible note | ||||||||
| Repayment of convertible notes | ( | ) | ( | ) | ||||
| Proceeds from issuance of convertible notes - related party | ||||||||
| Proceeds from issuance of note payable - related party | ||||||||
| Repayment of note payable - related party | ( | ) | ||||||
| Proceeds from issuance of common stock and warrants | ||||||||
| Purchase of treasury stock and warrants | ( | ) | ||||||
| Net Cash Provided By Financing Activities | ||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ||||
| Net Change in Cash | ( | ) | ||||||
| Cash – Beginning of Year | ||||||||
| Cash – End of period | $ | $ | ||||||
| SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
| Cash Paid During the Year for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest | $ | $ | ||||||
| SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Settlement of vendor liabilities | $ | $ | ||||||
| Beneficial conversion feature on convertible notes | $ | $ | ||||||
| Warrants issued with debt | $ | $ | ||||||
| Shares issued with debt | $ | $ | ||||||
| Issuance of common stock for prepaid services | $ | $ | ||||||
| Cancellation of Treasury stock | $ | $ | ||||||
| Conversion of note payable and interest into convertible notes | $ | $ | ||||||
| Conversion of Demand loan into notes payable | $ | $ | ||||||
| Deferred offering costs | $ | $ | ||||||
| Common stock and warrants issued upon conversion of notes payable | $ | $ | ||||||
| Shares issued for acquisition | $ | $ | - | |||||
| Conversion of note payable and interest into convertible notes | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
Creatd, Inc.
September 30, 2021
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
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
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
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
On
July 20, 2021, the Company acquired
On
August 16, 2021, the Company acquired
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.
9
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, 2021 or any other interim period or for any other future year. These unaudited condensed 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, 2020, included in the Company’s 2020 Annual Report on Form 10-K filed with the SEC. The balance sheet as of December 31, 2020 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.
Principles of consolidation
The Company consolidates all majority-owned subsidiaries, if any, in which the parent’s power to control exists.
As of September 30, 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 | % | |||||
| Abacus Tech Pty Ltd | % | |||||
| Seller’s Choice, LLC | % | |||||
| Recreatd, LLC | % | |||||
| Give, LLC | % | |||||
| Creatd Partners LLC | % | |||||
| Plant Camp LLC | % | |||||
| Sci-Fi Shop, LLC | % | |||||
| OG Collection LLC | % | |||||
| VMENA LLC | % | |||||
| Vocal For Brands, LLC | % | |||||
| Vocal Ventures LLC | % | |||||
| What to Buy, LLC | % | |||||
| WHE Agency, Inc. | % | |||||
10
All inter-company balances and transactions have been eliminated.
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 September 30, 2021 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 and capital lease obligations. 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, 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 models. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.
The following table provides a summary of the relevant assets and liabilities that are measured at fair value on recurring basis:
Fair Value Measurements as of
September 30, 2021
| 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: | ||||||||||||||||
| Marketable securities - debt securities | $ | $ | $ | $ | ||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total Liabilities | $ | $ | $ | |||||||||||||
The following table shows the valuation methodology and unobservable inputs for Level 3 assets and liabilities measured at fair value on recurring basis as of September 30, 2021:
| Fair Value | Valuation Methodology | Unobservable Inputs | ||||||
| Marketable securities - debt securities | $ | |||||||
| Derivative liabilities | $ | |||||||
11
The following table provides a summary of the relevant assets that are measured at fair value on non-recurring basis:
Fair Value Measurements as of
September 30, 2021
| 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 | $ | $ | $ | $ | ||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
The following table shows the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on non-recurring basis as of September 30, 2021:
| Fair Value | Valuation Methodology | Unobservable Inputs | ||||||
| Equity investments, at cost | $ | |||||||
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”) insurable limits. The Company has never
experienced any losses related to these balances. As of September 30, 2021, and December 31, 2020, cash amounts in excess of $
Long-lived Assets Including Goodwill and Other Acquired Intangibles 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 and nine months ended September 30,
2021 the Company recorded an impairment charge of $
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.
During the year ended December 31, 2020 the Company completed its annual impairment test of goodwill. The Company performed the qualitative assessment as permitted by ASC 350-20 and determined that the fair value of the reporting units are more likely than not equal or greater than the carrying value, including Goodwill. Based on completion of this annual impairment test, no impairment was indicated.
12
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:
| For
the nine months ended September 30, 2021 | ||||
| Total | ||||
| Beginning of period | $ | |||
| Purchase of marketable securities | ||||
| Interest due at maturity | ||||
| Other than temporary impairment | ( | ) | ||
| Conversion of marketable securities | ||||
| September 30, 2021 | $ | |||
We
invest in debt securities.
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:
| For
the three months ended September 30, 2021 | For
the nine months ended September 30, 2021 | |||||||
| Total | Total | |||||||
| Beginning of period | $ | $ | ||||||
| Purchase of equity investments | ||||||||
| Conversion to equity method investments | ( | ) | ( | ) | ||||
| September 30, 2021 | $ | $ | ||||||
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.
13
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.
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 no indicators of impairment related to our equity method investments for the three and nine months ended September 30, 2021.
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 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 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.
14
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The Company changed its method of accounting for the debt and warrants through the early adoption of ASU 2017-11 during the three months ended December 31, 2017, on a retrospective basis.
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.
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. |
| ● | 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 and nine months ended September 30, 2021 and 2020 consists of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Agency (Managed Services, Branded Content, & Talent Management Services) | $ | $ | $ | $ | ||||||||||||
| Platform (Creator Subscriptions) | ||||||||||||||||
| Ecommerce | ||||||||||||||||
| Affiliate Sales | ||||||||||||||||
| Other Revenue | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
15
The Company utilizes the output method to measures the results achieved and value transferred to a customers over time. Timing of revenue recognition for the three and nine months ended September 30, 2021 and 2020 consists of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Products and services transferred over time | $ | $ | $ | $ | ||||||||||||
| Products and services transferred at a point in time | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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
$
Branded Content
Branded content represents the revenue recognized from the Company’s obligation to create and publish branded articles for clients on the Vocal platform and promote said stories, tracking engagement for the client. The performance obligation is satisfied when the Company successfully publishes the articles on its platform and meets any required promotional milestones as per the contract. The revenue is recognized over time as the services are performed and any required milestones are met.
Below are the significant components of a typical agreement pertaining to branded content revenue:
| ● | The Company collects fixed fees ranging from $ | |
| ● | The articles are created and published within three months of the signed agreement, or as previously negotiated with the client. | |
| ● | The articles are promoted per the contract and engagement reports are provided to the client. | |
| ● | Most billing for contracts occurs | |
| ● | 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
Below are the significant components of a typical agreement pertaining to talent management revenue:
| ● | Total gross contracts range from $ | |
| ● | The Company collects fixed fees in the amount of | |
| ● | 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 |
16
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
E-Commerce Revenue
The Company’s e-commerce businesses are housed under Creatd Ventures, and currently consists of two majority-owned e-commerce companies, Camp (previously Plant Camp) and Dune Glow Remedy (“Dune”). The Company generates revenue through the sale of Camp and Dune’s consumer products through its e-commerce distribution channels. The Company satisfies its performance obligation upon shipment of product by its customers.
