BLACKBOXSTOCKS INC. - Quarter Report: 2020 September (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended

September 30, 2020

or

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

 

For the transition period from

to

 

Commission File No.

0-55108

 

BLACKBOXSTOCKS INC.

(Exact name of registrant as specified in its charter)

 

Nevada		45-3598066
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

5430 LBJ Freeway, Suite 1485, Dallas, Texas	75240
(Address of principal executive offices)	(Zip Code)

 

(972) 726-9203

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☒

                    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                                    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares outstanding of the registrant’s Common Stock as of November 12, 2020 was 8,341,130.

 

 

TABLE OF CONTENTS

 

		Page
INTRODUCTORY COMMENT		1
CAUTION REGARDING FORWARD LOOKING STATEMENTS		1
PART I –FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	2
	Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	3
	Statement of Stockholders’ Deficit for the the Nine Months Ended September 30, 2020 and 2019 (Unaudited)	4
	Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited)	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II – OTHER INFORMATION		17
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
Signatures		20

 

 

 

		September 30,				December 31,
		2020				2019
Assets
Current assets:
Cash		$	165,477			$	21,172
Accounts receivable, net of allowance for doubtful accounts of $68,589 at September 30, 2020 and December 31, 2019, respectively			20,234				5,745
Inventory			14,757				-
Total current assets			200,468				26,917
Property and equipment:
Office, computer and related equipment, net of depreciation of $45,200 and $39,526 at September 30, 2020 and December 31, 2019, respectively			3,952				9,626
Domain name, net of amortization of $13,849 and $9,551 at September 30, 2020 and December 31, 2019, respectively			3,343				7,641
Right of use lease, net of amortization of $86,958 and $51,009 at September 30, 2020 and December 31, 2019, respectively			73,115				109,064
Total property and equipment			80,410				126,331
Long term assets:
Advances receivable, related parties (Note 5)			-				9,823
Prepaid expenses			80,868				80,868
Prepaid expenses, related party (Note 5)			36,700				36,700
Total long term assets			117,568				127,391
Total Assets		$	398,446			$	280,639
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable		$	581,523			$	632,287
Accrued interest			30,665				42,566
Accrued interest, related party			27,640				16,680
Unearned subscriptions			416,741				189,007
Lease liability right of use, current			42,177				46,124
Other liabilities			180,000				180,000
Convertible notes payable, net of discount of $335,512 and $13,859 at September 30, 2020 and December 31, 2019, respectively (Note 6)			383,699				593,891
Notes payable, net of note discount of $7,049 and $38,294 at September 30, 2020 and December 31, 2019, respectively (Note 6)			250,641				218,138
Notes payable, related party (Note 6)			121,509				228,000
Derivative liability			34,999				1,405,530
Total current liabilities			2,069,594				3,552,223
Lease liability right of use, long term			35,798				66,715
Commitments and contingencies (Note 8)
Stockholders' Deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively			-				-
Series A Convertible Preferred Stock, $0.001 par value, 5,000,000 shares authorized; 5,000,000 issued and outstanding at September 30, 2020 and December 31, 2019, respectively			5,000				5,000
Common stock, $0.001 par value, 100,000,000 shares authorized: 8,171,187 and 7,908,231 issued and outstanding at September 30, 2020 and December 31, 2019, respectively			8,171				7,908
Common stock, subscribed			35,060				35,060
Additional paid in capital			4,910,784				3,443,640
Accumulated deficit			(6,665,961	)			(6,829,907	)
Total Stockholders' Deficit			(1,706,946	)			(3,338,299	)
Total Liabilities and Stockholders' Deficit		$	398,446			$	280,639

 

