BLACKBOXSTOCKS INC. - Quarter Report: 2020 June (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

June 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 August 7, 2020 was 8,124,903.

 

 

 

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 June 30, 2020 (Unaudited) and December 31, 2019	2
	Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)	3
	Statement of Stockholders’ Deficit for the the Six Months Ended June 30, 2020 and 2019 (Unaudited)	4
	Statements of Cash Flows for the Six Months Ended June 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	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II – OTHER INFORMATION		15
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	16
Item 5.	Other Information	16
Item 6.	Exhibits	16
Signatures		17

 

 

 

		June 30,				December 31,
		2020				2019
Assets
Current assets:
Cash		$	159,106			$	21,172
Accounts receivable, net of allowance for doubtful accounts of $68,589 at June 30, 2020 and December 31, 2019, respectively			13,400				5,745
Total current assets			172,506				26,917
Property and equipment:
Office, computer and related equipment, net of depreciation of $43,489 and $39,526 at June 30, 2020 and December 31, 2019, respectively			5,663				9,626
Domain name, net of amortization of $12,417 and $9,551 at June 30, 2020 and December 31, 2019, respectively			4,776				7,641
Right of use lease, net of amortization of $75,683 and $51,009 at June 30, 2020 and December 31, 2019, respectively			84,450				109,064
Total property and equipment			94,889				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		$	384,963			$	280,639
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable		$	654,801			$	632,287
Accrued interest			112,203				42,566
Accrued interest, related party			23,960				16,680
Unearned subscriptions			349,459				189,007
Lease liability right of use, current			43,927				46,124
Other liabilities			180,000				180,000
Convertible notes payable, net of discount of $72,877 and $13,859 at June 30, 2020 and December 31, 2019, respectively (Note 8)			659,623				593,891
Notes payable, net of note discount of $33,923 and $38,294 at June 30, 2020 and December 31, 2019, respectively (Note 6)			321,540				218,138
Notes payable, related party (Note 7)			144,931				228,000
Derivative liability			567,821				1,405,530
Total current liabilities			3,058,265				3,552,223
Lease liability right of use, long term			45,647				66,715
Commitments and contingencies (Note 10)
Stockholders' Deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued and outstanding at June 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 June 30, 2020 and December 31, 2019, respectively			5,000				5,000
Common stock, $0.001 par value, 100,000,000 shares authorized: 7,958,236 and 7,908,231 issued and outstanding at June 30, 2020 and December 31, 2019, respectively			7,958				7,908
Common stock, subscribed			35,060				35,060
Additional paid in capital			3,826,283				3,443,640
Accumulated deficit			(6,593,250	)			(6,829,907	)
Total Stockholders' Deficit			(2,718,949	)			(3,338,299	)
Total Liabilities and Stockholders' Deficit		$	384,963			$	280,639

 

		For the three months								For the six months
		ended June 30,								ended June 30,
		2020				2019				2020				2019
Revenue:
Subscriptions		$	801,048			$	245,613			$	1,212,849			$	465,612
Other revenues			7,800				8,195				11,250				14,545
Total revenues			808,848				253,808				1,224,099				480,157
Cost of operations			297,605				169,008				505,453				330,326
Gross margin			511,243				84,800				718,646				149,831
Expenses:
Software development costs			57,914				53,371				92,245				75,349
General and administrative			403,275				357,867				803,569				585,752
Depreciation and amortization			3,337				4,699				6,828				9,932
Total operating expenses			464,526				415,937				902,642				671,033
Operating income (loss)			46,717				(331,137	)			(183,996	)			(521,202	)
Interest expense			61,265				38,267				94,760				56,705
Convertible note financing			282,693				-				500,469				-
Gain on derivative liability			(554,315	)			-				(1,155,485	)			-
Default expense			-				-				24,750				-
Amortization of debt discount			63,246				70,375				114,853				70,375
Incomce (loss) before income taxes			193,828				(439,779	)			236,657				(648,282	)
Income taxes			-				-				-				-
Net income (loss)		$	193,828			$	(439,779	)		$	236,657			$	(648,282	)
Weighted average number of common
shares outstanding - basic			7,958,231				7,709,067				7,950,539				7,657,651
shares outstanding - fully diluted			13,450,090								7,950,539
Net income (loss) per share - basic		$	0.02			$	(0.06	)		$	0.03			$	(0.08	)
Net income per share - fully diluted		$	0.00			$	(0.06	)		$	0.03			$	(0.08	)

