UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number: 0-21537

  

Grandparents.com, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		93-1211114
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
589 Eighth Avenue, 6th Floor New York, New York		10018
(Address of Principal Executive Offices)		(Zip Code)

 

(646) 839-8800

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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.

Yes   x   No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x   No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨   No   x

 

As of November 4, 2016, there were 202,268,582 shares of the registrant’s common stock, $.01 par value per share, outstanding.

  

  

  

GRANDPARENTS.COM, INC.

 

QUARTERLY REPORT ON FORM 10-Q

September 30, 2016

 

TABLE OF CONTENTS

 

		PAGE
Cautionary Note Regarding Forward-Looking Statements		3
PART I—FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	4
	Condensed Consolidated Statements of Operations (unaudited) for the three- and nine- month periods ended September 30, 2016 and September 30, 2015	5
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine-month periods ended September 30, 2016 and September 30, 2015	6
	Condensed Consolidated Statement of Stockholders’ Deficit (unaudited) for the nine-month period ended September 30, 2016	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II—OTHER INFORMATION		27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
SIGNATURES		29

 

  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included in this Quarterly Report on Form 10-Q (this “Report”) or in other materials we have filed or will file with the Securities and Exchange Commission (“SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. In some cases, forward-looking statements may contain terms such as “anticipates,” “believes,” “seeks,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “will,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Such statements may include, but are not limited to, information related to: anticipated operating results; relationships with our marketing partners and members; demand for our website and changes in our membership ranks; financial resources and condition; changes in revenues; ability to create revenue; changes in profitability; changes in accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; the ability to produce liquidity or enter into agreements to acquire the capital necessary to continue our operations and take advantage of opportunities; legal proceedings and claims. Forward-looking statements reflect our current views with respect to future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” contained in the Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC on March 28, 2016. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

 

  

PART I—FINANCIAL INFORMATION

 

Item 1.          Financial Statements.

 

GRANDPARENTS.COM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Current assets:
Cash		$	1,306,607			$	3,765,723
Accounts receivable			67,845				96,874
Prepaid expenses			41,179				351,346
Total current assets			1,415,631				4,213,943
Property and equipment, net			9,472				16,384
Other Assets:
Security deposits			86,500				92,800
Intangibles, net			632,684				882,188
Total other assets			719,184				974,988
Total assets		$	2,144,287			$	5,205,315
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	2,327,034			$	1,952,247
Accrued dividends			87,500				1,563
Accrued expenses			209,362				205,340
Deferred revenue			10,480				7,396
Notes payable			999,957				999,957
Total current liabilities			3,634,333				3,166,503
Convertible loan, net			-				3,319,020
Term loan, net			3,642,576				-
Total long-term liabilities			3,642,576				3,319,020
Total liabilities			7,276,909				6,485,523
Commitments and contingencies
Series C redeemable convertible preferred stock, 875,000 shares (liquidation preference $1,750,000) issued and outstanding at September 30, 2016 and December 31, 2015			221,261				216,912
Stockholders’ deficit:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 875,000 shares of Series C preferred stock designated
Common stock, $0.01 par value, 350,000,000 shares authorized; 202,268,582  shares issued and outstanding at September 30, 2016 and 132,268,582 at December 31, 2015			2,022,686				1,322,686
Additional paid-in capital			48,645,734				46,610,937
Accumulated deficit			(56,022,303	)			(49,430,743	)
Total stockholders’ deficit			(5,353,883	)			(1,497,120	)
Total liabilities and stockholders’ deficit		$	2,144,287			$	5,205,315

  

See accompanying notes to condensed consolidated financial statements. 

  

   

GRANDPARENTS.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Revenue:
Commission revenue		$	14,858			$	160,000			$	14,858			$	260,000
Advertising and other revenue			117,352				28,055				241,121				122,625
Total revenue			132,210				188,055				255,979				382,625
Operating expenses:
Selling and marketing			902,822				86,313				1,036,838				215,482
Salaries			452,649				494,613				1,357,094				1,585,944
Rent			56,254				45,500				167,345				161,478
Accounting, legal and filing fees			543,289				166,498				965,226				524,073
Consulting			204,831				346,699				882,601				986,361
Equity-based compensation			34,056				791,675				778,499				2,548,587
Other general and administrative			209,957				200,584				627,885				578,190
Depreciation and amortization			85,014				99,500				256,415				311,587
Total operating expenses			2,488,872				2,231,382				6,071,903				6,911,702
Other income (expense):
Interest expense			(277,134	)			(422,386	)			(655,323	)			(521,868	)
Other income			-				72,427				-				72,427
Total other income (expense)			(277,134	)			(349,959	)			(655,323	)			(449,441	)
Net loss attributable to common and preferred shareholders			(2,633,796	)			(2,393,286	)			(6,471,247	)			(6,978,518	)
Dividends and amortization of discount on preferred stock			33,990				-				124,662				-
Net loss attributable to common shareholders		$	(2,667,786	)		$	(2,393,286	)		$	(6,595,909	)		$	(6,978,518	)
Net loss per share-basic and diluted		$	(0.02	)		$	(0.02	)		$	(0.05	)		$	(0.05	)
Weighted average common shares outstanding, basic and diluted			143,681,625				132,675,929				136,100,699				132,199,959

   

See accompanying notes to condensed consolidated financial statements.

  

  

GRANDPARENTS.COM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2016				2015
Cash flows from operating activities:
Net loss		$	(6,471,247	)		$	(6,978,518	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			256,415				311,587
Equity-based compensation			639,145				1,751,508
Stock issued for services			139,353				802,619
Payment in kind interest added to loan balance			294,113				66,235
Amortization of discount on loans and notes payable			129,443				330,296
Gain on settlement of accounts payable			-				72,427
Changes in operating assets and liabilities:
Accounts receivable			29,029				43,036
Prepaid expenses			177,114				817,309
Accounts payable			371,664				(222,523	)
Accrued expenses			2,459				(18,162	)
Deferred officer salary			-				(226,875	)
Deferred revenues			3,084				(999,810	)
Net cash used in operating activities			(4,429,428	)			(4,250,871	)
Cash flows from investing activities:
Capitalized website development costs			-				(52,080	)
Net cash used in investing activities			-				(52,080	)
Cash flows from financing activities:
Repayments of loans and short-term advances			-				(600,000	)
Proceeds from private placement			1,050,000				700,000
Proceeds from loans and short-term advances, net			950,000				5,000,164
Proceeds from sale of preferred stock, net			-				1,673,577
Payments of dividends on preferred stock			(29,688	)			-
Net cash provided by financing activities			1,970,312				6,773,741
Net (decrease) increase in cash			(2,459,116	)			2,470,790
Cash, beginning of period			3,765,723				126,600
Cash, end of period		$	1,306,607			$	2,597,390
Supplemental cash flow information:
Equity discount on secured term loan		$	1,050,000			$	-
Common stock to be issued as dividends on preferred stock		$	87,500			$	-
Amortization of preferred stock discount		$	4,349			$	(21	)
Fair value of warrants issued in exchange for services		$	-			$	836,119
Warrant issued in connection with beneficial conversion on convertible loans and  notes		$	-			$	4,390,000
Warrant issued in connection with beneficial conversion on preferred stock		$	-			$	1,458,639
Settlement of liabilities through issuance of equity		$	-			$	5,541
Cashless exercise of warrants to common stock		$	-			$	200
Cash paid for interest		$	133,176			$	107,773

  

See accompanying notes to condensed consolidated financial statements.

 

   

GRANDPARENTS.COM, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

																		Additional								Total
		Preferred Stock								Common Stock								Paid-In				Accumulated				Stockholder’s
		Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance, December 31, 2015			-			$	-				132,268,582			$	1,322,686			$	46,610,937			$	(49,430,743	)		$	(1,497,120	)
Equity based compensation			-				-				-				-				639,145				-				639,145
Equity discount on secured term loan			-				-				-				-				1,050,000				-				1,050,000
Issuance of common shares			-				-				70,000,000				700,000				350,000				-				1,050,000
Amortization of discount on preferred stock			-				-				-				-				(4,349	)			-				(4,349	)
Preferred dividends			-				-				-				-				-				(120,313	)			(120,313	)
Net loss for the period			-				-				-				-				-				(6,471,247	)			(6,471,247	)
Balance, September 30, 2016			-			$	-				202,268,582			$	2,022,686			$	48,645,733			$	(56,022,303	)		$	(5,353,884	)

   

See accompanying notes to these condensed consolidated financial statements.

