NWYU New You Inc (CE)

Summary of Basic and Diluted Net (Loss) Income per Common Share 

Schedule of Diluted Net (Loss) Income per Share Anti-dilutive 

Recently Issued Accounting Pronouncements

FASB ASU No. 2019-12 Income Taxes - In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company has adopted this guidance as of its first quarter ended March 31, 2021. Such adoption did not have an impact to the Company’s financial position, results of operations, or cash flows.

ASU 2020-06: In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2023, although early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements.

Note 2 – Going Concern

We incurred a net loss of $11,768,620 for the six months ended June 30, 2021 and had an accumulated deficit of $18,935,635. At June 30, 2021, we had a cash balance of $14,577 and a working capital deficit of $13,899,734.

We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling common stock. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support operations.

Based on the above factors, substantial doubt exists about our ability to continue as a going concern for one year from the issuance of these financial statements.

Note 3 – Concentrations of Business and Credit Risk

The Company at times maintains balances in various operating accounts in excess of federally insured limits.

Since the Company sells its products to a large number of customers, there is no receivable or revenue concentration from customers. However, as of June 30, 2021 and 2020, one credit card processor accounted for 100% of credit card receivables.

The Company also made purchases from and has accounts payable to Carlsbad Naturals, LLC as described in Note 10.

Note 4 – Investments in Future Subsidary

During the six months ended June 30, 2021, there were investments in the amounts of $120,000 to Herring Creek Pharmaceuticals, $1,000 to ST Biosciences, and $1,500,000 to F Squared Management, all of which are future subsidiaries.

Herring Creek is a pharmaceutical research and development (“R&D”) firm that provides services to ST brands. In April 2021, ST Brands entered into an agreement with Herring Creek to develop a synthetic CBD “cold crystal” molecule to be utilized as a sweetener additive in CBD drinks that ST Brands seeks to manufacture and distribute through its strategic partners. The Company made an advance payment of $120,000 to acquire minority interest in the future.

On 6/28/2021, ST brands entered into an agreement to acquire F-Squared Management. The specifics of the acquisition included ST Brands paying F-Squared Management $1.5m by 6/28/2021 for a 49% interest in the company. To date, ST Brands has remitted $315,000 to F-Squared Management as part of this transaction and owes an additional $1,185,000 to complete the acquisition.

Investments in unconsolidated affiliates are accounted for under the cost or the equity method of accounting, as appropriate. The Company accounts for investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5% of the investee’s outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid. As investments accounted for under the cost method do not have readily determinable fair values, the Company only estimates fair value if there are identified events or changes in circumstances that could have a significant adverse effect on the investment’s fair value.

Note 5 – Equity

Restricted Stock Grants

The Company estimated the fair value of restricted stock grants at $0.50 per share based on the price at which the Company issued common shares for cash in 2019 and not based on the amount that shares were trading for on the OTC “Pink” market since shares were thinly traded on the market from August 2019 to June 30, 2021 when the equity instruments were granted.

The table below summarizes the activity of the restricted stock during the six months ended June 30, 2021:

For the six months ended June 30, 2021 the compensation costs include $1,811,619 of stock based compensation. No portion of the total compensation cost was capitalized. The unrecognized compensation costs as of June 30, 2021 is $0. The Company recognized stock based compensation expense using the straight line method and forfeitures are recognized as they occur. During the six months ended June 30, 2021, the Company wrote off the balance of unamortized, non-vested restricted stock because the Board modified the terms of the grants to accelerate vesting. As a result, all outstanding share grants had fully vested as of June 30, 2021.

Other Equity issuances:

There were 6,636,580 restricted shares issued that vested immediately on the date issued. 5,336,580 shares were issued to the CEO and a board member to convert a total of $160,097 in shareholder loans, 1,200,000 issued to a related party in consideration of interest owed by the company on a related note payable, and 100,000 shares issued to a consultant as a bonus for services provided to the company.

Note 6 – Commitments and Contingencies

Operating Lease Commitments

The Company leases a warehouse facility under a lease agreement that expires July 31, 2021. The Company does not have any significant capital leases.