 

																										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			-				-				-				-				37,504				38				(99,000	)			108,962				-				10,000
Common stock shares, subscribed			-				-				-				-				-				-				261,197				-				-				261,197
Imputed discount on convertible notes payable (Note 8)			-				-				-				-				-				-				-				288,726				-				288,726
Net loss			-				-				-				-				-				-				-				-				(648,282	)			(648,282	)
Balance at June 30, 2019			5,000,000			$	5,000				-			$	-				7,715,551			$	7,716			$	306,257			$	2,940,952			$	(4,494,751	)		$	(1,234,826	)
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 in settlement of expenses			-				-				-				-				50,005				50				-				99,950				-				100,000
Warrants issued for amendment of convertible notes payable			-				-				-				-				-				-				-				282,693				-				282,693
Net income			-				-				-				-				-				-				-				-				236,657				236,657
Balance at June 30, 2020			5,000,000			$	5,000				-			$	-				7,958,236			$	7,958			$	35,060			$	3,826,283			$	(6,593,250	)		$	(2,718,949	)

 

		2020				2019
Cash flows from operating activities
Net income (loss)		$	236,657			$	(648,282	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense			6,828				9,932
Allowance for doubtful accounts			-				-
Amortization of note discount			114,853				104,529
Shares issued in settlement of financing costs			100,000				-
Expenses paid by lender			6,030				-
Convertible note financing			500,469				-
Change in fair value of derivative liability			(1,155,485	)			-
Convertible note default expense			24,750
Financing cost			-				26,275
Lease expense			1,350				-
Changes in operating assets and liabilities:
Accounts receivable			(7,655	)			(5,257	)
Accounts payable			22,514				49,207
Accrued interest			69,637				9,455
Accrued interest, related party			7,280				7,240
Unearned subscriptions			160,452				(9,336	)
Net cash provided by (used in) operating activities			87,680				(456,237	)
Cash flows from investing activities
Cash advances to related parties			-				(89,832	)
Cash repayments from related parties			5,000				67,642
Purchases of property and equipment			-				(1,587	)
Net cash used in investing activities			5,000				(23,777	)
Cash flows from financing activities
Common stock issued for cash			-				10,000
Common stock subscribed			-				261,197
Proceeds from notes payable			127,100				107,755
Proceeds from convertible notes payable			100,000				323,726
Proceeds from Payroll Protection Program			130,200				-
Repayment of notes payable			(233,800	)			(158,883	)
Repayment of notes payable, related parties			(78,246	)			-
Net cash provided by financing activities			45,254				543,795
Net increase in cash			137,934				63,781
Cash - beginning of period			21,172				28,001
Cash - end of period		$	159,106			$	91,782
Supplemental disclosures
Interest paid		$	-			$	-
Income taxes paid		$	-			$	-
Non-cash investing and financing activities:
Repayment of note in exchange for note payable		$	(39,370	)		$	-
Discount on notes payable		$	-			$	25,845
Lease, right of use and liability		$	-			$	160,073
Discount on notes payable		$	69,500			$	16,445
Discount on convertible notes payable		$	-			$	323,725
Repayment of note payable, related party in exchange for advances		$	4,823			$	-

 

 

Blackboxstocks Inc.

Notes to Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

 

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.  The Company also recently 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 monthly and/or annual subscription basis to individual consumers through the Company website at http://www.blackboxstocks.com.