Deferred Revenue
Deferred revenue consists of billings and payments from clients in
advance of revenue recognition. As of September 30, 2021, and December 31, 2020, the Company had deferred revenue of $
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 nine months ended September 30, 2021, the Company recorded $
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 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.
17
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 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. 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, using the cliff straight-line method. 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 and nine months ended September 30, 2021 and 2020 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 September 30, 2021 and 2020:
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Options | ||||||||
| Warrants | ||||||||
| Convertible notes | ||||||||
| Totals | ||||||||
Reclassifications
18
Recently Adopted Accounting Guidance
In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The updated guidance, which became effective for fiscal years beginning after December 15, 2020, 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. 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 guidance on its condensed consolidated financial statements.
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 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. This guidance is effective for annual periods after December 15, 2021, including interim periods within those annual periods. 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 September 30, 2021, the Company had an accumulated deficit of $
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.
19
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 September 30, 2021:
September 30, 2021 | ||||
| Raw Materials | $ | |||
| Packaging | ||||
| Finished goods | ||||
| $ | ||||
Note 5 – 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 $
On
October 23, 2020, the Company entered into an equity interest purchase agreement whereas the Company purchased
On
February 17, 2021, the Company entered into a membership interest purchase agreement whereas the Company purchased another
On
May 21, 2021, the Company entered into a common stock purchase agreement whereas the Company purchased
Note 6 – Equity Method Investments
During the nine months ended September 30, 2021,
we invested $
20
Note 7 – Notes Payable
Notes payable as of September 30, 2021 and December 31, 2020 is as follows:
| Outstanding Principal as of | ||||||||||||||
| September 30, 2021 | December 31, 2020 | Interest Rate | Maturity Date | |||||||||||
| Seller’s Choice Note | $ | $ | % | |||||||||||
| The May 2020 PPP Loan Agreement | % | |||||||||||||
| The April 2020 PPP Loan Agreement | % | |||||||||||||
| The October 2020 Loan Agreement | % | |||||||||||||
| The November 2020 Loan Agreement | % | |||||||||||||
| The February 2021 Loan Agreement | % | |||||||||||||
| The July 2021 Loan Agreement | % | |||||||||||||
| Less: Debt Discount | ( | ) | ||||||||||||
| Less: Debt Issuance Costs | ||||||||||||||
| Less: Current Debt | ( | ) | ( | ) | ||||||||||
| Total Long-Term Debt | $ | $ | ||||||||||||
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 $
During
the nine months ended September 30, 2021, the Company accrued interest of $
The April 2020 PPP Loan Agreement
On
April 30, 2020, the Company was granted a loan with a principal amount of $
During
the nine months ended September 30, 2021, the Company accrued interest of $
During
the nine months ended September 30, 2021, the Company repaid $
The Company is in the process of returning the funds received from the Loan.
21
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.
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 $
During
the nine months ended September 30, 2021, the Company accrued interest of $
During the nine months ended September 30, 2021, the Company repaid $136,597 in principal and was forgiven $275,903 of principal and $3,119 of accrued interest.
The October 2020 Loan Agreement
On October 6, 2020,
During the nine months ended September 30, 2021,
the Company accrued $
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 $
22
During
the nine months ended September 30, 2021, the Company repaid $
The February 2021 Loan Agreement
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 $
During
the nine months ended September 30, 2021, the Company repaid $
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 $
During the nine months ended September 30, 2021,
the Company repaid $
Note 8 – Convertible Note Payable
Convertible notes payable as of September 30, 2021, and December 31, 2020, is as follows:
| Outstanding Principal as of | Warrants granted | |||||||||||||||||||||||||||
September 30, 2021 | December 31, 2020 | Interest Rate | Conversion Price | Maturity Date | Quantity | Exercise Price | ||||||||||||||||||||||
| The September 2020 convertible Loan Agreement | $ | $ | % | (*) | ||||||||||||||||||||||||
| The First December 2020 convertible Loan Agreement | % | (*) | ||||||||||||||||||||||||||
| The October 2020 convertible Loan Agreement | % | (*) | ||||||||||||||||||||||||||
| The Second December 2020 convertible Loan Agreement | % | (*) | ||||||||||||||||||||||||||
| The May 2021 Loan | % | (*) | ||||||||||||||||||||||||||
| The July 2021 Loan | % | (*) | ||||||||||||||||||||||||||
| Less: Debt Discount | ( | ) | ( | ) | ||||||||||||||||||||||||
| Less: Debt Issuance Costs | ( | ) | ( | ) | ||||||||||||||||||||||||
| Less: Current Debt | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total Long-Term Debt | $ | $ | ||||||||||||||||||||||||||
| (*) | As subject to adjustment as further outlined in the notes |
23
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 $
During
the nine months ended September 30, 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
$
During
the nine months ended September 30, 2021, the Company converted $
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 $
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 $
During
the nine months ended September 30, 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 $
24
During
the nine months ended September 30, 2021 the Company converted $
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 $
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 $
During
the nine months ended September 30, 2021 the Company repaid $
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 $
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 $
During the nine months ended September 30, 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 $
During the nine months ended September 30, 2021, the
Company converted $
25
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 $
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 $
During
the nine months ended September 30, 2021 the Company repaid $
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 $
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 $
During
the nine months ended September 30, 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 $
During the nine months ended September 30, 2021, the
Company converted $
26
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 $
The
Company recorded a $
The
Company recorded a $
During the nine months ended September 30, 2021, the Company converted
$
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 $
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 $
During the nine months ended September 30, 2021, the Company accrued
Note 9 – Related Party
Notes payable
Notes payable – related party as of September 30, 2021 and December 31, 2020 is as follows:
| Outstanding Principal as of | Warrants granted | |||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | Interest Rate | Maturity Date | Quantity | Exercise Price | |||||||||||||||||
| The September 2020 Goldberg Loan Agreement | % | |||||||||||||||||||||
| The September 2020 Rosen Loan Agreement | % | |||||||||||||||||||||
| Less: Debt Discount | ( | ) | ( | ) | ||||||||||||||||||
| Less: Current Debt | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | |||||||||||||||||||||
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 $
27
Since the September 2020 Goldberg Note has a make-whole
provision if the shares of
On September 15, 2021, the make-whole provision was
triggered, causing an increase in principal of the September 2020 Goldberg Note by $
During the nine months ended September 30, 2021, the
Company accrued interest of $
Subsequent to September 30, 2021, the Company
agreed to a settlement of the amount owed under the September 2020 Goldberg Note in the amount of $
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 $
Since the September 2020 Rosen Note has a make-whole
provision if the shares of
On September 15, 2021 the make-whole provision was
triggered, causing an increase in principal of the September 2020 Rosen Note by $
During the nine months ended September 30, 2021, the
Company accrued interest of $
Subsequent to September 30, 2021, the Company repaid all outstanding principal and interest on this Note.
