NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - ORGANIZATION AND BASIS OF PRESENTATION
SmartMetric,
Inc. (the “Company” or “SmartMetric”) was incorporated in the State of Nevada on December 18, 2002. SmartMetric’s
main product is a fingerprint sensor-activated card with a finger sensor onboard the card and a built-in rechargeable battery
for portable biometric identification. This card may be referred to as a biometric card or the SmartMetric Biometric Datacard. SmartMetric
has completed development of its card along with pre-mass manufacturing cards but has not yet begun to mass manufacture the biometric
fingerprint activated cards.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management of the Company, the accompanying unaudited financial statements contain all the adjustments (which
are of a normal recurring nature) necessary for a fair presentation. Operating results for the six months ended December 31, 2020
are not necessarily indicative of the results that may be expected for the year ending June 30, 2021. For further information,
refer to the financial statements and the footnotes thereto contained in the Company’s Annual Report on Form 10-K for the
year ended June 30, 2020, as filed with the Securities and Exchange Commission on October 20, 2020. The consolidated balance sheet
as of June 30, 2020, has been derived from the audited financial statements at that date, but does not include all the information
and footnotes required by US GAAP for complete financial statements.
Going
Concern
As shown in the accompanying
condensed consolidated financial statements the Company has sustained recurring losses of $683,664 for the six months ended December
31, 2020 and has an accumulated deficit of $28,454,728 at December 31, 2020.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date
of this filing. The financial statements do not include any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern. The COVID-19 has had an impact on SmartMetric’s final card production. While the delays are due to supply
line disruption, the Company is confident that these delays will be short-lived based on advice from our manufacturing partners,
manufacturing alternatives and alternative supply lines that are being put into place by the Company.
Management
believes that the Company’s capital requirements will depend on many factors. These factors include product marketing and
distribution. The management plans include equity sales and borrowing in order to fund the operations. The Company plans to continue
its relationship with Geneva Roth Remark in order to raise capital through means other than private placement stock sales.
There
are no assurances that the Company will be able to achieve the level of revenues adequate to generate sufficient cash flow from
operations to support the Company’s working capital requirements. To the extent that funds generated are insufficient, the
Company will have to raise additional working capital. No assurance can be given that additional financing will be available,
or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may not
continue its operations.
On
March 5, 2020, the Company entered into an agreement with GHS Investments, LLC whereas the investor agrees to invest up to four
million dollar ($4,000,000) over the 36 months immediately subsequent to the effective date of the agreement. As of the date of
this filing, the registration is not effective, and is pending review by the Securities and Exchange Commission.
In
December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China (“COVID-19”) and has since
spread worldwide, including to the Unites States, posing public health risks that have reached pandemic proportions (the “COVID-19
Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors.
Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially; delaying the beginning of production.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SmartMetric Australia
Pty. Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those
related to income taxes and contingencies. The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could
differ from those estimates.
Research
and Development
Research
and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures
for electronics design and engineering, software design and engineering, component sourcing, component engineering, manufacturing,
product trials, compensation and consulting costs.
Recent
Accounting Pronouncements
The
Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s
results of operations, financial position or cash flow.
Loss
Per Share of Common Stock
In
accordance with FASB ASC 260, “Earnings Per Share,” the basic loss per share is computed by dividing the loss attributable
to common stockholders by the weighted average number of common shares outstanding during the period. Basic net loss per share
excludes the dilutive effect of stock options or warrants and convertible notes. Diluted net earnings (loss) per common share
is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect
of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In
periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents,
because their inclusion would be anti-dilutive. As of December 31, 2020 and 2019, 112,170,182 and 28,153,406 dilutive shares
were excluded from the calculation of diluted loss per common share, with all dilutive shares being Common stock warrants at December
31, 2020 and 2019, as their effect would be anti-dilutive.
Stock-Based
Compensation
The
Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and
ASC 505-50, Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and
the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments
issued and are recognized over the employees required service period, which is generally the vesting period.
Fair
value of financial instruments
The
Company measures fair value in accordance with ASC 820 - Fair Value Measurements. ASC 820 defines fair value and establishes a
three-level valuation hierarchy for disclosures of fair value measurements. ASC 820 establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency
and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes
the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the
highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The three (3) levels of fair value hierarchy defined by ASC 820 are:
Level
1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level
2 - Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the
asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s
anticipated life.
Level
3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability
at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs
to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement
of fair value of assets or liabilities.
As
defined by ASC 820, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that
would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between
market participants at the measurement date.