		For the three months								For the nine months
		ended September 30,								ended September 30,
		2020				2019				2020				2019
Revenue:
Subscriptions		$	1,093,245			$	289,632			$	2,306,094			$	755,244
Other revenues			7,050				6,700				18,300				21,245
Merchandise sales			34				-				34				-
Total revenues			1,100,329				296,332				2,324,428				776,489
Cost of operations			288,213				159,216				700,723				438,168
Gross margin			812,116				137,116				1,623,705				338,321
Expenses:
Software development costs			83,705				27,140				175,950				102,489
Selling, general and administrative			466,224				290,713				1,131,661				789,088
Advertising and marketing			173,559				62,549				404,635				201,299
Depreciation and amortization			3,144				4,196				9,972				14,128
Total operating expenses			726,632				384,598				1,722,218				1,107,004
Operating income (loss)			85,484				(247,482	)			(98,513	)			(768,683	)
Interest expense			33,469				37,373				128,229				94,078
Convertible note financing			-				-				500,469				-
Gain on derivative liability			(10,757	)			-				(1,166,242	)			-
Default expense			-				-				24,750				-
Amortization of debt discount			135,482				223,004				250,335				293,379
Income (loss) before income taxes			(72,710	)			(507,859	)			163,946				(1,156,140	)
Income taxes			-				-				-				-
Net income (loss)		$	(72,710	)		$	(507,859	)		$	163,946			$	(1,156,140	)
Weighted average number of common shares outstanding - basic			8,116,112				7,788,008				8,006,006				7,701,581
Net income (loss) per share - basic		$	(0.01	)		$	(0.07	)		$	0.02			$	(0.15	)

 

																										Common				Additional
		Series A Preferred Stock								Preferred Stock								Common Stock								Stock				Paid-in				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Subscribed				Capital				Deficit				Total
Balance at December 31, 2018			5,000,000			$	5,000				-			$	-				7,678,047			$	7,678			$	144,060			$	2,543,264			$	(3,846,469	)		$	(1,146,467	)
Issuance of shares for cash			-				-				-				-				191,354				191				(109,000	)			381,356				-				272,547
Issuance of shares in settlement of accrued expenses			-				-				-				-				13,830				14				-				127,986				-				128,000
Imputed discount on convertible notes payable (Note 6)			-				-				-				-				-				-				-				423,726				-				423,726
Net loss			-				-				-				-				-				-				-				-				(1,156,140	)			(1,156,140	)
Balance at September 30, 2019			5,000,000			$	5,000				-			$	-				7,883,231			$	7,883			$	35,060			$	3,476,332			$	(5,002,609	)		$	(1,478,334	)
Balance at December 31, 2019			5,000,000			$	5,000				-			$	-				7,908,231			$	7,908			$	35,060			$	3,443,640			$	(6,829,907	)		$	(3,338,299	)
Issuance of shares for cash			-				-				-				-				184,617				185				-				135,971				-				136,156
Issuance of shares in settlement of expenses			-				-				-				-				53,339				53				-				106,447				-				106,500
Issuance of shares in exchange for services			-				-				-				-				25,000				25				-				48,725				-				48,750
Convertible note forbearance extinguishment of derivative liability			-				-				-				-				-				-				-				522,065				-				522,065
Warrants issued for amendment of convertible notes payable			-				-				-				-				-				-				-				653,936				-				653,936
Net loss			-				-				-				-				-				-				-				-				163,946				163,946
Balance at September 30, 2020			5,000,000			$	5,000				-			$	-				8,171,187			$	8,171			$	35,060			$	4,910,784			$	(6,665,961	)		$	(1,706,946	)

 