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), which contemplate 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 June 30, 2020, the Company had an accumulated deficit of $6,593,250 and for the six months ended June 30, 2020 and 2019 the Company incurred net income of $236,657 and a net loss of $648,282, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with respect to operations include the sustained and aggressive marketing of subscriptions for the Blackbox System both domestically and abroad and raising additional capital through sales of equity or debt securities as may be necessary to pursue its business plans and sustain operations until such time as the Company can achieve profitability. Management believes that aggressive marketing combined with additional financing as necessary will result in improved operations and cash flow. However, there can be no assurance that management will be successful in obtaining additional funding or in attaining profitable operations. 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.

 

2. Summary of Significant Accounting Policies

 

The accompanying interim unaudited financial statements and footnotes of Blackboxstocks Inc. have been prepared in accordance with GAAP. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature unless otherwise indicated. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with the rules and regulation of the SEC have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report. The accompanying unaudited financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results for any subsequent quarter or the entire year ending December 31, 2020. These financial statements should be read in conjunction with the Company’s audited financial statements filed in its Form 10-K for the year ended December 31, 2019.

 

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 six months ended June 30, 2020 and 2019, there were several new accounting pronouncements issued by the FASB. Each of these 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.

 

In February 2016, the FASB issued ASU 2016-02, Leases. This is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It requires all leases that have a term in excess of 12 months be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset value based on the present value of future aggregate payments. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the term of the lease. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard became effective beginning January 1, 2019 and was adopted on our financial statements. The Company recorded the right-of-use asset for the lease in the amount of $160,073 and the related lease liability. The current liability for the lease is $43,927 and non-current of $45,647 as of June 30, 2020.

 

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. The Company launched its Blackbox System web application and began generating subscription sales revenues during the quarter ended September 30, 2016. Revenue related to annual subscriptions is recognized each month with unearned subscriptions reflected as a current liability.

 

Marketing Costs - The Company incurs significant marketing expenses related to the development and expansion of its subscription base to potential users. During the six months ended June 30, 2020 and 2019, the Company reported $231,076 and $138,750 for marketing costs, respectively.

 

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, CFO and President.

 

The Company announced and approved a reverse stock split effective July 15, 2019 at a ratio of 1 for 3, whereby every 3 shares of common stock issued and outstanding were automatically reclassified and combined into one share of common stock (“Reverse Stock Split”). The Reverse Stock Split has been reflected retroactively in these financial statements for all periods presented.

 

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 on January 27, 2020.

 

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 is 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. The fair value cost at the date of issuance of the warrants was $560,935. In conjunction with the issuance of convertible notes payable as described in Note 8, warrants exercisable for a five year period were issued at an exercise price of $0.01 per share. As of June 30, 2020, there are 199,680 warrants 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 six months ended June 30, 2020 Mr. Kepler repaid $5,000 and agreed to offset $4,823 of the advances as partial settlement of the note payable to him (Note 7).

 

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 June 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. Notes Payable

 

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 is being amortized over the term of the agreement for a total of $7,968 in interest expense as of June 30, 2020.

 

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, through November 3, 2020. The related note discount of $57,000 is being amortized over the term of the agreement for a total of $31,420 in interest expense as of June 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 May 28, 2020.

 

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 May 2020. Approximately $39,000 of this funding was settled with proceeds of the January 27, 2020 financing described in the preceding paragraph. The related note discount of $31,600 has been fully amortized over the term of the agreements in interest expenses as of June 30, 2020.

 

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 is in default as of June 30, 2020.

 

 

7. Notes Payable, Related Party

 

On November 9, 2018, Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company 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. The note remains unpaid as of June 30, 2020 and is in default; however, no demand for repayment has been made by the holder. Accrued interest due on the note is $23,960 as of June 30, 2020.