The
reported fair values for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety
of factors and assumptions. Accordingly, certain fair values may not represent actual values of the Company’s financial
instruments that could have been realized as of December 31, 2020 or that will be recognized in the future, and do not include
expenses that could be incurred in an actual settlement. The carrying amounts of the Company’s financial assets and liabilities,
such as cash, accounts receivable, receivables from related parties, prepaid expenses and other, accounts payable, accrued liabilities,
and related party and third-party notes payables approximate fair value due to their relatively short maturities. The Company’s
notes payable to related parties approximates the fair value of such instrument based upon management’s best estimate of
terms that would be available to the Company for similar financial arrangements at December 31, 2020.
Financial assets and liabilities measured
at fair value on a recurring basis are summarized below as of December 31, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
65,000
|
|
|
$
|
65,000
|
|
As
of December 31, 2020, the Company’s stock price was $0.02, risk-free discount rate of 0.10% and volatility of 340.54%
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for the six months ending December
31, 2020:
|
|
Amount
|
|
Balance June 30, 2020
|
|
$
|
-0-
|
|
Discount
to mezzanine equity
|
|
|
100,923
|
|
Financing
costs recorded
|
|
|
49,324
|
|
Derivative
reclassed to additional paid in capital
|
|
|
(197,812
|
)
|
Change in fair market
value of derivative liabilities
|
|
|
112,565
|
|
Balance December
31, 2020
|
|
$
|
65,000
|
|
The
following tables provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for the three months ended December
31, 2020:
|
|
Amount
|
|
Balance September 30, 2020
|
|
$
|
42,767
|
|
Discount to mezzanine equity
|
|
|
70,923
|
|
Financing cost recorded
|
|
|
35,493
|
|
Derivative reclassed to additional paid in capital
|
|
|
(197,812
|
)
|
Change in fair market
value of derivative liabilities
|
|
|
113,629
|
|
Balance December
31, 2020
|
|
$
|
65,000
|
|
NOTE
3 - PREPAID EXPENSES
Prepaid
expenses represent the unexpired terms of various consulting agreements as well as advance rental payments. Prepaid expenses at
December 31, 2020 were $4,875.
NOTE
4 - COMMITMENTS AND CONTINGENCIES
Lease
Agreement
The
Company’s main office is in Las Vegas, Nevada. Rent expense under all leases for the six months ended December 31, 2020
and 2019 was $2,433 and $2,303 respectively. The Company maintains only one office. This office is in Las Vegas, NV and is a month-to-month
lease.
Related
Party Transactions
The
Company’s Chief Executive Officer has made cash advances to the Company with an aggregate amount due of $4,286 and $0 as
of December 31, 2020 and June 30, 2020, respectively. These advances bear interest at 7.00% per annum.
As
of December 31, 2020 and June 30, 2020, the Company has accrued the amounts of $744,115 and $759,948, respectively, as deferred
Officer’s salary for the difference between the president’s annual salary and the amounts paid.
As
a result of these shareholder loans and deferred officer salary, the Company has accrued a balance of $175,664 and $149,481 as
interest payable as of December 31, 2020 and June 30, 2020.
On
September 11, 2017, we received a license to certain patents from Chaya Hendrick, our founder and CEO, related to our technologies
until the expiration of the patents. As consideration, we issued Chaya Hendrick, or her assigns, (i) 200,000 shares of Series
B Convertible Preferred Stock, (ii) a royalty equal to 5% of gross revenues derived from products sold related to the patents,
and (iii) certain minimum required payments beginning at $50,000 and doubling each year thereafter. The Series B Preferred Shares
may be converted at the election of holder on a basis for 50 common shares for each preferred share at any time or an aggregate
of 10,000,000 common shares in exchange for all 200,000 preferred shares.
Our
CEO maintains an employment agreement that stipulates a $190,000 annual salary. This agreement is in effect until mutual agreement
between its CEO and the Company to terminate.
Litigation
From
time to time we may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business. As
of the date of this Quarterly Report, there are no material pending legal or governmental proceedings relating to us or properties
to which we are a party, and, to our knowledge, there are no material proceedings to which any of our directors, executive officers
or affiliates are a party adverse to us or which have a material interest adverse to us.
NOTE
5 - DEBT
On April 17, 2020, we
received funds under the Paycheck Protection Program, a part of the CARES Act. The loan is serviced by Chase Bank, and the application
for these funds required us to, in good faith, certify that the current economic uncertainty made the loan necessary to support
our ongoing operations. We used the funds for payroll and related costs. The receipt of these funds, and the forgiveness of the
loan attendant to these funds, is dependent on our ability to adhere to the forgiveness criteria. The loan bears interest at a
rate of 0.98% per annum and matures on April 6, 2022, with the first payment being deferred until April 17, 2021. Under the terms
of the PPP, certain amounts may be forgiven if they are used in accordance with the CARES Act. The Company believes that the full
amount of the $20,832 Paycheck Protection Program loan will be forgiven and therefore the entire loan is classified as current
liability in the accompanying Balance Sheet.
