HEALTHY EXTRACTS INC. - Quarter Report: 2016 June (Form 10-Q)

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

The Company will record revenue when it is realizable and earned and the computer programming services or marketing services have been rendered to the customers. Additionally, the Company will record revenue from the sale of its software when the software is delivered to the customer or it will be recognized ratably throughout the term of the contract.

Concentration

One customer accounted for 100% of total revenue earned during the three and six months ended June 30, 2016 and 2015. 100% of the accounts receivable is due from this customer at June 30, 2016 and December 31, 2015.

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. As of June 30, 2016, the Company did not have any amounts recorded pertaining to uncertain tax positions.

Fair Value Measurements

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which  defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The Company has no assets or liabilities valued at fair value on a recurring basis.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2016

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Convertible Instruments

The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

Common Stock Purchase Warrants

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). The Company classifies as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification is required.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2016

(unaudited)

NOTE 3 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has generated minimal revenues from operations. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring start up costs and expenses. As a result, the Company incurred accumulated net losses from Inception (December 19, 2014) through the period ended June 30, 2016 of $1,190,807. In addition, the Company’s development activities since inception have been financially sustained through equity financing. Management plans to seek funding through debt and equity financing.

NOTE 4 – RELATED PARTY

For the three and six months ended June 30, 2016, the Company had expenses totaling $24,000 and $48,000, respectively, to an officer and director for salaries, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of June 30, 2016, there was $0 in accounts payable – related party.

For the three and six months ended June 30, 2016, the Company had expenses totaling $19,000 and $43,650, respectively, to a company owned by an officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of June 30, 2016, there was $799 in accounts payable – related party.

For the six months ended June 30, 2015, the Company paid $82,752 to a an officer and director and a company owned by the officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations.

NOTE 5 – NOTES PAYABLE

On June 9, 2016, the Company executed a promissory note for $20,000. The loan bears interest at 18% per annum and is due on December 9, 2016. The Company issued 60,000 shares of common stock to the lender as part of this note. The fair value of the shares were recorded as a debt discount and amortized over the life of the loan.

During the six months ended June 30, 2016, the Company recorded interest expense of $207 and amortization of debt discount of $5,997.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2016

(unaudited)

NOTE 6 – CONVERTIBLE DEBT

On January 23, 2016, the Company executed a convertible promissory note for $50,000. The loan had an original issue discount of $6,000 and legal fees of $1,000. The loan bears interest at 8% per annum and is due on January 23, 2017. The lender has the right to convert the principal amount and unpaid interest of the loan on or after 180 days to convert at a rate of 56% of the lowest trading price.

On March 7, 2016, the Company executed a convertible promissory note for $100,000. The loan bears interest at 10% per annum and is due on December 7, 2016. The lender has the right to convert the principal amount and unpaid interest of the loan at $0.10 per share if the market price is greater than $0.25. If the market price is less than or equal to $0.25 but greater than $0.10, then the conversion price is $0.05. If the market price is less than or equal to $0.10 then the conversion price is $0.02. On May 5, 2016, the Company amended the terms of the note and issued 600,000 warrants as part of the loan agreement which was effective as of March 7, 2016. The Company calculated the debt discount based on the allocated fair value of the beneficial conversion feature and the fair value of the warrants. The Company recorded a debt discount of $100,000 which was capped at the principal amount of the loan.

During the six months ended June 30, 2016, the Company recorded interest expense of $5,100 and amortization of debt discount of $50,737.

NOTE 7 – STOCKHOLDERS’ EQUITY

Authorized Stock

The Company has authorized 75,000,000 common shares with a par value of $0.001 per share.  Each common share entitles the holder to one vote on any matter on which action of the stockholders of the corporation is sought.

Common Share Issuances

On January 5, 2016, the Company issued 10,000 shares of common stock to an investor that exercised their warrants for cash totaling $5,000.

On February 2, 2016, the Company issued 484,183 shares of common stock for the cashless exercise of 650,000 warrants.

On April 20, 2016, the Company issued 65,000 shares of common stock to investors that exercised their warrants for cash totaling $32,500.

On June 9, 2016, the Company agreed to issue 60,000 shares of common stock to the lender as part of the note payable. These shares were valued at $112,009, recorded as a debt discount, and classified as equity instruments to be issued on the accompanying balance sheet.

Warrant Issuances

On September 28, 2015, the Company granted 650,000 warrants to an individual for consulting services. The warrants can purchase 650,000 shares of common stock with an exercise price of $0.25 and expire on September 28, 2018. Of the total, 350,000 warrants vest immediately and the remaining 300,000 warrants will vest 33.33% upon the acquisition of 17 million IP addresses, 33.33% upon the acquisition of additional 17 million IP addresses and 33.33% upon the acquisition of additional 16 million IP addresses. On February 2, 2016, the Company agreed to waive the vesting provision and the individual executed a cashless exercise of 650,000 warrants and received 484,183 shares of common stock.