The components of total lease costs are as follows:

 Schedule of Components of Total Lease Cost

Cash paid for amounts included in operating lease liabilities was $64,605 for the six months ended June 30, 2021. The table below presents total operating lease ROU assets and lease liabilities as of June 30, 2021:

Schedule of Operating Lease ROU Assets and Lease Liabilities

The table below presents the maturities of operating lease liabilities as of June 30,

Schedule of Operating Weighted Average Remaining Lease and Discount Rate 

Litigation and Claims

The Company may be involved in lawsuits and claims arising in the ordinary course of business from time to time. The Company reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for the Company’s financial statements not to be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company determined that there were no matters that required an accrual as of June 30, 2021 or 2020, nor were there any asserted or unasserted material claims for which material losses are reasonably possible.

Note 7 – Notes Payable

In April 2020, the Company’s subsidiary received a non-interest bearing advance from the Small Business Administration under the Emergency Injury Disaster Loan program of $10,000. All or a portion of this loan may be forgiven if the Company satisfies certain criteria.

In May, 2020, the Company’s subsidiary received a Paycheck Protection Program loan in the amount of $103,958. The monthly payments on the note are deferred for a period of 6 months and the notes bear interest of 1%. Monthly payments of $5,850 will begin on December 21, 2021; however all or a portion of this loan may be forgiven if the Company satisfies certain criteria as follows:

The Company may apply for forgiveness of the amount due on this loan in an amount equal to the sum of the following costs incurred during the 8-week period beginning on the date of first disbursement of this loan:

The amount of loan forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the Paycheck Protection Program, including the provisions of Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136). Not more than 25% of the amount forgiven can be attributable to non-payroll costs. The Company applied for forgiveness of this loan in August 2021.

In July, 2020, the Company’s subsidiary received a Paycheck Protection Program loan in the amount of $100,000.The monthly payments on the note are deferred for a period of 6 months and the notes bear interest of 1%. Monthly payments of $5,628 began on January 1, 2021. The proceeds of the requested PPP Loan may be used only for business purposes permitted under the Paycheck Protection Program, including permitted payroll costs and benefits, interest on business mortgage obligations incurred before February 15, 2020, rent under a lease entered into before February 15, 2020 and utilities for which service began before February 15, 2020. Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs.

In June, 2021, the Company received a loan in the amount of $150,000. The Company will make weekly payments of $2,976 across 65 weeks. The weekly payment consists of $2,307.69 of the principal of the loan and $669.23 in interest. The total repayment amount will be $193,500. The balance of the loan at June 30, 2021 is $143,077.

In June 2021, the Company received a loan in the amount of $75,000, the Company will make weekly payments of $7,495 until the loan is paid off. The balance of the loan at Jun 30, 2021 is $49,515

During the six months ended June 30, 2021, directors and members of management converted deferred payroll to related party debt in the amount of $135,000. As of December 31, 2020, the balance includes loans to the Company or various expenses paid for on behalf of the Company. These loans contained no interest, term or due date. As of June 30, 2021, these loans and deferred payroll had a combined balance of $498,831 for the CEO, the President, and two other board members. See Note 11.

During the six months ended June 30, 2021, the Company received loan proceeds of $50,000 for future receipts of $75,000 to be paid in daily instalments of 25% of daily sales. The balance of the loan at Jun 30, 2021 is $28,948.

During the six months ended June 30, 2021, the Company received loan proceeds in the amount $79,015 for future receipts of $119,000 to be paid in weekly instalments of $4,959. The balance of the loan at Jun 30, 2021 is $59,179.

During the six months ended June 30, 2021, the Company received loan proceeds in the amount $79,900 for future receipts of $122,400 to be paid in daily instalments of $765. The balance of the loan at Jun 30, 2021 is $60,903.

Note 8 – Convertible Debt

As of June 30, 2021, the Company owed $1,354,500 in principal (before a debt discount of $960,837 and $33,106 in accrued interest (included in accounts payable and accrued expenses) on its outstanding convertible promissory notes. As of December 31, 2020, the Company owed $406,000 in principal (before a debt discount of $177,798) and $9,549 in accrued interest.