On March 5, 2020,
the Company issued a $35,000 10% convertible note to the investor in relation to the equity financing agreement (Note 6). The
note was due on December 5, 2020 and is convertible at a rate of $0.0175 per share which resulted in a discount from the beneficial
conversion feature totaling $5,000. During the year ended June 30, 2020, $2,127 of the debt discount was amortized. For the
three month period ended September 31, 2020, $3,804 of the debt discount was amortized. As of December 31, 2020, all $5,000 of
the debt discount was fully amortized and the note was at its full amount of $35,000. As of December 31, 2020, the note has not
been paid and currently is in default. The default conversion rate is convertible at a variable rate. Accordingly, the Company
concluded there is an embedded derivative which was required to be bifurcated and accounted for as a derivative liability. The
Company chose to use the Black Scholes model to calculate the derivative liability. The assumptions in the derivative liability
calculation included the price of the Company’s common stock of $0.0070 at the valuation date, term of zero, a risk free
rate of between $0.0010 and $0.0011 and a volatility rate of between 337% and 341%.
NOTE
6 - STOCKHOLDERS’ DEFICIT
Preferred
Stock
As
of December 31, 2020, the Company has 5,000,000 shares of Class B preferred stock, par value $0.001, authorized and 610,000 shares
issued and outstanding.
On
December 11, 2009, the Company filed a Certificate of Designation with the State of Nevada, to designate 500,000 shares of preferred
stock as Series B Convertible Preferred Stock (“Series B Convertible Preferred Stock”). Effective November 5, 2014,
the number of shares designated as Series B Convertible Preferred Stock was increased to 5,000,000 shares.
Each
share of Series B Convertible Preferred Stock has a par value of $0.001, and a stated value equal to $5.00 (“Stated Value”).
Holders of the Series B Convertible Preferred Stock are entitled to receive dividends or other distributions with the holders
of the common stock of the Company on an as converted basis when, as, and if declared by the directors of the Company. Holders
of the Series B Convertible Preferred Stock are entitled to convert each share of the Series B Convertible Preferred Stock into
fifty (50) shares of common stock.
Upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, holders of the Series B Convertible
Preferred Stock are entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to the Stated
Value, pro rata with the holders of the common stock.
The
Company issued 200,000 Series B preferred shares upon its inception in 2004.
In
October 2015, the Company issued 200,000 Series B preferred shares.
On
September 11, 2017, the Company issued an additional 210,000 shares of Series B preferred shares to its CEO, Chaya Hendrick, in
consideration for grant of exclusive rights to the licensed patent.
NOTE
6 - STOCKHOLDERS’ DEFICIT (CONTINUED)
Class
A Common Stock
During
the three month period ending December 31, 2019, the Company increased its total number of shares of authorized capital stock
to 600,000,000 shares, par value $0.001 per share.
Common
Stock
As
of December 31, 2020, the Company had 416,590,136 shares of common stock issued and outstanding.
|
●
|
During the three
months ended December 31, 2020, the Company sold 16,500,000 shares of common stock for net proceeds of $82,455. With these
issuances the company also issued warrants to purchase: (i) 16,500,000 shares at prices ranging from $0.05 to $0.10 per share
and (ii) 16,500,000 shares at prices ranging from $0.10 to $0.20 and (iii) 1,500,000 at a price of $0.30. The warrants
expire at various times through December 21, 2022. None of the 16,500,000 shares were issued during the quarter ended December
31, 2020, and were recognized as stock payable.
|
|
●
|
During the three
months ended December 31, 2020, the Company issued 32,034,876 shares for $75,000, of which 15,000,000 were issued
from stock payable and 16,034,876 were converted from 78,100 Preferred shares.
|
|
●
|
During the three
months ended December 31, 2019, the Company sold for cash 40,675,000 shares of common stock and warrants to purchase: (i)
825,000 shares at a price ranging between $0.20 and $0.25 per share for net proceeds of $214,510. The warrants
expire at various times through November 1, 2021. None of these shares were issued during the quarter ended December 31, 2019,
with all 40,675,000 shares being recorded as stock payable. During the three months ended December 31, 2019, the
Company issued 6,100,696 common shares. Of these shares, 3,730,000 were issued from stock payable and 2,370,696
were converted from Preferred shares.
|
Equity
Financing Agreement
On
March 5, 2020, the Company entered into an equity financing agreement with GHS Investments, LLC, a Nevada limited liability company
(“Investor”). Pursuant to the agreement, the Company agrees the sell to the investor an indeterminate amount of shares
of the Company’s common stock, par value $0.001 per share, up to an aggregate price of four million dollars ($4,000,000).