Officer compensation
During the nine months ended September 30, 2021,
the Company paid $
Note 10 – Derivative Liabilities
The Company has identified derivative instruments arising from a make-whole feature in the Company’s notes payable during the nine months ended September 30, 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 9. 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 nine months ended September 30, 2021. For the terms of the conversion features see Note 9. The Company had no derivative assets or liabilities measured at fair value on a recurring basis as of September 30, 2021.
28
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
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 and nine months ended September 30, 2021.
| Three Months Ended September 30, 2021 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Derivative liabilities as July 1, 2021 | $ | $ | $ | |||||||||
| Addition | ||||||||||||
| Extinguishment | ( | ) | ||||||||||
| Conversion to Note payable - related party | ( | ) | ||||||||||
| Changes in fair value | ||||||||||||
| Derivative liabilities as September 30, 2021 | $ | $ | $ | |||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Derivative liabilities as January 1, 2021 | $ | $ | $ | |||||||||
| Addition | ||||||||||||
| Extinguishment | ( | ) | ||||||||||
| Conversion to Note payable - related party | ( | ) | ||||||||||
| Changes in fair value | ||||||||||||
| Derivative liabilities as September 30, 2021 | $ | $ | $ | |||||||||
Note 11 – Stockholders’ Equity
Shares Authorized
Prior
to July 13, 2020, the Company was authorized to issue up to thirty-five million (
29
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
Preferred Stock
Series E Convertible Preferred Stock
On
December 29, 2020,
The
warrants are exercisable for a term of five-years from the date of issuance, at an exercise price of $
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 nine months ended September 30, 2021, the Company received the $
During
the nine months ended September 30, 2021, investors converted
Common Stock
On
January 14, 2021, the Company issued
On January 20, 2021, the Company issued
On
February 1, 2021, the Company issued
On
February 3, 2021, the Company issued
30
On
February 8, 2021, the Company entered into a consulting agreement whereas the Company issued a total of
On
February 18, 2021, the Company issued
On
February 18, 2021, the Company issued
On
February 26, 2021, the Company issued
On
March 17, 2021, the Company issued
On
March 28, 2021, the Company issued
On
March 31, 2021, the Company issued
On
April 10, 2021, the Company issued
On
April 21, 2021, the Company entered into a consulting agreement whereas the Company issued a total of
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
On
July 20, 2021, the Company issued
On
July 15, 2021, the Company issued
On
August 15, 2021, the Company issued
On
September 15, 2021, the Company issued
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.
31
The assumptions used for options granted during the nine months ended September 30, 2021, are as follows:
| September 30, 2021 | ||||
| Exercise price | $ | |||
| Expected dividends | % | |||
| Expected volatility | % | |||
| Risk free interest rate | % | |||
| Expected life of option | ||||
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 – December 31, 2020 – outstanding | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/Cancelled | ( | ) | ||||||||||
| Balance – September 30, 2021 – outstanding | ||||||||||||
| Balance – September 30, 2021 – exercisable | ||||||||||||
| 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) | |||||||||||||||||
| $ | ||||||||||||||||||||||
During
the ended December 31, 2018 the Company granted options of
Stock-based
compensation for stock options has been recorded in the consolidated statements of operations and totaled $
As
of September 30, 2021, there was $4,472,344 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
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.
32
The assumptions used for warrants granted during the nine months ended September 30, 2021 are as follows:
| September 30,
2021 | ||||
| Exercise price | $ | | ||
| Expected dividends | % | |||
| Expected volatility | | % | ||
| Risk free interest rate | | % | ||
| Expected life of warrant | | |||
Warrant Activities
The following is a summary of the Company’s warrant activity:
| Warrant | Weighted Average Exercise Price | |||||||
| Balance – December 31, 2020 – outstanding | ||||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Forfeited/Cancelled | ( | ) | ||||||
| Balance – September 30, 2021 – outstanding | ||||||||
| Balance – September 30, 2021 – exercisable | $ | |||||||
| 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 | |||||||||||||||||
| $ | ||||||||||||||||||||||
During
the nine months ended September 30, 2021, the Company issued
During
the nine months ended September 30, 2021, a total of
During
the nine months ended September 30, 2021, a total of
During
the nine months ended September 30, 2021, some of the Company’s warrants had a reset provision triggered that also resulted in
an additional
On
June 17, 2021, the Company issued
Stock-based
compensation for stock warrants has been recorded in the consolidated statements of operations and totaled $
33
Share-based awards, restricted stock award (“RSAs”)
On
February 4, 2021 the Board resolved that,
A summary of the activity related to RSUs for the nine months ended September 30, 2021 is presented below:
| Restricted stock units (RSUs) | Total shares | Grant date fair value | ||||||
| RSAs non-vested at January 1, 2021 | $ | |||||||
| RSAs granted | $ | |||||||
| RSAs vested | $ | |||||||
| RSAs forfeited | ( | ) | $ | |||||
| RSAs non-vested September 30, 2021 | $ | |||||||
Stock-based
compensation for RSA’s has been recorded in the consolidated statements of operations and totaled $
Note 12 – Commitments and Contingencies
The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Corporate taxpayers may carry back net operating losses (NOLs) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.
In
addition, the CARES Act raises the corporate charitable deduction limit to
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.
34
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 September 30, 2021, the May 2020 PPP Loan
is no longer outstanding, as during the nine months ended September 30, 2021, the Company repaid $
Subsequent to September 30, 2021, the Company made a payment of $
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. After filing the Complaint but prior to our Answer date, Home Revolution moved by order to show cause to have a receiver appointed by the Court to take over Creatd’s operations.
We submitted an opposition, and after oral arguments on August 13, 2020, the Court denied the receiver request in its entirety. We then filed a Motion to Dismiss on August 14, 2020 on a number of grounds, the most significant of which is that this is a simple (alleged) breach of Promissory Note case. Creatd is current on all payments under the Note, and because both parties are New Jersey entities a mere breach of contract and/or collection-based case is not appropriately venued in federal court. Upon receipt of our Motion to Dismiss, Home Revolution submitted an Amended Complaint, presumably in an effort to cure the problems with the Complaint which we identified in the Motion to Dismiss. Home Revolution has subsequently initiated a series of atypical procedures and, as a result, has (without following the Federal Rules of Civil Procedure) moved for both default and to submit yet another newly Amended Complaint (the one precludes the other and vice versa).
After we submitted a motion to clear up the above, the Court reinstated the matter to the docket and permitted Plaintiff to file the Second Amended Complaint (we had no objection). We have filed a motion to dismiss the Second Amended Complaint. That will take some time to be decided. We expect no major event to occur for the next 12 months. Finally, we believe the lawsuit lacks merit and will vigorously challenge the action.