 

   

GRANDPARENTS.COM, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. Description of Business

 

Grandparents.com, Inc., together with its consolidated subsidiaries (the “Company”), is a digitized media and eCommerce company that through its website, www.grandparents.com, serves the age 50+ demographic market. The Company owns and operates the Grandparents.com website. As a membership organization and social media community, it connects grandparents, seniors, and boomers to differentiated, discounted products and services. Its services are geared to the approximately 72 million grandparents in the U.S., but its audience also includes “boomers” and seniors that are not grandparents. The Company’s website offers content on health, wellbeing, relationships and finances as well as other topics that appeal to its audience. The Company believes that its website is one of the leading online communities for its market and is one of the premier social media platforms targeting active, involved grandparents. The Company’s business model is to provide group discount benefits for a small membership fee. In addition to the website, the Company’s membership association, the American Grandparents Association (the “AGA”), was formed to unite grandparents, boomers and seniors. The AGA is a resource for those seeking advice, information and discussion of issues important to grandparents. Members of the AGA also enjoy access to its deals, discounts and products provided by third parties that the AGA endorses or recommends or makes available to its members.

 

2. Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Grandparents.com, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

The accompanying unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.

 

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue, the useful lives and impairment of long-lived assets including property and equipment and intangible assets, fair values, stock-based compensation, income taxes, and contingencies. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from these estimates.

 

These condensed consolidated financial statements and the related notes should be read in conjunction with the December 31, 2015 financial statements and related notes included in the Company’s Annual Report on Form 10-K filed March 28, 2016. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission. The condensed consolidated balance sheet as of December 31, 2015 was derived from the Company’s audited financial statements for the year ended December 31, 2015, but does not include all disclosures required by U.S. GAAP. 

 

3. Going Concern

 

The Company incurred a net loss of approximately $6.5 million during the nine months ended September 30, 2016. The Company has an accumulated deficit of $56.0 million and a stockholders’ deficit of $5.4 million at September 30, 2016. It has used approximately $4.4 million in cash for operating activities during the nine months ended September 30, 2016. Without additional capital from existing or outside investors or further financing, the Company’s ability to continue to operate will be limited. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

  

On September 15, 2016, the Company sold 70,000,000 shares of its common stock for $1,050,000 and received an additional loan from its secured lender in the amount of $950,000. The Company has an agreement to sell preferred stock for $1,000,000 and to receive additional loans from its secured lender up to $2,000,000 which is contingent upon certain events including obtaining stockholder approval to increase the number of authorized shares of common stock to provide for the conversion feature of the preferred stock.

 

Management plans to obtain resources for the Company through raising additional capital through sales of its equity or debt securities. In addition, management is seeking to expand its revenue streams and increase its endorsement opportunities. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

4. Intangible Assets

 

Intangible assets, all of which are finite-lived, consisted of the following at September 30, 2016 and December 31, 2015:  

  

		Estimated Useful		September 30,				December 31,
		Lives (in Years)		2016				2015
URL and trademarks		4		$	1,000,000			$	1,000,000
Website and mobile application development		3			527,562				527,562
					1,527,562				1,527,562
Less: accumulated amortization					(894,878	)			(645,374	)
Intangible assets, net				$	632,684			$	882,188

 

During the year ended December 31, 2015, additional costs of $52,080 were capitalized for further major enhancements of the website. 

 

Amortization expense related to intangible assets amounted to $82,702 and $97,060 for the three months ended September 30, 2016 and 2015, respectively, and $249,504 and $302,487 for the nine months ended September 30, 2016 and 2015, respectively. The future amortization expense for the remaining three months of 2016 and each of the four succeeding years related to intangible assets is estimated as follows:

 

For the Periods Ending December 31,		Amortization
2016		$	82,659
2017			293,207
2018			256,818
2019			-
2020			-
		$	632,684

 

5. Notes Payable

 

Notes payable and long-term loans, consisted of the following at September 30, 2016 and December 31, 2015:

 

		September 30,				December 31,
		2016				2015
Notes payable assumed February 2012		$	999,957			$	999,957
Convertible loan – July 2015 Convertible Loan, due 2025			-				8,130,970
Term Secured loan – September 2016 Term Secured Loan, due 2031			9,375,083				-
			10,375,040				9,130,927
Less: debt discount and debt issue costs			(5,732,508	)			(4,811,950	)
Notes payable and long-term loans		$	4,642,532			$	4,318,977

 

  

Accrued interest expense included in accrued expenses at September 30, 2016 and December 31, 2015 was $202,746 and $185,687, respectively.

 

Convertible Secured Loan – July 2015 Convertible Secured Loan

 

On July 8, 2015, the Company and VB Funding, LLC (“VB Lender”) entered into a credit agreement (“Credit Agreement”) which provided for a multi-draw term loan credit facility (the “VB Loan”) in an aggregate amount not to exceed $8,000,000. The full amount of the VB Loan was advanced in two disbursements, with the initial amount of $5,000,000 (which includes the $1,000,000 amount previously funded on May 18, 2015 pursuant to a bridge loan from VB Lender disbursed by VB Lender at the time of closing of the Credit Agreement. The second disbursement was on December 31, 2015. The VB Loan was used to fund ongoing operations and to repay then outstanding indebtedness. The Credit Agreement was replaced by an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) on September 15, 2016.

  

Pursuant to the Credit Agreement, the Company was subject to certain customary limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Credit Agreement contained usual and customary events of default, the occurrence of which could have led to an acceleration of the Company’s obligations thereunder.

 

Outstanding indebtedness under the VB Loan could have been voluntarily prepaid at any time, in whole or in part, without premium or penalty. The indebtedness under the VB Loan was due July 8, 2025 with interest at an aggregate of 7.5% per annum, 2.5% of which was payable in cash and 5.0% was payable in-kind as additional principal. The VB Loan was secured by a security interest in the Company’s and certain of its subsidiaries’ assets and each such subsidiary guaranteed the repayment of the VB Loan. VB Lender had the right to convert the outstanding balance of the VB Loan into shares of common stock of the Company, at a conversion price per share equal to $0.20 which gave rise to a beneficial conversion feature having a relative fair market value of $1,950,000 as of July 8, 2015. This beneficial conversion feature value was recorded as a discount to the VB Loan and was amortized to interest expense over the life of the loan. In connection with the initial disbursement, VB Lender received a ten-year warrant to purchase 12.5 million shares of the Company’s common stock at an exercise price of $0.30 per share. As of July 8, 2015, the warrant had a relative fair market value of $1,700,000 and was recorded as a debt discount. In connection with the second disbursement, VB Lender received a ten-year warrant to purchase 7.5 million shares of the Company’s common stock at an exercise price of $0.30 per share. The warrant had a relative fair market value of $465,146 and was recorded as a debt discount. There was no beneficial conversion feature in connection with the second disbursement.

 

Term Secured Loan – September 2016 Term Secured Loan

 

On September 15, 2016, the Company and VB Lender entered into the Amended and Restated Credit Agreement, which amended and restated the Credit Agreement. The Amended and Restated Credit Agreement has a principal balance equal to the outstanding balance under the VB Loan and provided for two additional disbursements in an aggregate amount not to exceed $2,950,000 (collectively, the “New VB Loan”). The first disbursement was advanced on September 15, 2016 in the amount of $950,000 and a second disbursement may be made in the amount of $2,000,000 when certain conditions are satisfied.

 

Outstanding indebtedness under the New VB Loan may be voluntarily prepaid at any time, prior to the maturity date. The indebtedness under the New VB Loan matures on October 1, 2031 and bears interest at the following rates per annum, payable in cash on a quarterly basis: 1% for the first year of the New VB Loan, 2% for the second year, 3% for the third year, 12% for the fourth year and 15% thereafter. Interest is no longer payable in-kind as additional principal on the New VB Loan. At September 30, 2016, outstanding indebtedness under the New VB Loan was $9,375,083 plus accrued interest of $47,543.

 

  

The New VB Loan is secured by a security interest in the Company’s and certain of its subsidiaries’ assets and the subsidiaries guaranteed the repayment of the New VB Loan. The Company is subject to certain customary limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Amended and Restated Credit Agreement contains usual and customary events of default, the occurrence of which can lead to an acceleration of the Company’s obligation thereunder.

 

The New VB Loan has no convertible feature so it is not convertible into shares of the Company’s common stock.

 

In accordance with ASC 470-60 this refinancing was considered a troubled debt restructuring with a modification of terms. As a result, the unamortized discount of $4,473,147 and unamortized debt issue costs of $275,885 from the VB Loan were carried forward to be amortized using the effective interest method for the New VB Loan. On September 15, 2016, the Company also sold to VB Lender 70,000,000 shares of the Company’s common stock at a price per share of $0.015, for an aggregate purchase price of $1,050,000. Because the fair value on the date of purchase was $2,100,000, the difference of $1,050,000 was recorded as an additional equity discount on the New VB Loan and will be amortized over the life of the loan using the effective interest rate method. Any new fees paid to third parties in connection with the New VB Loan were expensed as required.

 

The Company intends to use borrowings under the Amended and Restated Credit Agreement to fund the operations of the Company and to pay fees and expenses relating to the Amended and Restated Credit Agreement and related transactions.

 

The Company intends to use borrowings under the Amended and Restated Credit Agreement to fund the operations of the Company and to pay fees and expenses relating to the Amended and Restated Credit Agreement and related transactions.