Note 1 - On January 2, 2020, the Company received loan proceeds of $125,000 pursuant to a promissory note (“First Convertible Note”), with a maturity date of June 15, 2020 and interest of $4,167 per month. The note’s terms required that the Company issue 50,000 common shares, and allowed the note holder to convert the note into common shares at a conversion price of $0.50 per share. This note was not paid off as of June 30, 2021. The Company is still making the agreed upon interest payments of $4,167 per month and there are no penalties for not paying the note off by its maturity date. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 250,000.

Note 2 - On June 17, 2020, the Company received $85,000 in loan proceeds, which is net of $3,000 in debt issuance costs, pursuant to a loan agreement (“Second Convertible Note”), with a maturity date of June 17, 2021 and an interest rate of 8% per annum from the date of issuance until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date until the full amount is paid. Upon certain events of default, the Company would be obligated to pay cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price of the Company’s common stock from the date of first default to the date of payment, multiplied by the number of shares that would be issued if the outstanding principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior to the date of payment. The holder may convert the note to common shares starting 180 days after the issuance date at a conversion price equal to 61% of the lowest trading price in the last 20 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. During the six months ended June 30, 2021, the Company issued 2,292,012 common shares for a value of $91,520, satisfying the balance of principal and accrued interest on the Note.

Note 3 - On July 20, 2020, the Company received $40,000 in loan proceeds, which is net of $3,000 in debt issuance costs, pursuant to a loan agreement (“Third Convertible Note”), with a maturity date of July 20, 2021 and an interest rate of 8% per annum from the date of issuance until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date until the full amount is paid. Upon certain events of default, the Company would be obligated to pay cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price of the Company’s common stock from the date of first default to the date of payment, multiplied by the number of shares that would be issued if the outstanding principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior to the date of payment. The holder may convert the note to common shares starting 180 days after the issuance date at a conversion price equal to 61% of the lowest trading price in the last 20 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. During the six months ended June 30, 2021, the Company issued 1,433,333 common shares for a value of $44,720, satisfying the balance of principal and accrued interest on the Note.

Note 4 – On November 18, 2020, the Company entered into a Secured Promissory Note (“Fourth Convertible Note”) with a third party, receiving $150,000 in loan proceeds. The Note matures on May 18, 2021 and accrues interest at 2% per month. The Noteholder may convert any portion of the debt into shares of common stock of the Company at $0.10 USD per share or 30% discount to the 5 day VWAP on the day of conversion. In addition to the monthly interest, the Company agreed to transfer 100,000 shares of common stock to the Noteholder. In the event that Company fails to make any payment of principal and/or interest within ten (10) calendar days of the due date for the same, then in addition to such payment due, the Company is obligated to pay a late payment charge to the Noteholder in the amount of five percent (5%) of the delinquent principal and/or interest payment. As of June 30, 2021, the Company owed $150,000 in principal and $9,559 in accrued interest on the note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 2,717,100.

Note 5 – On March 18, 2021, the Company received $75,000 in loan proceeds, which is net of $3,500 in debt issuance costs, pursuant to a loan agreement (“Fifth Convertible Note”), with a maturity date of March 18, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date until the full amount is paid. Upon certain events of default, the Company would be obligated to pay cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price of the Company’s common stock from the date of first default to the date of payment, multiplied by the number of shares that would be issued if the outstanding principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior to the date of payment. The holder may convert the note to common shares starting 180 days after the issuance date at a conversion price equal to 61% of the lowest trading price in the last 20 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $78,500 in principal and $1585.75 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 882,524.

Note 6 - On April 7, 2021, the Company received $70,000 in loan proceeds, which is net of $3,500 in debt issuance costs, pursuant to a loan agreement (“Sixth Convertible Note”), with a maturity date of April 7, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date until the full amount is paid. Upon certain events of default, the Company would be obligated to pay cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price of the Company’s common stock from the date of first default to the date of payment, multiplied by the number of shares that would be issued if the outstanding principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior to the date of payment. The holder may convert the note to common shares starting 180 days after the issuance date at a conversion price equal to 61% of the lowest trading price in the last 20 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $73,500 in principal and $1,366 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 876,646.