Lease Agreements
On May 5, 2018, the Company signed a
On April 1, 2019, the Company signed a
On July 28, 2021, the Company signed a
35
The components of lease expense were as follows:
| Three Months Ended September 30, 2021 | ||||
| Operating lease cost | $ | |||
| Short term lease cost | ||||
| Total net lease cost | $ | |||
| Nine Months Ended September 30, 2021 | ||||
| Operating lease cost | $ | |||
| Short term lease cost | ||||
| Total net lease cost | $ | |||
Supplemental cash flow and other information related to leases was as follows:
| Nine Months Ended September 30, 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating lease payments | ||||
| Weighted average remaining lease term (in years): | ||||
| Weighted average discount rate: | % | |||
Total future minimum payments required under the lease as of December 31, 2020 are as follows:
| Twelve Months Ending December 31, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total | $ | |||
Rent expense for the nine months ended September
30, 2021 and 2020 was $
Note 13 – 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
36
On June 4, 2021, the Company, entered into a
MIPA with Sellers, pursuant to which the Purchaser acquired
The following sets forth the components of the purchase price:
| Purchase price: | ||||
| Cash paid to seller | $ | |||
| Fair value of equity investment purchased on June 1, 2021 | ||||
| Total purchase price | ||||
| Assets acquired: | ||||
| Cash | ||||
| Accounts Receivable | ||||
| Inventory | ||||
| Total assets acquired | ||||
| Liabilities assumed: | ||||
| Accounts payable and accrued expenses | ||||
| Deferred Revenue | ||||
| Loan Payable | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ( | ) | ||
| Non-controlling interest in consolidated subsidiary | ||||
| Excess 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.
| Goodwill | $ | |||
| Trade Names & Trademarks | ||||
| Know-How and Intellectual Property | ||||
| Website | ||||
| Customer Relationships | ||||
| Excess purchase price | $ |
WHE Agency, Inc.
On July 20, 2021, the Company entered into a Stock
Purchase Agreement to purchase
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 transaction leverages the existing synergies between Creatd and WHE, specifically enabling WHE to utilize the Vocal platform and technology to further expand its creator network, introduce new verticals, and deepen existing brand ties. At the same time, the addition of WHE has enabled Creatd to expand its existing agency offerings, specifically within the scope of influencer marketing. With WHE in its portfolio, Creatd has expanded the pool of talent available to partner with its brand clients. Finally, the integration of WHE and its influencer network into Creatd’s existing business has provided Creatd the benefit of a significantly expanded customer base.
37
The following sets forth the components of the purchase price:
| Purchase price: | ||||
| Cash paid to seller | $ | |||
| Shares granted to seller | ||||
| Total purchase price | ||||
| Assets acquired: | ||||
| Cash | ||||
| Accounts Receivable | ||||
| Total assets acquired | ||||
| Liabilities assumed: | ||||
| Accounts payable and accrued expenses | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Non-controlling interest in consolidated subsidiary | ||||
| Excess 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.
| Goodwill | $ | |||
| Trade Names & Trademarks | ||||
| Non-Compete Agreements | ||||
| Influencers / Customers | ||||
| Excess purchase price | $ |
38
Note 14 – Segment Information
We operate
in
| 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 September 30, 2021 | ||||||||||||||||||||
| Creatd Labs | Creatd Ventures | Creatd Partners | Corporate | Total | ||||||||||||||||
| Accounts receivable, net | $ | $ | $ | $ | $ | |||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||||||||
| Intangible assets | ||||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Inventory | ||||||||||||||||||||
| All other assets | ||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | $ | |||||||||||||||
| Accounts payable and accrued liabilities | $ | $ | $ | $ | $ | |||||||||||||||
| Note payable, net of debt discount and issuance costs | ||||||||||||||||||||
| Deferred revenue | ||||||||||||||||||||
| All other Liabilities | ||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | $ | |||||||||||||||
| As of December 31, 2020 | ||||||||||||||||
| Creatd Labs | Creatd Partners | Corporate | Total | |||||||||||||
| Accounts receivable, net | $ | $ | $ | $ | ||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||||
| Intangible assets | ||||||||||||||||
| Goodwill | ||||||||||||||||
| All other assets | ||||||||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||||
| Accounts payable and accrued liabilities | $ | $ | $ | $ | ||||||||||||
| Note payable, net of debt discount and issuance costs | ||||||||||||||||
| Deferred revenue | - | |||||||||||||||
| All other Liabilities | ||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||||
39
| For the three months ended September 30, 2021 | ||||||||||||||||||||
| Creatd Labs | Creatd Ventures | Creatd Partners | Corporate | Total | ||||||||||||||||
| Net revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Gross margin | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Research and development | ||||||||||||||||||||
| Marketing | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| General and administrative | ||||||||||||||||||||
| Total operating expenses | ) | |||||||||||||||||||
Loss before income tax provision and equity in net loss from unconsolidated investments | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| For the three months ended September 30, 2020 | ||||||||||||||||
| Creatd Labs | Creatd Partners | Corporate | Total | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross margin | ( | ) | ( | ) | ||||||||||||
| Research and development | ||||||||||||||||
| Marketing | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
Loss before income tax provision and equity in net loss from unconsolidated investments | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| For the nine months ended September 30, 2021 | ||||||||||||||||||||
| Creatd Labs | Creatd Ventures | Creatd Partners | Corporate | Total | ||||||||||||||||
| Net revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of revenue | ||||||||||||||||||||
| Gross margin | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Research and development | ||||||||||||||||||||
| Marketing | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| General and administrative | ||||||||||||||||||||
| Total operating expenses | $ | $ | $ | $ | $ | |||||||||||||||
Loss before income tax provision and equity in net loss from unconsolidated investments | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| For the nine months ended September 30, 2020 | ||||||||||||||||
| Creatd Labs | Creatd Partners | Corporate | Total | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross margin | ( | ) | ( | ) | ||||||||||||
| Research and development | ||||||||||||||||
| Marketing | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | $ | $ | $ | $ | ||||||||||||
Loss before income tax provision and equity in net loss from unconsolidated investments | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
40
Note 15 – Subsequent Events
Dune Transaction
On October 3, 2021,
In addition, pursuant
to the Dune Agreement, $
Based on
the purchase price of $
Warrant Exercises
Subsequent to September 30, 2021, a total of 975,430 warrants were exercised, resulting in the cancellation of 975,430 warrants, the issuance of 975,430 shares of common stock, and gross proceeds of $4,389,435 to the Company.
Note Conversions
Subsequent to September 30, 2021, a total of $1,141,669 in principal of convertible notes converted into shares of common stock at $5.00 per share, resulting in the issuance of 228,334 shares of common stock.
Series E Preferred Conversions
Subsequent
to September 30, 2021,
Registered Direct Offering
On October 25, 2021,
41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Form 10-Q and other reports filed by Creatd, Inc. (the “Company”), from time to time with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Form 10-Q.
We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our financial statements and accompanying notes for the year ended December 31, 2020, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 31, 2021.