 

Other Outstanding Indebtedness

 

In addition to the New VB Loan described above, we have certain unsecured indebtedness, primarily promissory notes outstanding in favor of Mr. Leber in the principal amount of $78,543 (the “Leber Note”), Meadows Capital, LLC, an entity controlled by Dr. Cohen, a member of the Company’s board of directors, in the principal amount of $308,914 (the “Meadows Note”) and BJ Squared, LLC, an entity controlled by Mr. Leber, in the principal amount of $612,500 (“BJ Squared Note”). Meadows Capital, LLC, has a 50% interest in the BJ Squared Note. These promissory notes reflect indebtedness assumed by us in connection with a merger in February 2012. The Meadows Note and the BJ Squared Note accrue interest at the rate of 5% per annum and mature upon the earlier of (i) the Company having EBITDA of at least $2,500,000 as reflected on its quarterly or annual financial statements filed with the SEC, or (ii) the Company closing a financing with gross proceeds to the Company of at least $10,000,000. On September 15, 2016, the Leber Note was modified so that no interest accrues on the Leber Note after September 1, 2016 and it matures upon the Company achieving fiscal year net income of at least $5,000,000. The Leber Note remains subordinate in right of payment to the Meadows Note and the New VB Loan.

  

Total interest expense charged to operations amounted to $655,323 and $521,868 for the nine-months ended September 30, 2016 and 2015, respectively.

 

6. Stockholders’ Equity

 

Common Stock

 

On September 15, 2016 the Company sold to VB Lender 70,000,000 shares of its common stock, at a price per share of $0.015, for an aggregate purchase price of $1,050,000. Because the fair value on the date of purchase was $2,100,000, the difference of $1,050,000 was recorded as equity discount on the New VB Loan and will be amortized over the life of the New VB Loan using the effective interest method.

 

Series C Redeemable Convertible 7.5% Preferred Stock

 

On September 29, 2015, the Company entered into a securities purchase agreement (the “Preferred Agreement”) with certain investors (the “Preferred Purchasers”) and raised gross proceeds of $1,750,000, including the conversion by Mel Harris, a member of the Company’s board of directors, security holder and advisor to the Company, of the $450,000 principal amount of his convertible promissory note. Under the terms of the Preferred Agreement, the Preferred Purchasers purchased an aggregate amount of 875,000 shares of Series C Preferred Stock at a $2.00 per share purchase price. Each share of Series C Preferred Stock has a stated value of $2.00 (the “Stated Value”) and is convertible, at any time at the option of the holder, into ten (10) shares of the Company’s common stock (the “Conversion Shares”) at a conversion price of $0.20 per share (the “Conversion Price”), subject to customary adjustments, which gave rise to a beneficial conversion feature.

 

In addition, the Preferred Purchasers received warrants (the “Preferred Warrants”) representing the right to acquire an aggregate of 4,375,000 shares of the Company’s common stock at an exercise price of $0.30 per share (the “Preferred Warrant Shares”), subject to customary adjustments, for a period of ten (10) years from the date of issuance. Under certain circumstances, the holder of the Preferred Warrant may elect to exercise the warrant through a cashless exercise.

 

  

Under the Preferred Agreement, the Company shall prepare and file with the Securities and Exchange Commission a registration statement covering the resale of the Conversion Shares and Preferred Warrant Shares under certain conditions after notice from the Preferred Purchasers. 

 

Additionally, the Company granted piggyback registration rights to the Preferred Purchasers in connection with the Conversion Shares and Preferred Warrant Shares on subsequent registration statements filed by Company, subject to certain exceptions.  

 

Each share of Series C Preferred Stock earns dividends at the rate of 7.5% of the Stated Value, 2.5% of which dividend is payable in cash, and 5.0% will be payable in the form of Common Stock, on a quarterly basis, at $0.20 per share. Accrued dividends are recorded as a liability in the condensed consolidated balance sheets. As of September 30, 2016, cumulative unpaid dividends of $87,500 have been accrued for 437,500 shares of common stock at $0.20 per share. Accrued and unpaid dividends do not bear interest.

 

The Series C Preferred Stock has a liquidation preference over common stock and voting rights equal to the number determined by dividing the Stated Value by the Conversion Price then in effect. Holders of Series C Preferred Stock vote together with the holders of the Company’s common stock as a single class.

 

The Company may redeem the Series C Preferred Stock at any time, at a price equal to the Stated Value per share plus any unpaid dividends. Alternatively, upon the election of the holder, the Company will convert shares of the Series C Preferred Stock into shares of the Company’s common stock. In addition, the Company is required to redeem all remaining Series C Preferred Stock on September 29, 2025, the tenth anniversary of the original issue date.

 

The gross proceeds of $1,750,000 received were reduced by issuance costs incurred of $76,423 resulting in net proceeds of $1,673,577 for the Series C Preferred Stock.

 

In accordance with ASC 480-10, the Company classified the Series C Preferred Stock in temporary equity. The relative fair market value of the Preferred Warrants was $603,608 and the fair market value of the beneficial conversion feature was $855,031 totaling an aggregate discount of $1,458,639 which was recorded to additional paid-in capital. The issuance costs and discount are amortized using the effective interest rate method over 10 years.

 

Series D Convertible 12% Preferred Stock

 

Simultaneously with the entry into the Amended and Restated Credit Agreement, the Company and VB Lender also entered into a securities purchase agreement which provides VB Lender with the right to purchase a total of 1,500,000 shares of Series D Convertible 12% Preferred Stock (“Series D Preferred Stock”) for a total price of $1,000,000, convertible into an aggregate of 1,833,000,000 shares of common stock. The conditions to the closing of the sale of shares of Series D Preferred Stock include approval by the shareholders of an amendment to the certificate of incorporation to increase the number of authorized shares of common stock to 2,156,500,000 shares, and the filing of a Certificate of Designation, Preferences and Rights of Series D Preferred Stock (the “Certificate”). The Certificate specifies that from and after the date of the issuance of any shares of Series D Preferred Stock, dividends at the rate per annum of $0.08 per share (which represents 12% per annum) will accrue on such shares. Dividends will accrue from day to day and will be cumulative, provided, however, that except as provided for in certain circumstances, dividends will only be payable when, as, and if declared by the board of directors of the Company and the Company will be under no obligation to pay such accrued dividends.

 

As an additional condition to closing, VB Lender required that the holders of Series C Preferred Stock shall have the option to convert their shares of Series C Preferred Stock into shares of the Company's common stock at a discounted rate of $0.05 per share.  Additionally, VB Lender required as a condition to closing that all shares of Series C Preferred Stock held by directors, officers and executives of the Company be converted into shares of the Company's common stock at a discounted rate of $0.05 per common share.  The Series C Preferred Stock was issued in 2015 for $2.00 per preferred share, with an initial conversion price of $0.20 per common share.  This option to convert therefore represents a discount of $0.15 per common share from the original conversion price and shall take effect immediately following the effective date of the Certificate and the closing of the Series D Preferred Stock.

  

Net Earnings (Loss) Per Common Share

 

Basic earnings (loss) per common share are computed by dividing net earnings (loss) per common share by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per common share are computed by dividing net earnings (loss) by the sum of the weighted average number of shares of common stock and the dilutive effect of securities that can be converted into common stock.

 

  

Reconciliations of the weighted average shares outstanding for basic and diluted earnings per common share are as follows:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Basic EPS Shares outstanding (weighted average common shares)			143,681,625				132,675,929				136,100,699				132,199,959
Effect of Dilutive Securities			-				-				-				-
Diluted EPS Shares outstanding			143,681,625				132,675,929				136,100,699				132,199,959

 

Dilutive securities consist of unexercised stock options and warrants as well as the convertibility of the Series C Preferred Stock and accrued dividends. The inclusion of such dilutive securities in the computation of earnings per share would have been anti-dilutive and have therefore been excluded. For the three and nine months ended September 30, 2016 and 2015, the numbers of excluded dilutive securities were 114,677,086 and 102,581,823, respectively.

 

7. Stock Based Compensation

 

The Company adopted the Grandparents.com, Inc. 2012 Stock Incentive Plan (the “Plan”), which currently provides for 25,000,000 shares of the Company’s common stock to be eligible for issuance to employees, officers, directors, consultants, agents, advisors, and independent contractors who provide services to the Company under the Plan.

 

During the nine months ended September 30, 2016, the Company granted 2,000,000 options to purchase shares of common stock, which expire five or ten years from the date of grant, under the Plan to two employees. The options had an exercise price of $0.30 per share, which was greater than the stock price per share on the date of grant.

  

A summary of stock option activity for the nine months ended September 30, 2016 and the year ended December 31, 2015 is presented below:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding at January 1, 2015			24,385,000			$	0.28				7.52			$	445,000
Granted			1,450,000				0.19
Expired			(190,000	)			0.27
Forfeited			(5,312,500	)			0.33
Outstanding at December 31, 2015			20,332,500				0.26				7.25			$	-
Granted			2,000,000				0.30
Expired			(620,000	)			0.33
Outstanding at September 30, 2016			21,712,500			$	0.26				6.65			$	-
Exercisable at September 30, 2016			19,683,876			$	0.26				6.72			$	-

   

The compensation expense recognized for Plan and non-Plan options awarded for the three-months ended September 30, 2016 and 2015 was $98,283 and $438,172, respectively. The compensation expense recognized for Plan and non-Plan options awarded for the nine months ended September 30, 2016 and 2015 was $551,741 and $1,413,067 respectively. Total unrecognized compensation costs related to non-vested equity-based compensation arrangements was $188,066 as of September 30, 2016. That cost is expected to be recognized over the remaining vesting period of 27 months.