Note 7 - On April 8, 2021, the Company received $142,000 in loan proceeds, which is net of $7,500 in debt issuance costs, pursuant to a loan agreement (“Seventh Convertible Note”), with a maturity date of April 8, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. The holder may convert the note to common shares during the first six months after the issuance date at a conversion price equal to 65% of the lowest trading price in the last 15 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $150,000 in principal and $427.96 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 4,110,054.

Note 8 - On April 16, 2021, the Company received $118,750 in loan proceeds, which is net of $5,250 in debt issuance costs, pursuant to a loan agreement (“Eighth Convertible Note”), with a maturity date of April 16, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. The holder may convert the note to common shares during the first six months after the issuance date at a conversion price equal to 65% of the lowest trading price in the last 15 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $125,000 in principal and $2071.55 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 1,396,391.

Note 9 - On May 1, 2021, the Company received $55,000 in loan proceeds, which is net of $3,500 in debt issuance costs, pursuant to a loan agreement (“Ninth Convertible Note”), with a maturity date of May 1, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date until the full amount is paid. Upon certain events of default, the Company would be obligated to pay cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price of the Company’s common stock from the date of first default to the date of payment, multiplied by the number of shares that would be issued if the outstanding principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior to the date of payment. The holder may convert the note to common shares starting 180 days after the issuance date at a conversion price equal to 61% of the lowest trading price in the last 20 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $78,500 in principal and $777.62 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 697,045.

Note 10 - On May 11, 2021, the Company received $133,000 in loan proceeds, which is net of $7,000 in debt issuance costs, pursuant to a loan agreement (“Tenth Convertible Note”), with a maturity date of May 11, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. The holder may convert the note to common shares during the first six months after the issuance date at a conversion price equal to 65% of the lowest trading price in the last 15 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $140,000 in principal and $1,542 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 1,555,412.

Note 11 - On May 13, 2021, the Company received $166,250 in loan proceeds, which is net of $8,750 in debt issuance costs, pursuant to a loan agreement (“Eleventh Convertible Note”), with a maturity date of May 13, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. The holder may convert the note to common shares during the first six months after the issuance date at a conversion price equal to 65% of the lowest trading price in the last 15 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $175,000 in principal and $1,851 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 1,943,413.

Note 12 - On June 2, 2021, the Company received $50,000 in loan proceeds, which is net of $3,750 in debt issuance costs, pursuant to a loan agreement (“Twelfth Convertible Note”), with a maturity date of June 2, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22% per annum from the due date until the full amount is paid. Upon certain events of default, the Company would be obligated to pay cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price of the Company’s common stock from the date of first default to the date of payment, multiplied by the number of shares that would be issued if the outstanding principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior to the date of payment. The holder may convert the note to common shares starting 180 days after the issuance date at a conversion price equal to 61% of the lowest trading price in the last 20 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $50,000 in principal and $331 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 594,295.

Note 13 - On June 23, 2021, the Company received $118,750 in loan proceeds, which is net of $6,250 in debt issuance costs, pursuant to a loan agreement (“Thirteenth Convertible Note”), with a maturity date of June 23, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. The holder may convert the note to common shares during the first six months after the issuance date at a conversion price equal to 65% of the lowest trading price in the last 15 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $125,000 in principal and $191 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 1,375,735.

Note 14 - On June 23, 2021, the Company received $95,000 in loan proceeds, which is net of $5,000 in debt issuance costs, pursuant to a loan agreement (“Fourteenth Convertible Note”), with a maturity date of June 23, 2022 and an interest rate of 8% per annum from the date of issuance until maturity date. The holder may convert the note to common shares during the first six months after the issuance date at a conversion price equal to 65% of the lowest trading price in the last 15 trading days. The Company is required to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of June 30, 2021, the Company owed $100,000 in principal and $154 in accrued interest on the Note. As of June 30, 2021, the equivalent number of common shares the Company would be required to issue to satisfy the Note is 1,100,588.

The Company is currently in default of the non-financial covenant relating to timely filing of periodic SEC reports.