Overview
Creatd, Inc. (“CRTD,” “the Company,” or “Creatd”) is a holding company focused on providing economic opportunities for creators. We accomplish this through four main business pillars: Creatd Labs, Creatd Partners, Creatd Ventures, and Creatd Studios. Together, Creatd's pillars work together to create multiple flywheel effects and growth drivers, supporting our core vision of creating a viable ecosystem for all stakeholders in the creator economy.
Creatd Labs, our first pillar, is dedicated to building a home base for creators of all kinds. Creatd Labs houses our proprietary technology platforms, including Creatd’s flagship product, Vocal and its 40 niche communities. Vocal is an all-in-one platform where creators can share their stories, build an audience, and earn money. To date, over 1.2 million freemium creators, including 100,000 Vocal+ (premium) creators now call Vocal their home, from bloggers to podcasters, makers, musicians, photographers, and more.
42
Creatd Partners, Creatd’s second pillar, fosters relationships between creators and brands. This pillar houses Creatd’s three primary agency businesses: Vocal for Brands (content marketing), Seller’s Choice (performance marketing), and WHE Agency (influencer marketing). Creatd Partners leverages its network of brands and influencers, along with resources from across Creatd, to help direct-to-consumer brands achieve conversions and reach their target audiences, while driving success for all of Creatd’s stakeholders.
Creatd Ventures, our third pillar, is focused on building, developing, and scaling e-commerce brands, by providing needed capital, operational support, marketing expertise, and other resources. Creatd Ventures houses Creatd's portfolio of e-commerce businesses, both majority and minority-owned, including Camp, Dune Glow Remedy, and Untamed Photographer, with additional potential transactions under review. The ideal candidate for a Creatd Ventures partnership is an individual that shares in our mission of serving the creator economy and are accretive to our pillars.
Creatd Studios is our fourth pillar and focuses on identifying opportunities to leverage Creatd’s stories–including those from Vocal creators and from our owned IP library–for transmedia production and adaptation to print, podcasts, TV, film, digital video, games, comics, and more. Housed under Creatd Studios is Creatd’s intellectual property and legacy media assets, including acquired artwork, photographs and media memorabilia. Creatd Studios represents an initiative by Creatd to revitalize and transform this content, by partnering with the entertainment and publishing industries on bespoke productions, while utilizing Vocal’s technology, data, and marketing capabilities for optimal distribution.
Creatd Labs
Creatd Labs is building the home base for creators.
Vocal
Vocal, Creatd’s flagship product, is a robust, proprietary technology platform that 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 podcasters, makers, musicians, photographers, and more.
Vocal+ is Creatd’s premium subscription membership program. Vocal+ members pay a membership fee for premium features, including a higher rate of earnings per read, reduced platform processing fees on tips received, a Vocal+ badge on their creator page, eligibility to participate in exclusive Vocal+ Challenges, access to Vocal’s ‘Quick Edit’ feature for published stories, 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. From time to time, the Company offers Vocal+ subscriptions at a discount for a predetermined number of months as a promotion for new subscribers.
Since its initial launch in 2016, Vocal has grown to be one of the fastest growing communities for content creators of all shapes and sizes. As of September 30, 2021, Vocal had reached over 1.1 million freemium creators and over 30,000 Vocal+ paid subscribers across its 39 owned and operated niche communities. Subsequent to the close of the third quarter 2021, Creatd had announced that it reached over 1.2 million freemium creators and over 100,000 Vocal+ paid subscribers, and additionally launched its 40th owned and operated niche community.
43
Why Over 1 Million Creators Choose Vocal:
| ● | Easy-to-use, Open-Canvas Content Creation Editor: Vocal’s storytelling tools enable creators to produce beautiful and engaging stories in a simple, user-friendly interface, and incorporate rich-media content of all kinds, including streaming content, photos, videos, podcasts, product links, written text, and more. Vocal’s open canvas content creation editor makes it easy to create high-quality and engaging stories and is a cost-effective alternative to managing a blog content management system (CMS). |
| ● | Numerous Monetization Features: Both of Vocal’s membership tiers–Vocal freemium and the Vocal+ premium tier – provide multiple monetization opportunities for creators. Creators can earn money i) every time their story is read, ii) by competing in Challenges, 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 one-off microtransactions. vi) through the Vocal Ambassador Program, which enables creators to receive additional rewards whenever they refer a new Vocal+ member. For freemium members, content ‘reads’ are monetized at a rate of $3.80 per 1,000 reads (calculated based on time on page, scrolling behavior, and other internal metrics), whereas Vocal+ members monetize at $6.00 per 1,000 reads. These rates are subject to change based on market trends or the introduction of additional features and plan tiers. |
| ● | Brand-safe advertising platform: Vocal was designed to target consumers in an authentic, non-interruptive way. Brand partnerships and collaborations allow companies tap into the power of Vocal through campaign-optimized stories, authored by real Vocal creators, that build brand affinity, trust, and drive sales. |
| ● | Transparent Performance Data: Creators can view their “Stats” at any time to view their individual performance data, such as how many Reads a given story received, how much money they have earned, and how many Tips, Bonuses, or ‘Likes,’ they received. Additionally, Vocal users have the ability to view key metrics such as community-specific data and Vocal+ membership data. |
| ● | Valuable Audience: The nature of Vocal’s genre-specific (niche) community structure is such that it generates a positively selected audience, a quality which makes Vocal an attractive prospect for creators and brands alike. In a niche community, audiences are inherently more likely to be interested in the particular content housed in that community. Vocal 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. Moderation and compliance are more important than ever in a world where ambiguity can systematically damage value. Vocal’s enforcement of community guidelines and emphasis on content moderation protects the platform, its creators, and Creatd shareholders. 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: |
| ● | 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. |
44
Creatd Partners
Creatd Partners fosters relationships between brands and creators through its agency services, which encompass content marketing, performance marketing, and influencer marketing.
Vocal for Brands
All brands have a story to tell, and our creator community helps them tell it. Vocal for Brands, Creatd's internal content marketing studio, specializes in pairing leading brands with authentic Vocal creators to produce marketing campaigns that are non-interruptive, engaging, and direct-response driven.
| ● | Authentic Storytelling: Our internal data group partners brands with real Vocal creators to tell their brand’s story in a way that is both engaging and trustworthy. In addition, brands can opt to sponsor a Challenge, which effectively yields a collection of crowdsourced branded content for brands and helps them reach a wider audience. |
| ● | Valuable Audience: Vocal’s first-party data provides an opportunity to create highly targeted and segmented audiences to promote branded content. Most importantly, Vocal’s technology helps brands target the right audience by utilizing and applying that first-party data. |
| ● | Transparent Analytics: For every campaign we produce, our brand clients have access to story performance data, engagement data, behavioral data, and interest data. Brands can apply this data to further increase awareness and optimize audience targeting. |
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, all of which is used to further optimize the campaign’s success. 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 for Brands typically collects fixed fees ranging from $30,000 to $50,000, depending on campaign duration and specific client objectives.
Additionally, brands can 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.