						2020				2019
Cash flows from operating activities
Net income (loss)						$	163,946			$	(1,156,140	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense							9,972				14,128
Amortization of note discount							250,335				346,088
Shares issued in settlement of financing costs							100,000				-
Shares issued in settlement of services							55,250				-
Expenses paid by lender							6,030				24,984
Convertible note financing							500,469				-
Change in fair value of derivative liability							(1,166,242	)			-
Convertible note default expense							24,750				-
Financing cost							-				26,275
Lease expense							1,086				-
Changes in operating assets and liabilities:
Investments, market testing							-				(12	)
Accounts receivable							(14,489	)			(40	)
Inventory							(14,757	)			-
Accounts payable							(50,764	)			34,387
Accrued interest							(11,901	)			23,143
Accrued interest, related party							10,960				10,920
Unearned subscriptions							227,734				18,343
Net cash provided by (used in) operating activities							92,379				(657,924	)
Cash flows from investing activities
Cash advances to related parties							-				(134,673	)
Cash repayments from related parties							6,890				93,442
Purchases of property and equipment							-				(1,587	)
Net cash used in investing activities							6,890				(42,818	)
Cash flows from financing activities
Common stock issued for cash							136,156				272,547
Common stock subscribed							-				-
Proceeds from notes payable							127,100				175,684
Proceeds from convertible notes payable							100,000				473,725
Proceeds from Payroll Protection Program Loan							130,200				-
Repayment of notes payable							(331,573	)			(225,214	)
Repayment of convertible notes payable							(13,289	)			-
Advances from others							-				11,100
Repayment of notes payable, related parties							(103,558	)			-
Net cash provided by financing activities							45,036				707,842
Net increase in cash							144,305				7,100
Cash - beginning of period							21,172				28,001
Cash - end of period						$	165,477			$	35,101
Supplemental disclosures
Interest paid						$	-			$	-
Income taxes paid						$	-			$	-
Non-cash investing and financing activities:
Repayment of note in exchange for note payable						$	(39,370	)		$	-
Common stock issued in settlement of accrued expenses						$	-			$	128,000
Lease, right of use and liability						$	-			$	160,073
Discount on notes payable						$	69,500			$	52,845
Discount on convertible notes payable						$	-			$	473,725
Repayment of note payable, related party in exchange for advances						$	2,933			$	-
Issuance of warrants for forbearance agreements						$	371,243			$	-

 

1. Organization

 

Blackboxstocks Inc. (the “Company”) was incorporated on October 4, 2011 under the laws of the State of Nevada under the name SMSA Ballinger Acquisition Corp. to effect the reincorporation of Senior Management Services of Heritage Oaks at Ballinger, Inc., a Texas corporation, mandated by a Plan of Reorganization confirmed by the United States Bankruptcy Court for the Northern District of Texas for reorganization under Chapter 11 of the United States Bankruptcy Code.

 

The Company changed its name to Blackboxstocks, Inc. and began operating as a financial technology and social media platform in March 2016. The platform offers real-time proprietary analytics and news for stock and options traders of all levels. The Company’s web-based software employs “predictive technology” enhanced by artificial intelligence to find volatility and unusual market activity that may result in the rapid change in the price of a stock or option. The software continuously scans the NASDAQ, New York Stock Exchange, CBOE, and other options markets, analyzing over 8,000 stocks and up to 900,000 options contracts multiple times per second. The Company also provides users with a fully interactive social media platform that is integrated into our dashboard, enabling users to exchange information and ideas quickly and efficiently through a common network. Recently the Company also introduced a live audio/video feature that allows members to broadcast on their own channels to share trade strategies and market insight within the community. The platform was initially made available to subscribers in September 2016. Subscriptions for the use of the platform are sold on a monthly and/or annual subscription basis to individual consumers through the Company website at http://www.blackboxstocks.com.

 

2. Summary of Significant Accounting Policies

 

The accompanying interim unaudited financial statements and footnotes of Blackboxstocks Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2020. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

The accompanying financial statements have been prepared in assumption of the continuation of the Company as a going concern, which is dependent upon the Company's ability to obtain sufficient financing or establish itself as a profitable business. At September 30, 2020, the Company had an accumulated deficit of $6,665,961 and for the nine months ended September 30, 2020 and 2019 the Company incurred net income of $163,946 and a net loss of $1,156,140, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. As discussed in Note 9, subsequent events, on November 12, 2020 the Company executed a Loan Agreement with certain lenders (the “Lenders”) and FVP Servicing LLC, (“FVP”), as agent for the Lenders in connection with the issuance of a Note in the amount of $1,000,000 bearing interest at 12% per annum with an initial maturity of November 12, 2022. Simultaneously, with the execution of the Loan Agreement, the Company repaid an existing secured note payable in the amount of $100,000 along with accrued interest and certain outstanding trade payables in the amount of $133,880. In addition, the Company granted the Lender a security interest in substantially all of its assets. Excluding transaction costs, the Company will receive net proceeds of approximately $766,000 after repayment of the notes and payables described above. Management believes that this will be sufficient to fund its operations and service its debt for the next twelve months. In addition, management may continue to raise additional debt or equity capital in order to improve liquidity or finance more aggressive growth or development. There can be no assurance that the Company will be able to raise additional capital or on what terms. The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.