 

All options were excluded from diluted EPS since the Company is in a loss position.

 

  

8. Warrants

 

During the nine months ended September 30, 2016, the Company granted warrants to purchase 600,000 shares of common stock in connection with services to the Company. The warrants had exercise prices of $0.30 per share and they expire five years from the date of grant. The exercise price per share was greater than the stock price per share on the date of grant. The aggregate fair market value of the warrants issued was $40,820 which was recorded as an expense in the statement of operations during the nine months ended September 30, 2016.

 

During the nine months ended September 30, 2016, 5,359,737 unvested warrants issued to Starr Indemnity & Liability Company were forfeited (see note 10).

 

During the nine months ended September 30, 2016, 500,000 fully vested warrants were voluntarily forfeited by the holder per written request to the Company.

 

A summary of warrant activity for the nine months ended September 30, 2016 and the year-ended December 31, 2015 is presented below:

 

		Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding at January 1, 2015			58,094,323			$	0.20				3.48			$	4,164,331
Granted			27,575,000				0.30				-
Exercised			(70,000	)			0.14				-
Cancelled			(500,000	)			0.30				-
Outstanding at December 31, 2015			85,099,323				0.23				4.74			$	643,169
Granted			600,000				0.30
Forfeited			(5,859,737	)			0.07
Outstanding at September 30, 2016			79,839,586			$	0.24				4. 18			$	-
Exercisable at September 30, 2016			77,214,586			$	0.24				4.01			$	-

 

All warrants were excluded from diluted EPS since the Company is in a loss position.

  

9. Income Taxes

 

ASC 740-10 “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”) requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates Company tax positions at each reporting date and has determined that as of September 30, 2016, no accruals for uncertain tax positions are necessary.

 

The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the Company’s estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.

 

The difference between the federal statutory rate (34%) and the Company’s effective rate (0%) is primarily attributable to the change in valuation allowance on its deferred tax assets as it is more likely than not that the Company will not be able to utilize its NOL’s based on the Company’s current results and history of operating losses.

 

  

Generally, the Company is no longer subject to U.S. federal examinations by tax authorities for fiscal years prior to 2012.

 

10. Commitments and Contingencies

 

Operating Leases

 

The Company leases an office in New York, NY under an operating lease which expires September 30, 2018. The future minimum lease payments required under the office lease as of September 30, 2016, are as follows:

 

For the Years Ending December 31,
2016		$	56,238
2017			226,639
2018			173,775
Total		$	456,652

 

Rent expense recognized under operating leases was $56,254 and $45,500 for the three months ended September 30, 2016 and 2015, respectively, and $167,345 and $161,478 for the nine months ended September 30, 2016 and 2015.

 

Starr Agreement

 

On January 8, 2013, the Company entered into a Strategic Alliance Agreement (the “Starr Agreement”), with Starr Indemnity & Liability Company (“Starr”) under which Starr agreed to provide certain services to the Company, including developing strategic business and investment relationships for the Company and providing business consulting services to the Company. In exchange for the services, the Company agreed to pay Starr a monthly fee of $80,000 during the term of the Starr Agreement, which commenced on March 1, 2013, as well as fees to be agreed upon by the Company and Starr for Starr’s arranging agreements with insurance companies. On March 1, 2014 and on March 1, 2015, the Starr Agreement automatically renewed for one-year periods and was to automatically renew on March 1, 2016 unless either party terminated the agreement prior to the expiration of the then-current term. The Starr Agreement was amended in April 2013 at which time the Company committed to issuing Starr a warrant to acquire up to 21,438,954 shares of our common stock, subject to certain customary adjustments which was to vest one-fourth (1/4) of the warrant shares upon issuance and the remaining portion of the warrant shares in three equal annual installments on March 1, 2014, 2015 and 2016, provided, however, that the warrant shall automatically cease to vest upon termination or expiration of the Starr Agreement (see Note 8). On January 29, 2016, the Starr Agreement was amended to extend the renewal deadline to March 29, 2016. On March 29, 2016, the Company decided not to renew the Starr Agreement under its terms. As a result, the Starr Agreement is no longer in effect and the unvested warrants were forfeited.

  

Cegedim Agreement

 

Effective as of March 28, 2013, Grand Card, LLC, a wholly-owned subsidiary of the Company, entered into an Alliance Agreement (the “Cegedim Agreement”) with Cegedim Inc. (Opus Health Division) (“Cegedim”) pursuant to which the parties formed an exclusive strategic alliance (the “Alliance”) to develop member benefit programs (the “Programs”) that provide cash rebates and other rewards on the “Grand Card” debit card. The Cegedim Agreement provides that all costs for marketing and promoting the Programs will be borne by Grand Card LLC and that all other costs and funding of the Programs, subject to certain exceptions, shall be borne 75% by Grand Card LLC and 25% by Cegedim. The Cegedim Agreement further provides that revenues derived from the Alliance (after deduction for certain operating costs borne by the parties) shall be allocated 75% to Grand Card LLC and 25% to Cegedim. The term of the Cegedim Agreement commenced on March 28, 2013 and will continue for an initial term of four (4) years and will automatically renew for successive four-year terms unless fewer than 500,000 cards have been issued at the time of such renewal or either party provides written notice to the other party of its intent not to renew within 120 days of the end of the then-current term. On April 1, 2015, the Opus Health Division was sold by Cegedim Inc. to IMS Health Holdings, Inc.

 

  

Vantiv Agreement

 

In November 2014, Grand Card LLC, a wholly-owned subsidiary of the Company and Vantiv, LLC (“Vantiv”) entered into a master services agreement, an Addendum and exhibits thereto (collectively, the “Vantiv Agreement”) pursuant to which Vantiv agreed to provide card issuing and payment processing products and services to Grand Card LLC. Pursuant to the Vantiv Agreement, Grand Card LLC has committed to, among other things, a card purchasing allotment valued at $775,000 over a twelve (12) month period and in the first quarter of 2015, the Company purchased the initial card commitment at an aggregate cost of $168,756 cards. The initial term of the Vantiv Agreement was three years. On November 11, 2015, Vantiv and Grand Card LLC entered into an amendment to the Vantiv Agreement extending the date on which a purchase order for the balance of the card allotment must be made to December 17, 2015. On December 18, 2015, Vantiv and Grand Card LLC entered into another amendment to the Vantiv Agreement extending the date on which a purchase order for the balance of the card allotment must be made to (i) a partial purchase order for one-third of the remaining balance to be made by December 22, 2015 and (ii) an additional purchase order for the remaining balance by March 31, 2016. On December 22, 2015, such order was placed and in January 2016, the Company purchased additional cards for an aggregate cost of $202,050. On May 10, 2016, Vantiv and Grand Card LLC entered into another amendment which was revised on May 17, 2016 to the Vantiv Agreement extending the schedule of card purchases from July 1 through the end of 2016, extending the term of the Vantiv Agreement for two years and providing for an additional 100,000 cards to be purchased for an aggregate cost of approximately $158,024. It is subject to standard termination provisions as well as customary representations and warranties. In the event of a default under the Vantiv Agreement by Grand Card LLC, Grand Card LLC may be responsible for liquidated damages in an amount based upon the monthly revenue earned by Vantiv for the balance of the term. The Company’s Grand Card venture is a cash rebate debit card that will enable cardholders to purchase pharmaceutical products and consumer goods and services from participating merchants. Prior to September 30, 2016 all costs incurred for purchasing cards from Vantiv in the amount of $794,243 had been fully capitalized as a prepaid expense with anticipated future benefits from generating Grand Card revenues. As of September 30, 2016, these prepaid expenses were expensed and recorded as a selling and marketing expense because the corresponding revenue has yet to be achieved.

 

The Company intends to issue the Grand Card through the AGA and other channels and earn various related fees including percentages of discounts and rebates.

 

HSNi Agreement

 

On March 19, 2015, the Company entered into an agreement (the “HSN Agreement”) with HSNi, LLC and its affiliates (“HSN”) whereby HSN produced and broadcast segments promoting the Company’s membership group, the American Grandparents Association, as well as certain products and services offered by third parties. The initial on air segments involved education regarding Medicare Supplemental, Medicare Advantage, and Cancer and Heart Attack or Stroke health insurance policies offered by Aetna and its affiliates. Under the HSN Agreement, the Company received a percentage of certain proceeds generated through the multimedia marketing campaign conducted by the parties. During the year ended December 31, 2015, the Company recorded $400,000 as commission revenue under the HSN Agreement. The HSN Agreement expired on December 31, 2015.