On March 4, 2016, the Company entered into a consulting services agreement to provide business development services and issued 600,000 warrants. The warrants allow the holder to purchase 600,000 shares of common stock at an exercise price of $0.80 per share and are exercisable for 2 years. On May 5, 2016, the Company and the consultant agreed to rescind the agreement.

As of June 30, 2016, there were 6,971,250 warrants outstanding, of which 4,971,250 are fully vested.

GREY CLOAK TECH INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2016

(unaudited)

NOTE 8 – SUBSEQUENT EVENTS

On July 28, 2016, the Company received a loan of $15,000 from an officer and director of the Company. The loan bears interest at 8% per annum and due the earlier of January 27, 2017 or when the Company receives financing of over $45,000.

On August 1, 2016, the Company entered into a consulting services agreement with an entity for an indefinite period of time. The services will continue until either party provides thirty days written notice of termination. The compensation for the agreement is 6,500,000 cashless exercise warrants. The warrants are exercisable at $0.12 per share and have a life of three years. The first 500,000 warrants vest immediately and the remaining 6,000,000 warrants vest upon consummation of a transaction during the term of the consulting agreement or the six month period after the termination.

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Summary Overview

We were formed in December 2014. We are developing a cloud based software to detect advertising fraud on the internet. We had revenues of approximately $116,000 in the year ended December 31, 2015, approximately 85% of which was from a single customer. We had revenues of $41,250 for the three months ended June 30, 2016, nearly all of which was from a single customer.

Going Concern

As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the period from inception (December 19, 2014) through December 31, 2014, and the year ended December 31, 2015, that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and begin to generate revenue so that we can fund our operations from our sales and revenues. If we are not able to do this we may not be able to continue as an operating company. At our current revenue and burn rate, our cash on hand will last less than one month, and thus we must raise capital by issuing debt or through the sale of our stock. However, there is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.

Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015

Introduction

We had revenues of $41,250 for the three months ended June 30, 2016, compared to $34,800 for the three months ended June 30, 2015. Our operating expenses were $105,675 for the three months ended June 30, 2016, compared to $142,216 for the three months ended June 30, 2015, a decrease of $36,541, or 26%.

We had revenues of $80,250 for the six months ended June 30, 2016, compared to $45,400 for the six months ended June 30, 2015. Our operating expenses were $464,350 for the six months ended June 30, 2016, compared to $175,059 for the six months ended June 30, 2015, an increase of $289,291, or 165%.

Our operating expenses consisted mostly of general and administrative expenses, including general and administrative expenses to a related party.

Revenues and Net Operating Loss

Our revenue, operating expenses, net operating loss, and net loss for the three and six months ended June 30, 2016 and 2015 were as follows:

Revenues

Revenues were $41,250 for the three months ended June 30, 2016, compared to $34,800 for the three months ended June 30, 2015, an increase of $6,450, or 19%. Nearly all of the total revenue came from a single customer.

Revenues were $80,250 for the six months ended June 30, 2016, compared to $45,400 for the six months ended June 30, 2015, an increase of $34,850, or 77%. Nearly all of the total revenue came from a single customer

Direct Cost of Revenue

Direct cost of revenue expenses was $0 for the three months ended June 30, 2016, compared to $1,255 for the three months ended June 30, 2015.

Direct cost of revenue expenses was $11,603 for the six months ended June 30, 2016, compared to $1,255 for the six months ended June 30, 2015.

General and Administrative

General and administrative expenses were $62,675 for the three months ended June 30, 2016, compared to $71,709 for the three months ended June 30, 2015, a decrease of $9,034, or 13%. General and administrative expenses – related party were $43,000 for the three months ended June 30, 2016, compared to $69,252 for the three months ended June 30, 2015, a decrease of $26,252, or 38%.

General and administrative expenses were $361,097 for the six months ended June 30, 2016, compared to $91,052 for the six months ended June 30, 2015, an increase of $270,045, or 296%. A significant increase was due to an increase in consulting fees related to the removal of the vesting provision of the warrants and the amortization of the fair value of the warrants. General and administrative expenses – related party were $91,650 for the six months ended June 30, 2016, compared to $82,752 for the six months ended June 30, 2015, an increase of $8,898, or 11%.

Operating Loss

Net operating loss was $64,425 for the three months ended June 30, 2016, compared to $107,416 for the three months ended June 30, 2015, a decrease of $42,991. Net operating loss decreased, as set forth above, primarily due to a decrease in general and administrative expenses.

Net operating loss was $384,100 for the six months ended June 30, 2016, compared to $129,659 for the six months ended June 30, 2015, an increase of $254,441. Net operating loss increased, as set forth above, primarily due to an increase in general and administrative expenses.