 

 

Use of Estimates - The Company’s financial statement preparation requires that management make estimates and assumptions which affect the reporting of assets and liabilities and the related disclosure of contingent assets and liabilities in order to report these financial statements in conformity with GAAP.  Actual results could differ from those estimates.

 

Cash - Cash includes all highly liquid investments that are readily convertible to known amounts of cash and have original maturities at the date of purchase of three months or less.

 

Recently Issued Accounting Pronouncements - During the nine months ended September 30, 2020 there were several new accounting pronouncements issued by the FASB. Each of the new pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial statements.

 

Earnings or (Loss) Per Share - Basic earnings per share (or loss per share), is computed by dividing the earnings (loss) for the period by the weighted average number of common stock shares outstanding for the period.  Diluted earnings per share reflects the potential dilution of securities by including other potentially issuable shares of common stock, including shares issuable upon conversion of convertible securities or exercise of outstanding stock options and warrants, in the weighted average number of common shares outstanding for the period.  Therefore, because including shares issuable upon conversion of convertible securities and/or exercise of outstanding options and warrants would have an anti-dilutive effect on the loss per share, only the basic earnings (loss) per share is reported in the accompanying financial statements for period of loss.

 

Revenue Recognition - Revenue is recognized from the sale of subscriptions for the use of the Blackbox System web application, on a monthly or annual basis. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and subsequently remitted to governmental authorities. The performance obligation by the Company is in exchange for the monthly subscription fee, the subscriber is allowed access to the Blackbox System on the website for the calendar month. Revenue related to annual subscriptions is recognized each month with unearned subscriptions reflected as a current liability.

 

Reclassification - Affiliate referral expenses totaling $173,999 as of September 30, 2020 have been reclassed from cost of operations to selling, general and administrative expenses on the statement of operations.

 

3.   Stockholders’ Deficit

 

The Company has authorized 10,000,000 shares of preferred stock at $0.001 par value, 5,000,000 of which are designated as “Series A Convertible Preferred Stock” at $0.001 par value and 100,000,000 authorized shares of common stock at $0.001 par value (“Common Stock”).

 

Shares of Series A Convertible Preferred Stock do not accumulate dividends, have no liquidation preferences and are convertible into shares of Common Stock on a one-for-one basis. Additionally, each share entitles the holder to 100 votes and, with respect to dividend and liquidation rights, the shares rank pari passu with the Company’s Common Stock. All shares are held by Gust C. Kepler, Director, Chief Executive Officer, and President and Chief Financial Officers (“Mr. Kepler”).

 

On January 28, 2020 the Company issued 50,000 shares of its Common Stock at a value of $2.00 to a third party in conjunction with the financing arrangement executed on January 27, 2020 (Note 6).

 

On July 6, 2020, warrants to purchase 115,385 shares of Common Stock, issued in conjunction with Amended Convertible Promissory Notes, as described in Note 6, were exercised at $0.01 per share for aggregate cash consideration of $1,154.

 

 

On August 27, 2020 the Company sold 5,129 shares of Common Stock to a third party for $10,001.

 

On August 28, 2020 the Company issued 3,334 shares of its Common Stock at a value of $1.95 to a third party in settlement of services provided for marketing and advertising.

 

On September 25, 2020 the Company issued 25,000 shares of its Common Stock at a value of $1.95 to a third party in conjunction with a consulting services agreement (Note 8).

 

During the quarter ended September 30, 2020 the Company sold 64,103 shares of Common Stock and Warrants, exercisable for a period of 5 years, to purchase 32,053 shares of Common Stock at an exercise price of $1.95 per share, to third parties for aggregate consideration of $125,000.