 

Other Commitments and Contingencies

 

On June 30, 2015, the Company entered into an agreement with a consultant who will provide sales-related services to the Company. In addition to fees for services, the Company will issue warrants following each calendar year of the three-year term if certain performance milestones are achieved by the consultant. No warrants were issued for products sold in 2015 or 2016 under this agreement. For every 10,000 Grandparent.com-endorsed products sold in years 2016 and 2017 of the three-year term as a result of the consultant’s efforts, the Company will grant warrants to purchase 1,000,000 shares of common stock at an exercise price of $0.21 per share with a 5-year term.

 

On May 4, 2016, DMI Partners, Inc. instituted a suit against the Company in the Court of Common Pleas of Philadelphia County PA seeking damages of $158,677 plus interest of $137,842 and costs and fees. The suit is for a breach of contract claim alleging nonpayment for services rendered in connection with online marketing and sales lead generation. The Company has accrued the invoice amount of $158,677 in its accounts payable. The Company has filed an answer and intends to vigorously defend all claims.

 

  

11. Concentrations

 

As of September 30, 2016, three customers represented all of the Company’s accounts receivable and four customers represented approximately 67% of the Company’s revenues earned during the nine months ended September 30, 2016. As of December 31, 2015, four customers represented approximately 80% of the Company’s accounts receivable and two customers represented approximately 75% of the Company’s revenues earned during the nine months ended September 30, 2015.

 

12. Subsequent Events

 

None.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

In this Report, the terms “Company,” “we,” “us” and “our” refer to Grandparents.com, Inc. and its subsidiaries, unless the context otherwise requires. In addition, the term “Annual Report” refers to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC on March 28, 2016.

   

The following discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes thereto included in this Report. The following discussion and analysis should also be read in conjunction with the disclosure under “Cautionary Note Regarding Forward-Looking Statements” and the risk factors contained in our Annual Report.

 

Overview

 

We own and operate the Grandparents.com website. As a membership organization and social media community, we connect grandparents, seniors, and boomers to differentiated, discounted products and services. Our services are geared to the approximately 72 million grandparents in the U.S., but our audience also includes “boomers” and seniors that are not grandparents. Our website offers content on health, wellbeing, relationships and finances as well as other topics that appeal to our audience. Our business model is to provide group discount benefits for a small membership fee. We believe that our website is one of the leading online communities for our market and is the premier social media platform targeting active, involved grandparents.

 

In addition to our website, our membership association, the American Grandparents Association (the “AGA”), was formed to unite grandparents, boomers and seniors. Members of the AGA have access to a range of benefits including discounts on products and services. Members pay $15 annually to the AGA to receive these benefits as well as products and services that are endorsed or recommended by the AGA.

 

To date, most of our revenue has been from advertising on our website. We have broadened our focus to create additional revenue streams by establishing additional products and services and entering into various partnerships and joint ventures. As these products, services and partnerships continue to be developed, implemented and marketed, we expect to generate additional revenue from these sources in the future.

 

Like most developing companies, we face substantial financial challenges particularly in regard to revenue generation, cost control and capital requirements. Revenue for the nine months ended September 30, 2016 was $255,979, which reflected a decrease of $126,646, or 33%, compared to revenue of $382,625 for the comparable period in 2015. The decrease is mostly due to reduced placement fees by one vendor. The Company decreased its total operating expenses by $839,799 or 12%, to $6,071,903 for the nine months ended September 30, 2016 compared to $6,911,702 for the comparable period in 2015 mainly as a result of a decrease in equity-based compensation expense offset by an increase in selling and marketing expense. The Company decreased its net loss attributable to common shareholders by $382,609, or 5%, to $6,595,909 for the nine months ended September 30, 2016 compared to $6,978,518 for the comparable period in 2015.

 

  

The Company used $4,429,428 in cash for operating activities and received a net of $1,970,312 from financing activities during the nine months ended September 30, 2016. The Company had a working capital deficit of $2,218,702 as of September 30, 2016. It continues to seek additional capital and loans to fund ongoing operations. Going forward, the Company will need to raise significant capital in order to successfully implement its business plans. See “Liquidity and Capital Resources” below for additional information regarding our capital raising activities and use of cash.

 

On September 15, 2016, the Company sold 70,000,000 shares of its common stock for $1,050,000 and received an additional loan from its secured lender in the amount of $950,000. The Company has an agreement to sell preferred stock for $1,000,000 and to receive additional loans from its secured lender up to $2,000,000 which is contingent upon certain events including obtaining stockholder approval to increase the number of authorized shares of common stock to provide for the conversion feature of the preferred stock.

 

Without additional capital from existing or outside investors or further financing, our ability to continue to implement our business plan will be limited. These conditions raise substantial doubt about our ability to continue as a going concern and to execute on our business model.

 

Our Website

 

Our website offers content on health and wellbeing, relationships and finances as well as recipes, travel tips and recommended activities for grandparents, boomers and seniors. We believe that our website is one of the leading online communities for our market and is one of the premier social media platforms targeting active, involved grandparents.

 

American Grandparents Association

 

In addition to our website, our membership association, the AGA was formed to unite grandparents, boomers and seniors. Members of the AGA have access to a range of benefits including discounts on products and services. AGA members can access community features of the company’s offerings including discussions, blogs, games, and content as well as other products and services that are offered exclusively to AGA members. Members pay $15 annually to the AGA to receive these benefits as well as discounts on products and services that are endorsed or recommended by the AGA. There are approximately 1,830 members of the AGA and membership dues revenue of $15,144 was recorded in the condensed consolidated statement of operations.

 

Grand Giveaways and Premium Membership

 

Grand Giveaways offers free giveaways to registered users of the website. Grand Giveaways consist of consumer goods and services in the areas of entertainment, food and dining, health and wellness, children’s entertainment and education products. We offer our promotional partners exposure for their giveaways through various touch points: on our website, via our e-newsletter, and through social media channels.

  

Premium Membership benefits are typically discounted products and services provided by third parties appropriate for the 50+ demographic and their families. Premium Membership benefits include deals and discounts on gifts, jewelry, toys, eyewear, flowers, travel, entertainment (theaters), pet supplies, casinos, food and insurance. Many Premium Membership benefits providers have their promotions featured on our website. Premium Members receive Grand Giveaways and the Premium Membership benefits for an annual fee of $15 and there are approximately 1,830 Premium Members.

 

We seek to maintain direct relationships with our promotion providers and regularly have discussions about potential new giveaways, deals, and additional ways they can cross-promote the AGA. Each Grand Giveaway and Premium Membership benefit is subject to the terms provided by the promotion provider which may seek to change, retract, or cancel any giveaway or deal offered in Grand Giveaways and Premium Membership benefits or otherwise to registered users or AGA members.

 

 

Royalty Arrangements

 

We derive revenue by endorsing or recommending products and services provided by third parties in return for royalty payments. We have an agreement (the “Aetna Royalty Agreement”) with Aetna, pursuant to which Aetna will offer a group Medicare Supplement insurance policy to AGA members. On June 4, 2015, Aetna added a Cancer, Heart Attack or Stroke policy as a product offered under the Aetna Royalty Agreement. In exchange for our endorsement, a license to use our intellectual property and access to the AGA membership, Aetna will pay a royalty to the Company. The Aetna Royalty Agreement requires Aetna to design, price and manage the insurance policies. We are not required to perform any insurance producer services under the Aetna Royalty Agreement. Aetna continues to file its policy forms with various state insurance departments. For the nine months ended September 30, 2016, a royalty of $7,624 was earned and recorded in the condensed consolidated statement of operations in advertising and other revenue.

 

There can be no guarantee that we will be able to earn additional revenue from the Aetna Royalty Agreement or enter into similar agreements or other royalty arrangements with other third parties, or, if we are, the terms of such arrangements will be on terms advantageous to us. To the extent we are able to enter into royalty arrangements, revenues, if any, from such arrangements may be limited in the near term. There can be no guarantee the Company will derive revenue from this or any other royalty program.

 

Commission Arrangements

 

On October 29, 2014, a subsidiary of the Company entered into an Aetna Marketing Agreement for Upline Agents and Agencies (the “MA Contract”) with Aetna to offer a Medicare Advantage insurance policy pursuant to which such subsidiary will receive a commission for each such policy sold. The MA Contract became effective January 1, 2015.

 

Effective on October 31, 2014, a subsidiary of the Company entered into an Aetna Marketing Agreement for Group Contracting Only (the “MS Contract”) with Aetna to offer a Medicare Supplement insurance policy pursuant to which such subsidiary will receive a commission for each such policy sold.

 

On August 26, 2016, a subsidiary of the Company, entered into an Aetna Marketing Agreement for Upline Licensed Agents and Agencies (the “2016 MA Contract”) with Aetna Life Insurance Company and certain affiliates (“Aetna”). Pursuant to the 2016 MA Contract, GIS will serve as a general agent and offer Medicare Advantage and Part D policies to certain target customers pursuant to which such subsidiary will receive a commission for each such policy sold.