Seller’s Choice
In addition to Vocal for Brands, Creatd supports brands by providing managed and performance marketing services through Seller’s Choice. an in-house marketing agency for DTC (direct-to-consumer) and e-commerce clients. Acquired by Creatd in September 2019, Seller’s Choice provides direct-to-consumer brands with design, development, strategy, and sales optimization services. Its status as an Amazon Solution Provider and its weighty operational structure made it an ideal candidate for acquisition in late 2019. Creatd’s business model is built to absorb distressed operational infrastructures, integrate the few best components, and shed the non-essential costs.
45
WHE Agency
The WHE Agency (“WHE”), acquired by Creatd in 2021, was founded by Tracy Willis with the goal of supporting top creators and influencers, by connecting them with leading family and lifestyle brands and global audiences. Today, WHE represents a roster of approximately 60 family and lifestyle-focused creators, that collectively reach an audience of nearly 70 million.
Creatd Ventures
Creatd Ventures houses Creatd's portfolio of e-commerce businesses, both majority and minority-owned as well as associated e-commerce technology and infrastructure. The Company supports 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, previously Plant 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. |
| ● | Launched in second quarter 2021, Untamed Photographer is an online art marketplace that couples limited-edition, hand-selected wildlife photography, with the compelling stories behind each shot. Untamed Photographer has cultivated a network of international environmental artists who preserve the beauty of the planet through their art, donating a portion of profits back to environmental causes. |
| ● | In the third quarter of 2021, the Company announced its intent to purchase a controlling stake in Dune Glow Remedy (“Dune”). The Company subsequently announced the completion of its purchase of a 50.4% majority stake in the fourth quarter of 2021. 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. |
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 open doors. |
| ● | OG Gallery: Acquired by Creatd's founders, 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. |
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 strategic acquisitions when presented with opportunities that are in the interest of shareholder value.
46
Recent Developments
Board of Directors and Management
Mark Patterson resigned from the Board effective July 31, 2021. Such resignation is not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
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 “Restructuring”). Additionally, Justin Maury was appointed Chief Operating Officer and retains his position as President. Prior to the 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 October 27, 2021, the Board, upon the recommendation of the Compensation Committee of the Board, approved and authorized certain compensation arrangements with Jeremy Frommer, Co-Chief Executive Officer; Laurie Weisberg, Co-Chief Executive Officer; Justin Maury, President; and Chelsea Pullano, Chief Financial Officer (collectively, the “Compensation Arrangements”).
The Compensation Arrangements consist of both base salary and option awards as follows:
| ● | for Mr. Frommer: (i) annual base salary of $500,000, effective retroactive to October 1, 2021; (ii) 121,000 options, having a strike price of $5.00 per share, vesting immediately; and (iii) 121,000 options, having a strike price of $5.00 per share, to vest upon the achievement of certain metrics during the course of the 2022 fiscal year, to be set by the Board by not later than December 31, 2021; |
| ● | for Ms. Weisberg: (i) annual base salary of $475,000, effective retroactive to October 1, 2021; (ii) 121,000 options, having a strike price of $5.00 per share, vesting immediately; and (iii) 121,000 options, having a strike price of $5.00 per share, to vest upon the achievement of certain metrics during the course of the 2022 fiscal year, to be set by the Board by not later than December 31, 2021; |
| ● | for Mr. Maury: (i) annual base salary of $475,000, effective retroactive to October 1, 2021; (ii) 81,000 options, having a strike price of $5.00 per share, vesting immediately; and (iii) 81,000 options, having a strike price of $5.00 per share, to vest upon the achievement of certain metrics during the course of the 2022 fiscal year, to be set by the Board by not later than December 31, 2021; and |
| ● | for Ms. Pullano: (i) annual base salary of $250,000, effective retroactive to October 1, 2021; (ii) 37,000 options, having a strike price of $5.00 per share, vesting immediately; and (iii) 37,000 options, having a strike price of $5.00 per share, to vest upon the achievement of certain metrics during the course of the 2022 fiscal year, to be set by the Board by not later than December 31, 2021. |
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 management of family and lifestyle-focused influencers and digital creators. The 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 forty-four (44%) of the ownership of WHE Agency’s issued and outstanding shares, determined on a fully diluted basis post-transaction.
47
Pursuant 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”).
The 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 twelve (12) month Indemnification Holdback Period.
The 224,503 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), were issued as part of the 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 resold 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 Securities and Exchange Commission (the “SEC”) within ten business days after the Closing, a registration statement on Form S-1 or Form S-3 registering the resale of the Shares by the Sellers under the Act to cover 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 the 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 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 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 rights with respect to the WHE Agency shares at the direction of Creatd Partners. In addition, in connection with the Voting Agreements, the Restricted Stockholders delivered irrevocable proxies to Creatd Partners. The Voting Agreements terminate upon the twenty-year anniversary of executing the Voting Agreements.
Dune Transaction
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 Dun 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.
48
Each of the Dune Sellers and Buyer have made customary representations and warranties, and covenants in the Agreement.
In connection with the Dune Agreement, Dune, Creatd Partners, Mark De Luca and SHI entered into a Stockholders Agreement dated October 3, 2021, providing for the purchase of the Purchased Shares representing a majority stake in Dune. The Stockholders Agreement contains customary representations and warranties, and covenants.
Registered Direct Offering
On October 25, 2021, we entered into a securities purchase agreement (the “Purchase Agreement”) with institutional investors (collectively, the “Purchasers”) resulting in the raise of $3,825,000 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 (the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $4.50 per Share (the “Offering”). The Offering closed on October 27, 2021, subject to customary closing conditions.
Pursuant to the terms of the Purchase Agreement, each of the Purchasers was granted the right to participate in a subsequent financing in an amount up to 25% of such subsequent financing. Additionally, under the terms of the Purchase Agreement, the Company and its subsidiaries are prohibited from issuing Common Stock or common stock equivalents for a period of 30 days from the date of the closing of the Purchase Agreement, other than with respect to Exempt Issuances (as defined in the Purchase Agreement) and the Company shall not undertake a reverse or forward stock split or reclassification of the Common Stock without the prior written consent of the Purchasers holding a majority in interest of the Shares, except as may be required in connection with the satisfaction of the minimum bid price requirement of the principal Trading Market.
The Benchmark Company, LLC acted as exclusive placement agent (the “Placement Agent”) for the Company in connection with the Offering. Pursuant to that certain Placement Agency Agreement, dated as of October 25, 2021, between the Company and the Placement Agent (the “Placement Agency Agreement”), the Placement Agent is entitled to a cash fee equal to $267,750, which represents seven percent (7.0%) of the aggregate gross proceeds raised in the Offering, the reimbursement of certain of the Placement Agent’s expenses, and warrants to purchase up to 42,500 shares of Common Stock at an exercise price of $5.40 per share, which represents five percent (5.0%) of the aggregate number of Shares sold in the Offering (the “Placement Agent Warrants”). The Placement Agent Warrants will not be exercisable for a period of six months following the date of the closing and thereafter are exercisable for a period of five years.