 

4. Stock Options and Warrants

 

Costs attributable to the issuance of stock options and share purchase warrants are measured at fair value at the date of issuance and offset with a corresponding increase in ‘Additional Paid in Capital’ at the time of issuance. The fair value cost is computed utilizing the Black-Scholes model and assuming volatility based on U.S. Treasury yield rates for a similar period. The cost of these warrants was not recognized in the financial statements because they were granted in connection with raising capital for the Company. When the options or warrants are exercised, the receipt of consideration will be reported as an increase in stockholders’ equity.

 

Concurrently with certain securities purchase agreements entered into, warrants to purchase the Company’s Common Stock were issued to the subscribers. Each warrant is exercisable for a period of five years from the date of the securities purchase agreement at an exercise price of $1.95 per share (Note 3). The fair value cost at the date of issuance of these warrants was $614,805.

 

In conjunction with the issuance of convertible notes payable as described in Note 6, a warrant for the purchase of up to 115,385 shares of Common Stock exercisable for a one-year period was issued at an exercise price of $0.01 per share and another warrant for the purchase of up to 360,000 shares of Common Stock exercisable for a five-year period was issued at an exercise price of $1.00 per share. During the quarter ended September 30, 2020, the warrants for the purchase of 115,385 shares of Common Stock were exercised at $0.01 and as of September 30, 2020, there are warrants fo the purchase of up to 476,348 shares of Common Stock outstanding.

 

 

 

5.  Related Party Transactions

 

As of January 1, 2020 the Company was owed $9,823 from Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company. During the nine months ended September 30, 2020 Mr. Kepler repaid $6,890 and agreed to offset $2,933 of the advances as partial settlement of the note payable to him (Note 6).

 

 

During the year ended December 31, 2019 the Company advanced $1,500 to its VP/Director of Operations and the balance remains outstanding, is unsecured and bears no interest.

 

G2 International, Inc. (“G2”), which does business as IPA Tech Group (“IPA”), is a company wholly owned by Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company, and the Company’s controlling stockholder. As of both September 30, 2020 and 2019 the Company has a prepaid balance of $36,700 for public relations and marketing services with G2/IPA. These funds are reserved in anticipation of a future campaign to move the Company’s stock to listing on a national exchange.

 

 

6. Debt

 

A summary of the Company’s debt at September 30, 2020 and December 31, 2019, by counterparty, is as follows:

 

 

 

Notes Payable

 

a – On August 8, 2018 a third party advanced $200,000 to the Company in exchange for a secured promissory note, bearing interest at the rate of 12% per annum with a maturity date of November 20, 2018. The note is secured by a Security Agreement providing for a continuing lien and first priority security interest in the assets of the Company and by a personal Guaranty Agreement with Gust Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company, and the Company’s controlling stockholder. On December 6, 2018, Mr. Kepler made a payment on the note in the amount of $100,000 plus accrued interest of $8,000 for an aggregate of $108,000. The principal balance of $100,000 remains outstanding and was in default as of September 30, 2020. This note was repaid on Novermber 12, 2020. See Note 9.

 

b – On September 13, 2019 a third party advanced $90,000 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments of $490, through August 18, 2020. The related note discount of $27,000 was amortized as interest expense over the term of the agreement.

 

In October 2019 third parties advanced $80,000 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments of $761 through June 2020. Approximately $39,000 of this funding was settled with proceeds of the January 27, 2020 financing described in a later paragraph. The related note discount of $31,600 was amortized as interest expense over the term of the agreement.

 

On March 13, 2020 a third party advanced $35,000 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments of $291.67, through August 31, 2020. The related note discount of $12,500 was amortized as interest expense over the term of the agreement

 

On January 27, 2020 a third party advanced $207,000 to the Company in exchange for quasi-factoring financing arrangements to be repaid in daily installments of $1,035, and the debt was fully paid on November 5, 2020. The related note discount of $57,000 is being amortized over the term of the agreement for a total of $49,951 in interest expense as of September 30, 2020. A portion of the proceeds of this financing settled the balance of approximately $39,000 of previous funding from the third party with an original due date of June 3, 2020.