 

For the nine months ended September 30, 2016, commissions pursuant to these arrangements and others of $12,888 was earned and recorded in the condensed consolidated statement of operations in commission revenue.

 

There can be no guarantee that we will be able to earn additional revenue from the MA Contract, the MS Contract or the 2016 MA Contract or enter into similar agreements or other commission arrangements with other third parties or, if we are, the terms of such arrangements will be on terms advantageous to us. To the extent we are able to enter into commission arrangements, revenues, if any, from such arrangements may be limited in the near term. There can be no guarantee the Company will derive revenue from this or any other commission program.

 

Grand Card®

 

The Company has established a debit card rewards program that bundles rebates and discounts on a debit card which are activated when cardholders purchase pharmaceutical products and consumer goods and services offered by participating merchants (the “Grand Card”). We have formed an alliance with Cegedim for the purposes of developing the Grand Card. Cegedim has developed proprietary processes and technologies which will be customized and adapted to the Grand Card for rebate programs.

  

 

Development of the Grand Card has been ongoing; hence we have not generated any material revenue from this program as of the date of this report. We launched the Grand Card in the third quarter of 2016. The Company intends to issue the Grand Card through the AGA and other channels and earn various related fees including percentages of discounts and rebates. There can be no guarantee that we will be able to further develop this concept or, that if we are able to do so, that we will be able to generate revenue from it.

  

Strategic Partnerships

 

The Company has entered into several strategic partnerships which it believes will help generate future revenue. By entering into such arrangements, it seeks to leverage the marketing ability, distribution networks, and knowledge of its partners to help it develop its business.

 

In March 2013, the Company entered into an agreement with Cegedim, Inc. (Opus Health Division), the U.S. subsidiary of Cegedim, S.A., forming an alliance for the purpose of developing the Grand Card. On April 1, 2015, the Opus Health Division was sold by Cegedim Inc. to IMS Health Holdings, Inc. 

 

In November 2014, Grand Card LLC, a wholly-owned subsidiary of the Company and Vantiv entered into a master services agreement, an Addendum and exhibits thereto pursuant to which Vantiv agreed to provide card issuing and payment processing products and services to Grand Card. This agreement has been amended multiple times. The Company’s Grand Card venture is a cash rebate debit card that will enable cardholders to purchase pharmaceutical products and consumer goods and services from participating merchants.

 

In January 2013, the Company entered into a Strategic Alliance Agreement (the “Starr Agreement”) with Starr Indemnity & Liability Company (“Starr”), a wholly owned subsidiary of Starr International Company, Inc., under which Starr agreed to provide certain services to us, including developing strategic business and investment relationships and other business consulting services. On March 29, 2016, the Company decided not to renew the Starr Agreement under its terms.

  

On March 19, 2015, the Company entered into an agreement (the “HSN Agreement”) with HSN, LLC and its affiliates (“HSN”) whereby HSN produced and broadcast segments promoting the AGA, as well as certain products and services offered by third parties. The initial on air segments involved education regarding Medicare Supplemental, Medicare Advantage, and Cancer and Heart Attack or Stroke health insurance policies offered by Aetna and its affiliates. Under the HSN Agreement, the Company received a percentage of certain proceeds generated through the multimedia marketing campaign conducted by the parties. During 2015, the Company recorded $400,000 as commission revenue under the HSN Agreement. The HSN Agreement expired on December 31, 2015.

 

On April 7, 2016, the Company entered into an agreement with the Northeast Division of Marsh & McLennan Agency LLC (“Marsh”), pursuant to which Marsh will offer and sell certain Aetna Medicare products through Marsh’s insurance benefits portal in exchange for certain fees.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including, among others, those affecting revenue, the allowance for doubtful accounts, equity-based compensation, and the useful lives of tangible and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates.

 

 

The Company has identified below some of its accounting policies that it considers critical to its business operations and the understanding of its results of operations. For detailed information and discussion on its critical accounting policies and estimates, see its financial statements and the accompanying notes included in this Report. Many of its estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere in this Report. The Company does not undertake any obligation to update or revise this discussion to reflect any future events or circumstances. See “Cautionary Note Regarding Forward-Looking Statements” contained in this Report.

  

Included in its Annual Report, the Company identified four of our accounting policies that it considers critical to its business operations and an understanding of its results of operations:

  

	·	revenue recognition;
	·	fair value measurements;
	·	equity-based compensation; and
	·	impairment of long-lived assets.

 

The Company included in its Annual Report a brief discussion of some of the judgments, estimates and uncertainties that can impact the application of these policies and the specific dollar amounts reported on its financial statements. This is neither a complete list of all of its accounting policies, nor does it include all the details surrounding the accounting policies it identified, and there are other accounting policies that are significant to it. For detailed information and discussion on its critical accounting policies and estimates, see its financial statements and the accompanying notes included in this Report and in the Annual Report. Many of the Company’s estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere in this Report and in our Annual Report. The Company does not undertake any obligation to update or revise this discussion to reflect any future events or circumstances. See “Cautionary Note Regarding Forward-Looking Statements” contained in this Report.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2016 and 2015

 

Revenue

 

Revenue for the three months ended September 30, 2016 decreased by $55,845, or 30%, to $132,210 compared to $188,055 for the comparable period in 2015. The decrease is mostly due a decrease in commission revenue of $145,142 mostly from one customer offset by an increase in advertising revenue of $89,297, mostly from one customer, for the comparable period in 2015. 

 

Operating Expenses

 

Total operating expenses for the three months ended September 30, 2016 increased by $257,490, or 12%, to $2,488,872 compared to $2,231,382 for the comparable period in 2015 as explained below.

 

Selling and marketing. Selling and marketing expense for the three months ended September 30, 2016 increased by $816,509, or 946%, to $902,822 compared to $86,313 for the comparable period in 2015 due to an increase in Grand Card related costs of approximately $833,000.

 

Salaries. Salary expense for the three months ended September 30, 2016 decreased by $41,964, or 8%, to $452,649 compared to $494,613 for the comparable period in 2015 due to a decrease of $59,000 in executive salaries.

 

Rent. Rent expense for the three months ended September 30, 2016 increased by $10,754, or 24%, to $56,254 compared to $45,500 for the comparable period in 2015 due to an increase in office rent under a lease beginning October 1, 2015.

 

 

Accounting, legal and filing fees. Accounting, legal and filing fees expense for the three months ended September 30, 2016 increased by $376,791, or 226%, to $543,289 compared to $166,498 for the comparable period in 2015. The increase was due to higher legal expenses of $284,000 and higher accounting expenses of $93,000 in the third quarter of 2016. The increase in legal expense is due to stock and debt issue costs incurred in the third quarter of 2016. The increase in accounting expense is due to the engagement of consultants to provide certain accounting services to the Company.

 

Consulting. Consulting expense for the three months ended September 30, 2016 decreased by $141,868, or 41%, to $204,831 compared to $346,699 for the comparable period in 2015. The decrease was primarily due to elimination of one consultant for a reduction of $240,000 partially offset by increases of approximately $76,000 from engagement of four new consultants in late 2015 and early 2016.

 

Equity-based compensation. Equity-based compensation for the three months ended September 30, 2016 decreased by $757,619, or 96%, to $34,056 compared to $791,675 for the comparable period in 2015. The decrease was due to a decrease for the Starr warrant expense of $210,000 plus decreases due to forfeitures of options and options or warrants becoming fully vested before the third quarter of 2016.

 

Other general and administrative. Other general and administrative expense for the three months ended September 30, 2016 increased by $9,373, or 5%, to $209,957 compared to $200,584 for the comparable period in 2015. The increase was primarily due to an increase in recruitment expense of $40,000 offset by commissions paid of $16,000. 

 

Depreciation and amortization. Depreciation and amortization for the three months ended September 30, 2016 decreased by $14,486, or 15%, to $85,014 compared to $99,500 for the comparable period in 2015 due to some items becoming fully amortized before the third quarter of 2016.

  

Other income (expense). Other income (expense) consisted mainly of interest expense for the three months ended September 30, 2016 and 2015. Interest expense decreased by $145,252 or 34% to $277,134 compared to $422,386 for the comparable period in 2015 primarily due to no interest in the third quarter of 2016 on loans paid off in the third quarter of 2015. 

 

Net loss attributable to common shareholder. Net loss attributable to common shareholders for the three months ended September 30, 2016 was $2,667,786, or $0.02 per basic and diluted common share, compared to $2,393,286, or $0.02 per basic and diluted common share, for the comparable period in 2015, an increase of $274,500, or 11%.

 

Comparison of the Nine Months Ended September 30, 2016 and 2015

 

Revenue

 

Revenue for the nine months ended September 30, 2016 decreased by $126,646, or 33%, to $255,979 compared to $382,625 for the comparable period in 2015. The decrease is mostly due a decrease in commission revenue of $246,769 mostly from one customer offset by an increase in advertising revenue of $120,123, mostly from one customer, for the comparable period in 2015.