 

On December 6, 2018, Gust C. Kepler, a Director, President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company 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 six months ended June 30, 2020 the Company repaid $78,246 in principal and Mr. Kepler agreed to offset previous cash advances of $4,823 to him as additional repayment of the note, reducing the balance due as of June 30, 2020 to $24,931.

 

8. Convertible Notes Payable

 

On May 21, 2019, the Company issued an 8% Fixed Convertible Promissory Note payable to a third party for a total face value up to $550,000, which included an original issue discount of 10% on the investment amount of up to $500,000. The note specifies that the note holder shall retain an original issue discount of 10% of any consideration, bears interest of 8%, and matured 180 days from the effective date. The note provides for a redemption premium of 115% if retired after the 91^st day. The noteholder paid the first consideration of $350,000 and no further consideration was remitted within the allowed thirty days. As the note was not retired on or before the maturity date, the noteholder 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 noteholder’s election to convert. As of June 30, 2020 the note is in default and the Company recorded a redemption fee of $57,750. The note included a conversion feature recorded at inception of $207,308 and the conversion into the Company’s common stock resulted in the recognition of a derivative liability in the amount of $365,445 as of June 30, 2020.

 

 

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 specifies that the noteholder shall retain an original issue discount of 10% of any consideration, bears interest of 8%, and matures 180 days from the effective date. The note provides for a redemption premium of 115% if retired after the 91^st day. Until maturity, the note holder may convert all or a portion of the outstanding principal into shares of Common Stock of the Company at a fixed conversion price equal to $1.95 per share. If the note is not retired on or before the maturity date, the noteholder was entitled to convert a portion or all the outstanding principle into shares of the Company’s common stock at a variable conversion price which equals the lower of the fixed conversion price or 65% of the lowest closing bid price during the 15 consecutive trading days prior to the date of the noteholder’s election to convert. The note included a conversion feature recorded at inception of $135,000. This note is currently in default and the Company has recognized a derivative liability in the amount of $156,620 as of June 30, 2020.

 

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 to be exercised at any time until the maturity date of the notes. 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 $45,756 as of June 30, 2020.

 

 

9. Derivative Liabilities

 

During the year ended December 31, 2019, notes payable aggregating $550,000 were issued as convertible debt or became convertible and qualified as a derivative liability under FASB ASC 820. As of June 30, 2020 the aggregate fair value of the outstanding derivative liability using the Black-Scholes option pricing model used the following key assumptions:

 

                 

Additional notes payable in the principal amount of $100,000 were issued as convertible debt and qualified as derivative liabilities. As of June 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 June 30, 2020:

 

 

 

10. Commitments and Contingencies

 

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.

 

11. Subsequent Events

 

On July 10, 2020, the Company entered into a Forbearance and Note Settlement Agreement (“Agreement”) with third parties holding 8% Fixed Convertible Promissory Notes payable, agreeing to take no further action to avail themselves of the remedies of default defined in the Notes. The Agreement stipulates 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. As additional consideration for the Agreement, the Holders will be issued warrants to purchase up to 360,000 shares of the Company’s common stock at a price of $1.00 per share, beginning January 10, 2021 and expiring on July 10, 2025.  The fair value cost at the date of issuance of the warrants was $795,911.

 

On July 6, 2020 the holders of warrants issued on June 23, 2020 as additional consideration for amended and restated notes exercised their warrants for the purchase of 115,385 shares of common stock at a price of $0.01.

 

On July 6, 2020 the Company sold 25,641 shares of Common Stock and a Warrant, exercisable for a period of 5 years, to purchase 12,821 shares of Common Stock at an exercise price of $1.95 per share, to a third party, for aggregate consideration of $49,995.  The fair value cost at the date of issuance of the warrant was $26,935.

 

On July 30, 2020 the Company sold 25,641 shares of Common Stock and a Warrant, exercisable for a period of 5 years, to purchase 12,821 shares of Common Stock at an exercise price of $1.95 per share, to a third party, for aggregate consideration of $49,995.  The fair value cost at the date of issuance of the warrant was $26,935.