The Company estimates that net proceeds to the Company from the Offering will be approximately $3,407,250 after deducting the Placement Agent fees and estimated expenses payable by the Company.
The Shares were issued to the Purchasers in a registered direct offering pursuant to which the Shares will be registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company’s currently effective registration statement on Form S-3 (File No. 333-250982), which was initially filed with the Securities and Exchange Commission (the “SEC”) on November 25, 2020, as amended on April 9, 2021, and was declared effective on April 23, 2021 (the “Shelf Registration Statement”). A Prospectus Supplement for the closing dated October 25, 2021 was filed with the SEC and is available on the SEC’s website at http://www.sec.gov.
Results of Operations
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at September 30, 2021 compared to December 31, 2020:
| September 30, 2021 |
December 31, 2020 |
Increase / (Decrease) |
||||||||||
| Current Assets | $ | 2,550,911 | $ | 8,020,993 | $ | (5,470,082 | ) | |||||
| Current Liabilities | $ | 5,387,223 | $ | 4,968,427 | $ | 418,796 | ||||||
| Working Capital (Deficit) | $ | (2,836,312 | ) | $ | 3,052,566 | $ | (5,888,878 | ) | ||||
At September 30, 2021, we had a working capital (deficit) of $(2,836,312) as compared to a working capital of $3,052,566 at December 31, 2020, a decrease in working capital of $5,888,878. The decrease is primarily attributable to a reduction in cash and an increase in deferred revenue and notes payable. This was offset by an increase in prepaid expense and a decrease in convertible notes payable.
49
Net Cash
Net cash used in operating activities for the nine months ended September 30, 2021, and 2020, was $15,617,065 and $5,032,488, respectively. The net loss for the nine months ended September 30, 2021, and 2020 was $24,942,247 and $23,306,686, respectively. This change is primarily attributable to the net loss for the current period offset by share-based payments in the amount of $5,662,389 to employees and consultants for services rendered, accretion of debt discount and debt issuance costs of $3,028,015 due to incentives given with debentures, and a Change in fair value of derivative liability of $1,096,287, as well as a change in accounts payable and accrued expenses of $160,434.
The increased net cash used in 2021 reflected an extraordinary cash outlay for marketing, which went toward generating a lower creator acquisition cost for paid Vocal subscribers, and an increase in general and administrative expenses.
Net cash used in investing activities for the nine months ended September 30, 2021, was $1,325,155. This is primarily attributable to the purchase of Plant Camp, WHE Agency, property and equipment, deposits on investments related to the Memorandum of Understanding with Dune, Inc., and cash paid for the purchase of investments.
Net cash provided by financing activities for the nine months ended September 30, 2021, and 2020 was $10,560,265 and $8,337,715, respectively. During the nine months ended September 30, 2021, the Company’s operations were predominantly financed by net proceeds of $5,472,068 from the exercise of warrants, the proceeds from loans and notes of $3,931,720, and proceeds from the issuance of stock and warrants, which were partially offset by the repayment of notes and loans of $1,345,723. Similarly, the Company’s financing activity for the nine months ended September 30, 2020, generated $4,893,893 from loans and note issuances, the proceeds of which were partially offset by repayment of notes of $3,178,777.
Summary of Statements of Operations for the Three Months Ended September 30, 2021, and 2020:
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 1,179,620 | $ | 424,814 | ||||
| Cost of revenue | $ | 1,418,213 | $ | 731,309 | ||||
| Operating expenses | $ | (6,672,381 | ) | $ | (6,717,369 | ) | ||
| Loss from operations | $ | (6,910,974 | ) | $ | (7,023,864 | ) | ||
| Other expenses | $ | (2,809,147 | ) | $ | (9,154,834 | ) | ||
| Net loss | $ | (9,736,534 | ) | $ | (16,178,698 | ) | ||
| Loss per common share – basic and diluted | $ | (0.71 | ) | $ | (3.81 | ) | ||
Revenue
Revenue totaled $1,179,620 for the three months ended September 30, 2021, as compared to $424,814 for the comparable three months ended September 30, 2020, an increase of $754,806. The year-over-year increase in quarterly revenue is attributable to the steady growth of Vocal+ memberships as well as the acquisition of WHE and its contribution to growth in the Company’s agency businesses.
50
Cost of Revenue
Cost of revenue for the three months ended September 30, 2021, were $1,418,213 as compared to $731,309 for the three months ended September 30, 2020. The increase of $686,904 in cost of revenue is mainly related to R&D efforts and other overhead required to continue to increase Vocal+ memberships as well as the acquisition of WHE and its contribution to growth in the Company’s agency businesses. The Company expects the gross margin to improve over time as it continues to grow and improve upon a self-sustaining, organically driven revenue model across its business segments.
Operating Expenses
Operating expenses for the three months ended September 30, 2021, were $6,672,381 as compared to $6,717,369 for the three months ended September 30, 2020. The decrease of $44,988 in operating expenses is mainly related to an by a decrease in stock-based compensation, offset by an increase in marketing and research and development expenditure. We expect marketing expenditure to remain approximately the same over coming quarters as the Company continues to execute on its new organic subscriber growth strategies and works to reduce reliance on third party social media platforms.
Loss from Operations
Loss from operations for the three months ended September 30, 2021, was $6,910,974 as compared to $7,023,864 for the three months ended September 30, 2020. The decrease in the loss from operations this quarter primarily reflects continued revenue growth coupled with increased operating expenses compared to the prior year. Going forward, the Company expects the loss from operations to continue to decrease as revenues continue to grow and expenses remain consistent.
Other Income and Expenses
Other expenses for the three months ended September 30, 2021, were $2,809,147 as compared to $9,154,834 for the three months ended September 30, 2020. The decrease in third quarter 2021 other expenses was predominantly due to an increased gain on extinguishment of debt and a decrease in an accretion of debt discount and issuance cost.
Net Loss
Net loss attributable to common shareholders for the three months ended September 30, 2021, was $9,797,011, or loss per share of $0.71, as compared to a net loss attributable to common shareholders of $16,197,119, or loss per share of $3.81, for the three months ended September 30, 2020.
Summary of Statements of Operations for the Nine Months Ended September 30, 2021, and 2020:
| Nine Months Ended September 30, |
||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 2,894,390 | $ | 1,040,496 | ||||
| Cost of revenue | $ | 4,160,743 |
$ | 1,863,148 | ||||
| Operating expenses | $ | (19,971,413 | ) | $ | (11,562,413 | ) | ||
| Loss from operations | $ | (21,237,766 | ) | $ | (12,385,065 | ) | ||
| Other expenses | $ | (3,688,068 | ) | $ | (10,921,621 | ) | ||
| Net loss | $ | (24,942,247 | ) | $ | (23,306,686 | ) | ||
| Loss per common share – basic and diluted | $ | (2.20 | ) | $ | (6.65 | ) | ||
Revenue
Revenue was $2,894,390 for the nine months ended September 30, 2021, as compared to $1,040,496 for the comparable nine months ended September 30, 2020, an increase of $1,853,894. The year-over-year increase in quarterly revenue is attributable to the steady growth of Vocal+ memberships as well as consistent growth in the Company’s agency businesses.