 

Operating Expenses

 

Total operating expenses for the nine months ended September 30, 2016 decreased by $839,799, or 12%, to $6,071,903 compared to $6,911,702 for the comparable period in 2015 as explained below.

 

Selling and marketing. Selling and marketing expense for the nine months ended September 30, 2016 increased by $821,356, or 381%, to $1,036,838 compared to $215,482 for the comparable period in 2015 due to fully capitalizing and expensing Grand Card related costs of approximately $833,000.

 

Salaries. Salary expense for the nine months ended September 30, 2016 decreased by $228,850, or 14%, to $1,357,094 compared to $1,585,944 for the comparable period in 2015 due to decreases of $165,000 in executive salaries and $79,000 in staff salaries.

 

 

Rent. Rent expense for the nine months ended September 30, 2016 increased by $5,867, or 4%, to $167,345 compared to $161,478 for the comparable period in due to an increase in office rent under a lease beginning October 1, 2015.

 

Accounting, legal and filing fees. Accounting, legal and filing fees expense for the nine months ended September 30, 2016 increased by $441,153, or 84%, to $965,226 compared to $524,073 for the comparable period in 2015. The increase was due to higher legal expenses of $265,000 and higher accounting expenses of $181,000 in the first nine months of 2016. The increase in legal expense is due to stock and debt issue costs incurred in the third quarter of 2016. The increase in accounting expense was due to the engagement of consultants to provide certain accounting services to the Company.

 

Consulting. Consulting expense for the nine months ended September 30, 2016 decreased by $103,760, or 11%, to $882,601 compared to $986,361 for the comparable period in 2015. The decrease was primarily due to elimination of one consultant for a reduction of $480,000 partially offset by increases of approximately $393,000 from engagement of six new consultants in late 2015 and early 2016.

 

Equity-based compensation. Equity-based compensation for the nine months ended September 30, 2016 decreased by $1,770,088, or 69%, to $778,499 compared to $2,458,587 for the comparable period in 2015. The decrease was due to a decrease for the Starr warrant expense of $658,000 plus decreases due to forfeitures of options or warrants becoming fully vested after the third quarter of 2015.

 

Other general and administrative. Other general and administrative expense for the nine months ended September 30, 2016 increased by $49,696, or 9%, to $627,885 compared to $578,190 for the comparable period in 2015. The increase was primarily due to an increase in recruitment expense of $70,000. 

 

Depreciation and amortization. Depreciation and amortization for the nine months ended September 30, 2016 decreased by $55,172, or 18%, to $256,415 compared to $311,587 for the comparable period in 2015. Depreciation and amortization decreased in 2016 due to some items becoming fully amortized versus 2015.

  

Other income (expense). Other income (expense) consisted mainly of interest expense for the nine months ended September 30, 2016 and 2015. Interest expense increased by $133,455 or 26% to $655,323 compared to $521,868 for the comparable period in 2015 primarily due to an increase the existence of interest on the credit facility for one quarter in 2015 versus three quarters in 2016. 

 

Net loss attributable to common shareholder. Net loss attributable to common shareholders for the nine months ended September 30, 2016 was $6,595,909, or $0.05 per basic and diluted common share, compared to $6,978,518, or $0.05 per basic and diluted common share, for the comparable period in 2015, a decrease of $382,609, or 5%.

 

Liquidity and Capital Resources

 

As of September 30, 2016, we had unrestricted cash of $1,306,607. We do not have enough resources to continue as a going concern for the next 12 months. We expect to finance our operations over the next twelve months primarily through our existing cash and offerings of our equity or debt securities or through bank financing. Our operations have not yet generated positive cash flows. To effectively implement our business plan, we will need to obtain additional financing. If we obtain financing, we would expect to accelerate our business plan and increase our advertising and marketing budget, hire additional staff members and increase our operations all of which we believe would result in the generation of additional revenue and development of our business. We cannot be certain that financing will be available at all or on acceptable terms. To the extent that we raise additional funds by issuing debt or equity securities or through bank financing, our stockholders may experience significant dilution. If we are unable to raise funds when required or on acceptable terms, we may have to significantly scale back, or discontinue, our operations. If we are unable to raise funds, the Company’s ability to continue to operate will be limited

 

 

Capital Raising Efforts

 

On July 8, 2015, the Company and VB Funding, LLC (“VB Lender”) entered into a credit agreement (“Credit Agreement”) which provided for a multi-draw term loan credit facility (the “VB Loan”) in an aggregate amount not to exceed $8,000,000. The full amount of the VB Loan was advanced in two disbursements, with the initial amount of $5,000,000 (which includes the $1,000,000 amount previously funded on May 18, 2015 pursuant to a bridge loan from VB Lender disbursed by VB Lender at the time of closing of the Credit Agreement). The second disbursement was on December 31, 2015. The VB Loan was used to fund ongoing operations and to repay then outstanding indebtedness. The Credit Agreement was replaced by an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) on September 15, 2016.

 

Pursuant to the Credit Agreement, the Company was subject to certain customary limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Credit Agreement contained usual and customary events of default, the occurrence of which could have led to an acceleration of the Company’s obligations thereunder.

 

Outstanding indebtedness under the VB Loan could have been voluntarily prepaid at any time, in whole or in part, without premium or penalty. The indebtedness under the VB Loan was due July 8, 2025 with interest at an aggregate of 7.5% per annum, 2.5% of which was payable in cash and 5.0% was payable in-kind as additional principal. The VB Loan was secured by a security interest in the Company’s and certain of its subsidiaries’ assets and each such subsidiary guaranteed the repayment of the VB Loan. VB Lender had the right to convert the outstanding balance of the VB Loan into shares of common stock of the Company, at a conversion price per share equal to $0.20 which gave rise to a beneficial conversion feature having a relative fair market value of $1,950,000 as of July 8, 2015. This beneficial conversion feature value was recorded as a discount to the VB Loan and was amortized to interest expense over the life of the loan. In connection with the initial disbursement, VB Lender received a ten-year warrant to purchase 12.5 million shares of the Company’s common stock at an exercise price of $0.30 per share. As of July 8, 2015, the warrant had a relative fair market value of $1,700,000 and was recorded as a debt discount. In connection with the second disbursement, VB Lender received a ten-year warrant to purchase 7.5 million shares of the Company’s common stock at an exercise price of $0.30 per share. The warrant had a relative fair market value of $465,146 and was recorded as a debt discount. There was no beneficial conversion feature in connection with the second disbursement.

 

On September 15, 2015, the Company entered into a securities purchase agreement (the “Preferred Agreement”) with certain investors (the “Preferred Purchasers”) and raised gross proceeds of $1,750,000, including the conversion by Mel Harris, a member of the Company’s board of directors, security holder and advisor to the Company, of $450,000 principal amount of his convertible promissory note issued on August 20, 2015. Each share of Series C Redeemable Convertible 7.5% Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”) has a stated value of $2.00 (the “Stated Value”) and is convertible, at any time at the option of the holder, into ten (10) shares of the Company’s common stock at a conversion price of $0.20 per share, subject to customary adjustments. Each share of Series C Preferred Stock earns dividends at the rate of 7.5% of the Stated Value, 2.5% of which is payable in cash, and 5.0% is payable in the form of common stock, on a quarterly basis, at $0.20 per share. In connection with this Preferred Agreement, the Company issued a ten-year warrant to purchase an aggregate of 4,375,000 shares of common stock at an exercise price of $0.30 per share.

 

On September 15, 2016, the Company and VB Lender entered into the Amended and Restated Credit Agreement, which amended and restated the Credit Agreement. The Amended and Restated Credit Agreement has a principal balance equal to the outstanding balance under the VB Loan and provided for two additional disbursements in an aggregate amount not to exceed $2,950,000 (collectively, the “New VB Loan”). The first disbursement was advanced on September 15, 2016 in the amount of $950,000 and a second disbursement may be made in the amount of $2,000,000 when certain conditions are satisfied.

 

Outstanding indebtedness under the New VB Loan may be voluntarily prepaid at any time, prior to the maturity date. The indebtedness under the New VB Loan matures on October 1, 2031 and bears interest at the following rates per annum, payable in cash on a quarterly basis: 1% for the first year of the New VB Loan, 2% for the second year, 3% for the third year, 12% for the fourth year and 15% thereafter. Interest is no longer payable in-kind as additional principal on the New VB Loan. At September 30, 2016, outstanding indebtedness under the New VB Loan was $9,375,083 plus accrued interest of $47,543.

 

The New VB Loan is secured by a security interest in the Company’s and certain of its subsidiaries’ assets and the subsidiaries guaranteed the repayment of the New VB Loan. The Company is subject to certain customary limitations including the ability to incur additional debt, make certain investments and acquisitions, and make certain restricted payments, including stock repurchases and dividends. The Amended and Restated Credit Agreement contains usual and customary events of default, the occurrence of which can lead to an acceleration of the Company’s obligation thereunder.

 

The New VB Loan has no convertible feature so it is not convertible into shares of the Company’s common stock.