Note 9 – Beneficial Conversion Feature

ASC 470-20 applies to convertible securities with beneficial conversion features that must be settled in stock and to those that give the issuer a choice in settling the obligation in either stock or cash. ASC 470-20 requires that the beneficial conversion feature should be valued at the commitment date at its intrinsic value; that being the difference between the conversion price and the fair market value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible. This amount is recorded as a debt discount and amortized over the life of the debt. ASC 470-20 further limits this amount to the proceeds allocated to the convertible instrument.

The effective conversion prices were compared to the market prices on the dates of each convertible note and they were deemed to be less than the inception date fair value of the underlying common stock for the Second Convertible Note. The Company recognized a debt discount as a reduction (contra-liability) to the Second and Fourth, and Fifth Convertible Notes with an increase to paid in capital. The debt discounts are being amortized over the life of the notes. The Company recognized financing costs for charges by the lender for original issue discounts and other applicable administrative costs, normally withheld from proceeds, which are being amortized as finance costs over the life of the loan. As of June 30, 2021 and December 31, 2020, the unamortized beneficial conversion feature associated with our convertible notes was $0 and $0, respectively.

During the first quarter of 2021, an active market developed for the Company’s stock. Accordingly, the Company began recording the conversion features of its convertible notes payable as embedded derivatives. As a result, the Company re-characterized the beneficial conversion feature recorded on Note 4 as a discount related to the derivative liability, resulting in a decrease to additional paid in capital in the amount of $150,000.

Note 10 - Derivatives

The Company assessed its convertible notes for purposes of determining the associated embedded default derivatives. The Company relied on ASC 820-10-35-37 Fair Value in Financial Instruments and ASC 815 Accounting for Derivative Instruments and Hedging Activities. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance and at every balance sheet thereafter and in determining which valuation method is most appropriate for the instrument, the expected volatility, the implied risk-free interest rate, as well as the expected dividend rate, if any.

During the six months ended June 30, 2021, the Company had convertible notes payable outstanding in which the conversion rate was variable and undeterminable. The Company determined that the embedded conversion options met the definition of a derivative. The effective conversion price was compared to the market price on the date of the note and was deemed to be less than the market value of underlying common stock at the inception of the note. The Company recognized a debt discount on the notes as a reduction (contra-liability) to the Convertible Notes Payable. The debt discounts are being amortized over the life of the notes. The Company recognized financing costs for charges by the lender applicable administrative costs, normally withheld from proceeds, which are being amortized as finance costs over the life of the loan.

The Company evaluated the terms of the convertible notes in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined that the underlying is indexed to the Company’s common stock. The Company determined that the conversion features meet the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability. The Company then evaluated the conversion feature for the embedded conversion option. Since these notes contain conversion price adjustment provisions (i.e. down round, true-up, or ratchet provisions), the Company determined that the embedded conversion options met the definition of a derivative. The Monte Carlo model was used to estimate the fair values of the embedded derivatives on the conversion features of our convertible notes. The values are based on simulating stock volatility, risk free interest rates, and the conversion stock prices on the date of measurement.

The Company is subject to significant cash penalties in the event that the Company defaults on its convertible notes. The default penalties vary based on the type of default and range from incurring a default interest rate of 22% to a penalty of 50% of the amount due, to a parity value based on the effective conversion of the note on the date of payment of the default and the maximum stock value during the period between the default date and the settlement date. The Company determined that certain of the default provisions should be bifurcated from the debt host and treated as a liability, since they involve the contingent payment of a substantial premium on the convertible notes. The Company used a Monte Carlo model that values the embedded default derivatives based on simulating the stock price, the default likelihood, and the default liability.

Fair Value

ASC 825-10 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 825-10 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 825-10 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 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the convertible notes. At June 30, 2021, all of the Company’s derivative liabilities were categorized as Level 3 fair value liabilities. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Level 3 Valuation Techniques

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. At the date of the original transaction, we valued the convertible note that contains down round provisions using a Black-Scholes model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior. ASC 825-10 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 825-10 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 825-10 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 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the convertible notes. At December 31, 2020, all of the Company’s derivative liabilities were categorized as Level 3 fair value liabilities. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The following table summarizes the valuations of the default liability for each note and valuation date.