 

c – On May 1, 2020, pursuant to the Paycheck Protection Program under the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) the Company was awarded a loan of $130,200. The loan carries an interest rate of 1% and matures on May 1, 2022. By December 31, 2020, the Company may apply for loan forgiveness following SBA guidelines and a portion or all of the loan may be forgiven.

 

Notes Payable, related party

 

e- On November 9, 2018, Mr. Kepler, advanced $120,000 to the Company in exchange for a promissory note bearing interest at 12% per annum for a ninety-day period, maturing on January 28, 2019. On November 12, 2020 Mr. Kepler and the Company agreed to waive the deault and extend the maturity to the earlier of May 1, 2024 or such time as the senior secured note issued contemporaneously with the waiver is repaid (see Note 9). Accrued interest due on the note is $27,640 as of September 30, 2020.

 

f- On December 6, 2018, Mr.Kepler, advanced $108,000 to the Company for payment to a third party note holder (Note 6) in exchange for an unsecured promissory note. During the nine months ended September 30, 2020 the Company repaid $103,558 in principal and Mr. Kepler agreed to offset previous cash advances of $2,933 to him as additional repayment of the note, reducing the balance due as of September 30, 2020 to $1,509.

 

 

Convertible Notes Payable

 

g- On May 21, 2019, the Company issued an 8% Fixed Convertible Promissory Note payable to a third party for a $350,000, which included an original issue discount of 10% on the investment amount. The note specified that the note holder retain an original issue discount of 10% of any consideration, bore interest of 8%, and matured 180 days from the effective date. The note provided a redemption premium of 115% if retired after the 91^st day. As the note was not retired on or before the maturity date, the note-holder was entitled to convert a portion or all the outstanding principal into shares of the Company’s Common Stock at a variable conversion price which equals the lower of the fixed conversion price of $1.95 per share or 65% of the lowest closing bid price during the 15 consecutive trading days prior to the date of the note holder’s election to convert. The note was in default and the Company recorded a default fee of $57,750 which was added to the principal balance. The note included a conversion feature recorded at inception of $207,308.

 

h - On July 17, 2019, the Company issued an 8% Fixed Convertible Promissory Note payable to a third party for a total face value of $165,000, which included an original issue discount of 10% on the investment amount of $150,000. The note specified that the note holder shall retain an original issue discount of 10% of any consideration, bore interest of 8%, and matured 180 days from the effective date. The note provided for a redemption premium of 115% if retired after the 91^st day. As the note was not retired on or before the maturity date, the note holder was entitled to convert a portion or all the outstanding principal into shares of the Company’s Common Stock at a variable conversion price which equals the lower of the fixed conversion price of $1.95per share or 65% of the lowest closing bid price during the 15 consecutive trading days prior to the date of the note holder’s election to convert. The note was in default and the Company recorded a default fee of $24,750 which was added to the principal balance. The note included a conversion feature recorded at inception of $135,000.

 

On July 10, 2020, the Company entered into Forbearance and Note Settlement Agreements (“Agreements”) with the third parties agreeing to take no further action to avail themselves of the remedies of default defined in the Notes. The Agreements stipulate the Company will remit payment of all accrued interest and principal outstanding beginning on July 20, 2020 for thirteen agreed upon payments and until the note is repaid in full. Upon execution of these Agreements, effectively extinguishing the above described notes, the Company recognized a cancellation of the derivative liability previously related to the conversion feature of $522,065. As additional consideration for the Agreements, the Holders were issued warrants to purchase up to 360,000 shares of the Company’s Common Stock at a price of $1.00 per share, exercisable beginning January 10, 2021 and expiring on July 10, 2025. The fair value cost at the date of issuance of the warrants was $371,243, reflected in paid in capital and the related debt discount is being amortized over the term of the Agreements.