51
Cost of Revenue
Cost of revenue for the three months ended September 30, 2021, were $4,160,743 as compared to $1,863,148 for the three months ended September 30, 2020. The increase of $2,297,595 in cost of revenue is mainly related to an increase in Vocal+ memberships as well as the acquisition of WHE and its contribution to growth in the Company’s agency businesses.
Operating Expenses
Operating expenses for the nine months ended September 30, 2021, were $19,971,413 as compared to $11,562,413 for the nine months ended September 30, 2020. The increase of $8,409,000 in operating expenses is mainly related to a $6.7 million increase in marketing expenditure and $2.2 million increase in general and administrative expenses. Much of the increase in marketing expenditure occurred during the company’s second quarter 2021 as it focused significant resources on tactical experimentation utilizing our internal data to generate a lower creator acquisition cost, resulting in significant Vocal+ membership growth, with the Company ending the second quarter 2021 having achieved a new milestone of over 30,000 Vocal+ members. The Company went on to significantly reduce marketing spend in third quarter, 2021 and expects future quarterly spend to reflect levels consistent with third quarter.
Loss from Operations
Loss from operations for the nine months ended September 30, 2021, was $21,237,766 as compared to $12,385,065 for the nine months ended September 30, 2020. The operating loss increase primarily reflects added marketing expenses during the first half of 2021 as the company launched a comprehensive marketing campaign and the need for duplicate expenditures during transition period as new staff hires are trained by the outsourced third-party service providers whom they will be replacing. The majority of these additional costs have been eliminated during third quarter 2021. Going forward, the Company expects the loss from operations to decrease as revenues continue to increase and expenses remain relatively constant.
Other Income and Expenses
Other expenses for the nine months ended September 30, 2021, was $3,688,068 as compared to $10,921,621 for the nine months ended September 30, 2020. The decrease in other expenses was predominantly due to the change in extinguishment of debt and a reduction in interest expense. This was offset by an increase in derivative expense, change in fair value of derivative liability, and the impairment of investments.
Net Loss
Net loss attributable to common shareholders for the nine months ended September 30, 2021, was $25,413,042, or loss per share of $2.20, as compared to a net loss attributable to common shareholders of $23,325,107, or loss per share of $6.65, for the nine months ended September 30, 2020.
Off-Balance Sheet Arrangements
As of September 30, 2021, we had no off-balance sheet arrangements.
Significant Accounting Policies
Our significant accounting policies are described in Note 2 of the Financial Statements. If we complete an acquisition, we will be required to make estimates and assumptions typical of other companies. For example, we will be required to make critical accounting estimates related to valuation and accounting for business combinations. The estimates will require us to rely upon assumptions that were highly uncertain at the time the accounting estimates are made, and changes in them are reasonably likely to occur from period to period. Changes in estimates used in these and other items could have a material impact on our financial statements in the future. Our estimates will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates. For detailed information regarding our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our critical accounting policies and estimates from those disclosed in our most recent Annual Report on Form 10-K.
52
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our exposures to market risk since December 31, 2020. For details on the Company’s interest rate, foreign currency exchange, and credit risks, see “Item 7A. Quantitative and Qualitative Information About Market Risks” in our 2020 Annual Report.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are not effective.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, during throughout 2021, the Company continued the complete review of all of its financial procedures and controls that was requisitioned and begun during 2020 and is continuing the process of updating and optimizing its infrastructure around these controls. Over the past year, the Company has hired additional finance and accounting personnel, significantly improving the segregation of duties within that department and providing additional bandwidth for management to focus on improving controls and procedures. This review is ongoing, and the Company believes that this process will continue to positively affect our internal control over financial reporting in the future.
53
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, 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.
On June 25, 2020, Home Revolution, LLC (“Home Revolution”) filed a lawsuit in the United States District Court for the District of New Jersey (the “Court”), entitled Home Revolution, LLC, et al v. Jerrick Media Holdings, Inc. et al, Case No. 2:20-cv-07775-JMV-MF (the “Action”). The complaint for the lawsuit alleges, among other things, that the Company 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. After filing the Complaint but prior to our Answer date, Home Revolution moved by order to show cause to have a receiver appointed by the Court to take over Creatd’s operations.
We submitted an opposition, and after oral arguments on August 13, 2020, the Court denied the receiver request in its entirety. We then filed a Motion to Dismiss on August 14, 2020, on a number of grounds, the most significant of which is that this is a simple (alleged) breach of Promissory Note case. Creatd is current on all payments under the Note, and because both parties are New Jersey entities a mere breach of contract and/or collection-based case is not appropriately venued in federal court. Upon receipt of our Motion to Dismiss, Home Revolution submitted an Amended Complaint, presumably in an effort to cure the problems with the Complaint which we identified in the Motion to Dismiss. Home Revolution has subsequently initiated a series of atypical procedures and, as a result, has (without following the Federal Rules of Civil Procedure) moved for both default and to submit yet another newly Amended Complaint (the one precludes the other and vice versa).
After we submitted a motion to clear up the above, the Court reinstated the matter to the docket and permitted Plaintiff to file the Second Amended Complaint (we had no objection). We have filed a motion to dismiss the Second Amended Complaint. That will take some time to be decided. We expect no major event to occur for the next 12 months. Finally, we believe the lawsuit lacks merit and will vigorously challenge the action.
Item 1A. Risk Factors.
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our most recent Annual Report on Form 10-K for the year ended December 31, 2020, the occurrence of any one of which could have a material adverse effect on our actual results.
There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended September 30, 2021, we issued securities that were not registered under the Securities Act and were not previously disclosed in a Current Report on Form 8-K or Quarterly Report on Form 10-Q as listed below. All of the securities discussed in this Item 2 were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.
Board Issuances
During the nine months ended September 30, 2021, the Company issued 69,635 shares of common stock and options to purchase 352,500 shares of common stock to members of the board of directors under the Jerrick Media Holdings, Inc. 2020 Omnibus Equity Incentive Plan. The options have an exercise price ranging from $2.55 - $14.10, vest on the one-year anniversary and expire 5 years from the date of vesting.
Consultant Shares
During the three months ended September 30, 2021, the Company issued 29,415 shares of Common Stock to consultants and employees.
Debt Conversion
During the three months ended September 30, 2021, a lender converted $168,900 in promissory notes into 74,706 shares of Common Stock.
54
Item 3. Defaults Upon Senior Securities.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits.
| * | Filed herewith |
| # | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
55
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CREATD, INC. | ||
| Date: November 15, 2021 | By: | /s/ Jeremy Frommer |
| Name: | Jeremy Frommer | |
| Title: | Co-Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: November 15, 2021 | By: | /s/ Chelsea Pullano |
| Name: | Chelsea Pullano | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
56