 

In accordance with ASC 470-60 this refinancing was considered a troubled debt restructuring with a modification of terms. As a result, the unamortized discount of $4,473,147 and unamortized debt issue costs of $275,885 from the VB Loan were carried forward to be amortized using the effective interest method for the New VB Loan. On September 15, 2016, the Company also sold to VB Lender 70,000,000 shares of the Company’s common stock at a price per share of $0.015, for an aggregate purchase price of $1,050,000. Because the fair value on the date of purchase was $2,100,000, the difference of $1,050,000 was recorded as an additional equity discount on the New VB Loan and will be amortized over the life of the loan using the effective interest rate method. Any new fees paid to third parties in connection with the New VB Loan were expensed as required.

 

The Company intends to use borrowings under the Amended and Restated Credit Agreement to fund the operations of the Company and to pay fees and expenses relating to the Amended and Restated Credit Agreement and related transactions.

 

 

Simultaneously with the entry into the Amended and Restated Credit Agreement, the Company and VB Lender also entered into a securities purchase agreement which provides VB Lender with the right to purchase a total of 1,500,000 shares of Series D Convertible 12% Preferred Stock (“Series D Preferred Stock”) for a total price of $1,000,000, convertible into an aggregate of 1,833,000,000 shares of common stock. The conditions to the closing of the sale of shares of Series D Preferred Stock include approval by the shareholders of an amendment to the certificate of incorporation to increase the number of authorized shares of common stock to 2,156,500,000 shares and the filing of a Certificate of Designation, Preferences and Rights of Series D Preferred Stock (the “Certificate”). The Certificate specifies that from and after the date of the issuance of any shares of Series D Preferred Stock, dividends at the rate per annum of $0.08 per share (which represents 12% per annum) will accrue on such shares. Dividends will accrue from day to day and will be cumulative, provided, however, that except as provided for in certain circumstances, dividends will only be payable when, as, and if declared by the board of directors of the Company and the Company will be under no obligation to pay such accrued dividends.

 

As an additional condition to closing, VB Lender required that the holders of Series C Preferred Stock shall have the option to convert their shares of Series C Preferred Stock into shares of the Company's common stock at a discounted rate of $0.05 per share.  Additionally, VB Lender, required as a condition to closing that all shares of Series C Preferred Stock held by directors, officers and executives of the Company be converted into shares of the Company's common stock at a discounted rate of $0.05 per common share.  The Series C Preferred Stock was issued in 2015 for $2.00 per preferred share, with an initial conversion price of $0.20 per common share.  This option to convert therefore represents a discount of $0.15 per common share from the original conversion price and shall take effect immediately following the effective date of the Certificate and the closing of the Series D Preferred Stock.

 

The Company continues to seek capital in the form of equity or debt to fund its operations in the future.

  

Outstanding Indebtedness

 

In addition to the New VB Loan described above, we have certain unsecured indebtedness, primarily promissory notes outstanding in favor of Mr. Leber in the principal amount of $78,543 (the “Leber Note”), Meadows Capital, LLC, an entity controlled by Dr. Cohen, a member of the Company’s board of directors, in the principal amount of $308,914 (the “Meadows Note”) and BJ Squared, LLC, an entity controlled by Mr. Leber, in the principal amount of $612,500 (“BJ Squared Note”). Meadows Capital, LLC, has a 50% interest in the BJ Squared Note. These promissory notes reflect indebtedness assumed by us in connection with a merger in February 2012. The Meadows Note and the BJ Squared Note accrue interest at the rate of 5% per annum and mature upon the earlier of (i) the Company having EBITDA of at least $2,500,000 as reflected on its quarterly or annual financial statements filed with the SEC, or (ii) the Company closing a financing with gross proceeds to the Company of at least $10,000,000. On September 15, 2016, the Leber Note was modified so that no interest accrues on the Leber Note after September 1, 2016 and it matures upon the Company achieving fiscal year net income of at least $5,000,000. The Leber Note remains subordinate in right of payment to the Meadows Note and the New VB Loan.

 

Cash Flow

 

Net cash flow from operating, investing and financing activities for the periods below were as follows:

 

		Nine Months Ended September 30,
		2016				2015
Cash provided by (used in):
Operating activities		$	(4,429,428	)		$	(4,250,871	)
Investing activities			-				(52,080	)
Financing activities			1,970,312				6,773,741
Net (decrease) increase in cash:		$	(2,459,116	)		$	2,470,790

 

Cash Used In Operating Activities

 

For the nine months ended September 30, 2016, net cash used in operating activities of $4,429,428 consisted of net loss of $6,471,247 offset by $1,458,469 in non-cash adjustments for depreciation, amortization, equity-based compensation, payment in kind interest and discount amortization, combined with $583,350 in cash used by changes in working capital and other activities.

 

For the nine months ended September 30, 2015, net cash used in operating activities of $4,250,871 consisted of our net loss of $6,978,518 offset by $3,334,672 in non-cash adjustments for depreciation, amortization, equity-based compensation, payment in kind interest, discount amortization and gains on settlement of accounts payable, offset by $607,025 in cash provided by changes in working capital and other activities.

 

 

Cash Used In Investing Activities

 

For the nine months ended September 30, 2015, net cash used in investing activities of $52,080 was entirely for website development.

 

Cash Provided By Financing Activities

 

For the nine months ended September 30, 2016, net cash provided by financing activities of $1,970,312 consisted of $1,050,000 in proceeds from private placements, $950,000 in proceeds from loans and short-term advances offset by $29,688 in cash paid for dividends on preferred stock.

 

For the nine months ended September 30, 2015, net cash provided by financing activities of $6,773,741 consisted of $700,000 in proceeds from private placements, $5,000,164 in net proceeds from loans and short-term advances and $1,673,577 in net proceeds from sale of preferred stock offset by $600,000 in repayments of loans and short-term advances.

 

Off-Balance Sheet Arrangements

 

None.

 

Item 3.          Quantitative and Qualitative Disclosures About Market Risk.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 4.          Controls and Procedures.

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officers and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements because of error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected. 

 

As of the end of the period covered by this Report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. This evaluation was conducted under the supervision and with the participation of management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report due to material weaknesses in our internal control over financial reporting. The material weaknesses primarily consisted of the following: (i) we do not have written documentation of our internal control policies and procedures; (ii) we do not have sufficient segregation of duties within accounting functions; (iii) we do not have adequate staff and supervision within our accounting function; and (iv) we lack a sufficient process for periodic financial reporting, including timely preparation and review of financial reports and statements.

 

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

 

As of the end of the period covered by this Report, we have taken additional substantive steps to remediate the material weaknesses, including engaging an experienced consultant who is both an accountant and lawyer and previously served as a divisional CFO with a major insurance company and various other companies, an experienced consultant with significant SEC experience, and an assistant controller with 20 years’ experience in accounting, accounts payable, and accounts receivable. None the less, we have not yet remedied the material weaknesses as of the time of this filing. We have begun the process of documenting our internal controls and procedures to ensure timely filing of our periodic financial reports filed with the SEC. However, due to our size and nature, segregation of duties within our internal control system may not always be possible or economically feasible.

  

During the period covered by this Report, there were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

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.

 

Item 1A.       Risk Factors.

 

The risks described in Part I, Item 1A, “Risk Factors” in our Annual Report for the year ended December 31, 2015, could materially and adversely affect our business, financial condition and results of operations. These risk factors do not identify all risks that we face. Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.

  

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.          Defaults Upon Senior Securities.

 

None.

 

Item 4.          Mine Safety Disclosures.

 

Not applicable.

 

Item 5.          Other Information.

 

None.

 

Item 6.          Exhibits.

 

Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:

 

	·	may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;
	·	may apply standards of materiality that differ from those of a reasonable investor; and
	·	were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.

 

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.

 

Exhibit Number		Description
10.1*		Aetna Marketing Agreement for Upline Licensed Agent and Agencies by and between Grandparents Insurance Solutions, LLC and Aetna Life Insurance Company, effective June 30, 2016. (i)
10.2*		Agreement by and between Grandparents.com, Inc. and Northeast Division of Marsh & McLennan agency LLC, dated April 7, 2016.
10.3*		Consulting Agreement by and between Grandparents.com, Inc. and John Sweeney dated July 21, 2016.
31.1*		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Principal Executive Officer and Principal Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Schema
101.CAL*		XBRL Taxonomy Calculation Linkbase
101.DEF*		XBRL Taxonomy Definition Linkbase
101.LAB*		XBRL Taxonomy Label Linkbase
101.PRE*		XBRL Taxonomy Presentation Linkbase

 

(i)

Portions of this exhibit containing confidential information have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Exchange Act. Confidential information has been omitted from the exhibit in places marked “[***]”and has been filed separately with the Commission.

 

	*	Filed herewith.
	**	Furnished herewith in accordance with SEC Release 33-8238.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 14, 2016	GRANDPARENTS.COM, INC.
	/s/ Steven E. Leber
	Steven E. Leber
	Chairman, Chief Executive Officer, (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)