 

i - On March 23, 2020 third parties advanced $75,000 and $25,000 to the Company in exchange for Convertible Promissory Notes, bearing interest at 52% per annum to be paid monthly in arrears beginning April 30, 2020, secured by the Company’s assets, with rights to convert into the Company’s Common Stock at $0.60, and maturing on March 25, 2021. On June 23, 2020 the Company amended the notes changing the provision for conversion into the Company’s Common Stock from $0.60 to $1.95. Additional consideration for the amended and restated notes included the issuance of warrants for the purchase of up to 115,385 shares of Common Stock at a price of $0.01. On July 6, 2020 the holders exercised their warrants. In the event the notes are not converted prior to the maturity date, the Company has the right to repurchase one warrant share for each $0.8666 of unconverted principal. The Company recognized a derivative liability in the amount of $34,999 as of September 30, 2020. As discussed in Note 9, the holders of these notes elected to convert the notes into common stock.

 

 

7. Derivative Liabilities

 

On March 23, 2020 notes payable in the principal amount of $100,000 were issued as convertible debt and qualified as derivative liabilities. As of September 30, 2020 the aggregate fair value of the outstanding derivative liability for these notes using the Black-Scholes option pricing model used the following key assumptions:

 

 

The Company determines the fair values of its financial instruments based on the 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. The following three levels of inputs may be used to measure fair value:

 

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

 

Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly and include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and

 

Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

 

The following table presents the Company’s liabilities that were measured and recognized at fair value as of September 30, 2020:

 

 

8. Commitments and Contingencies

 

On August 11, 2020 the Company entered into a letter agreement with Winspear Investments, LLC (“Winspear”), pursuant to which the Company retained Winspear to provide strategic advisory services for financial and business matters. The agreement provides for a minimum three-month term and that Winspear would be compensated with the grant of 20,000 shares of the Company’s Common Stock at inception and an additional 5,000 shares per month for the initial term. In the event Winspear continues to provide services, Winspear shall be compensated an additional grant of 3,000 shares per month for a total of twelve-months and such grants shall not exceed an aggregate issuance of 71,000 shares. The agreement also provides that Winspear shall be granted 80,000 shares if the Company achieves a listing with NASDAQ. The total shares issuable under the agreement shall not be less than a minimum of 35,000 and not exceed a maximum of 151,000 shares.

 

The Company is not currently a defendant in any material litigation or any threatened litigation that could have a material effect on the Company’s financial statements.

 

 

9. Subsequent Events

 

On October 7, 2020 the Company repaid $35,060 to a third party to cancel a previous unexecuted subscription for 35,200 shares of Common Stock dated May 24, 2018, which shares were not issued.

 

On October 14, 2020 the Company entered into a subscription agreement to sell 12,820 shares of Common Stock at $1.95 per share, to a third party, for aggregate consideration of $24,999.

 

On October 15, 2020 the Company entered into subscription agreements to sell 77,300 shares of Common Stock at $1.95 per share, to a third party, for aggregate consideration of $150,735.

 

On November 3, 2020 the Company entered into subscription agreements to sell 25,641 shares of Common Stock at $1.95 per share, to a third party, for aggregate consideration of $49,996.

 

On November 12, 2020, the Company executed a Loan Agreement with certain Lenders and FVP Servicing LLC, as agent for the Lenders in connection with the issuance of a Note in the amount of $1,000,000 bearing interest at 12% per annum with an initial maturity of November 12, 2022. Simultaneously, with the execution of the Loan Agreement, the Company also entered into an agreement with an affiliate of FVP to provide certain credit and debit card processing services for the Company, which services will continue for a period of one year after the loan is repaid and contains a right of first refusal to continue to provide such services in the future subject to certain limitations. Mr. Kepler executed a guaranty in favor of FVP in connection with the loan. Proceeds from the loan will be to repay an existing secured note payable in the amount of $100,000 along with accrued interest, certain outstanding trade payables in the amount of $133,880 and for general working capital purposes. In addition, the Company granted the Lender a security interest in substantially all of its assets.

 

On November 12, 2020 the holders of certain amended and restated convertible promissory notes dated June 23, 2020 elected to convert obligations under such notes in the aggregate principal amotun of $100,000 into Common Stock.