Other Income (Expense)

Other expense was $44,371 for the three months ended June 30, 2016, compared to other income of $28 for the three months ended June 30, 2015, a decrease of $44,399. Other expense consisted of interest expense, net of interest income. The decrease of other income (or increase in interest expense) is attributable to new debt issuances.

Other expense was $56,335 for the six months ended June 30, 2016, compared to other income of $51 for the six months ended June 30, 2015, a decrease of $56,386. Other expense consisted of interest expense, net of interest income. The decrease of other income (or increase in interest expense) is attributable to new debt issuances.

Net Loss

Net loss was $108,796 for the three months ended June 30, 2016, or $0.01 per share, compared to $107,388 for the three months ended June 30, 2015, or $0.01 per share, an increase of $1,408. Net loss increased, as set forth above, primarily due to an increase in interest expense from new debt issuances, offset by a decrease in general and administrative expenses.

Net loss was $440,435 for the six months ended June 30, 2016, or $0.03 per share, compared to $129,608 for the six months ended June 30, 2015, or $0.01 per share, an increase of $310,827. Net loss increased, as set forth above, primarily due to an increase in general and administrative expenses and interest expense from new debt issuances.

Liquidity and Capital Resources

Introduction

During the three months ended June 30, 2016, because we generated only nominal revenues, we had negative operating cash flows. Our cash on hand as of June 30, 2016 was $26,019, which was derived from the exercise of warrants and the sale of stock, notes and convertible promissory notes to investors. Our monthly cash flow burn rate for 2015 was approximately $39,500. Although we have moderate short term cash needs, as our operating expenses increase we will face strong medium to long term cash needs. We anticipate that these needs will be satisfied through the issuance of debt or the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs.

Our cash, current assets, total assets, current liabilities, and total liabilities as of June 30, 2016 and December 31, 2015, respectively, are as follows:

Our cash increased slightly because we were able to raise capital from the sale of warrants, notes and convertible notes. Our total current assets decreased primarily because of a reduction in prepaid expenses. Our total current liabilities increased primarily because of the sale of notes and convertible notes. Our stockholders’ deficit increased by $440,435 to $1,190,807.

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.

Cash Requirements

Our cash on hand as of June 30, 2016 was $26,019. Based on our nominal revenues and current monthly burn rate of approximately $39,500 per month, we will need to continue to fund operations by raising capital from the sale of our stock and debt financings.

Sources and Uses of Cash

Operating Activities

We had net cash used in operating activities of $(175,436) for the six months ended June 30, 2016, compared to $(123,304) for the six months ended June 30, 2015. For the six months ended June 30, 2016, the net cash consisted primarily of our net loss of $(440,435), offset primarily by warrants issued for services expenses of $209,448. For the six months ended June 30, 2015, the net cash used in operating activities consisted primarily of our net loss of $(129,608), increased by an increase in accounts receivable of $(26,800) and offset by an increase in accounts payable of $32,575.

Investing Activities

We had $1,581 net cash used in investing activities for the six months ended June 30, 2016, and $6,350 net cash used in investing activities for the six months ended June 30, 2015.

Financing Activities

Our net cash provided by financing activities for the six months ended June 30, 2016 was $201,500, all of which was proceeds from notes payable, convertible notes payable and the exercise of warrants, compared to $330,000 for the six months ended June 30, 2015, all of which was proceeds from the issuance of common stock.

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 4 Controls and Procedures

(a) Disclosure Controls and Procedures

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2016, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2016, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in our Annual Report on Internal Control Over Financial Reporting filed in our Annual Report on Form 10-K.

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all errors and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b) Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report, the three month period ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 Legal Proceedings

We are not a party to or otherwise involved in any legal proceedings.

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

ITEM 1A Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

On April 20, 2016, we issued 65,000 shares of common stock to investors that exercised their warrants for cash totaling $32,500. The issuance of the securities was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were accredited and familiar with our operations, and there was no solicitation in connection therewith.

On June 9, 2016, we executed a promissory note for $20,000. The loan bears interest at 18% per annum and is due on December 9, 2016. We also agreed to issue 60,000 shares of common stock to the lender as part of this note. The issuance of the note was, and the issuance of the securities will be, exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited and familiar with our operations, and there was no solicitation in connection therewith.

ITEM 3 Defaults Upon Senior Securities

There have been no events which are required to be reported under this Item.

ITEM 4 Mine Safety Disclosures

Not applicable.

ITEM 5 Other Information

On July 28, 2016, we received a six month loan from an officer in the amount of $15,000. This loan and any accrued interest is payable in six months or if we receive financing over $45,000. The loan pays interest at 8% per annum.

ITEM 6 Exhibits

(a) Exhibits

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.