Pursuant
to the agreement, the Company is required, to within sixty (60) calendar days upon the date of execution of this agreement, use
its best efforts to file with the SEC a registration statement or registration statements (as is necessary) on Form S-1, covering
the resale of all of the registrable securities, which registration statement(s) shall state that, in accordance with Rule 416
promulgated under the 1933 Act, such registration statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon stock splits, stock dividends or similar transactions. Pursuant to this equity financing agreement,
the Company filed the Registration S-1 on August 6, 2020. The Registration Statement is not effective as of the date of this filing,
and is currently being reviewed by The Securities and Exchange Commission.
Following
effectiveness of the Registration Statement, the Company shall have the discretion to deliver puts to GHS and GHS will be obligated
to purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) based on the
investment amount specified in each put notice. The maximum amount that the Company shall be entitled to put to GHS in each put
notice shall not exceed two hundred percent (200%) of the average daily trading dollar volume of the Company’s Common Stock
during the ten (10) trading days preceding the put, so long as such dollar amount does not exceed $500,000. Pursuant to the Equity
Financing Agreement, GHS and its affiliates will not be permitted to purchase and the Company may not put shares of the Company’s
Common Stock to GHS that would result in GHS’s beneficial ownership, equaling more than 4.99% of the Company’s outstanding
Common Stock. The price of each put share shall be equal to eighty percent (80%) of the Market Price (as defined in the Equity
Financing Agreement). Puts may be delivered by the Company to GHS until the earlier of thirty-six (36) months after the effectiveness
of the Registration Statement.
Concurrently
with the execution of the equity financing agreement, the company entered into a convertible promissory note, for the principal
balance of $35,000. Per the terms of the convertible note agreement, the Company agrees to pay the investor interest at the rate
of ten percent (10%) until it became due on December 5, 2020. The holder shall have the right at any time to convert all or any
part of the outstanding and unpaid principal and interest at a fixed conversion price of $0.0175. See Note 5. The $35,000
has been recognized as deferred financing costs in current assets on the accompanying Consolidated Balance Sheet, and will be
charged against the gross proceeds of each put when received. Although the Company has not as of yet put to GHS, the agreement
is in effect for three years, through March, 2023, and as the Company does plan to put to GHS, the Company has determined it is
proper for the deferred costs to remain for the length of the agreement.
NOTE
6 - STOCKHOLDERS’ DEFICIT (CONTINUED)
Warrants
From
time to time the Company granted warrants in connection with private placements of securities, as described herein.
As
of December 31, 2020, and June 30, 2020, the following is a breakdown of the warrant activity:
Range of Exercise Prices
|
|
Number of
Warrants
Outstanding
|
|
|
Weighted-Average
Contractual Life
Remaining in Years
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted-
Average
Exercise Price
|
|
Warrants Outstanding and Exercisable at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05 - $1.00
|
|
|
112,170,182
|
|
|
|
1.27
|
|
|
$
|
0.28
|
|
|
|
112,170,182
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding and Exercisable at June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05 - $1.00
|
|
|
53,280,406
|
|
|
|
1.12
|
|
|
$
|
0.33
|
|
|
|
53,280,406
|
|
|
$
|
0.33
|
|
Warrant
Activity:
December
31, 2020:
Outstanding - June 30, 2020
|
|
|
53,280,406
|
|
Issued
|
|
|
66,500,000
|
|
Exercised
|
|
|
—
|
|
Expired
|
|
|
(7,610,224
|
)
|
Outstanding - December 31, 2020
|
|
|
112,170,182
|
|
December
31, 2019:
Outstanding - June 30, 2019
|
|
|
26,526,234
|
|
Issued
|
|
|
7,162,500
|
|
Exercised
|
|
|
—
|
|
Expired
|
|
|
(5,535,328
|
)
|
Outstanding - December 31, 2019
|
|
|
28,153,406
|
|
At
December 31, 2020, all 108,170,182 warrants are vested and all 112,170,182 warrants expire at various times prior to September
21, 2022.
NOTE
7 - MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Issuances
of Series C Mandatory Redeemable Convertible Preferred Stock
On
January 10, 2019, the Board of Directors of the Company adopted a resolution pursuant to the Company’s Certificate of Incorporation,
as amended, providing for the designations, preferences and relative, participating, optional and other rights, and the qualifications,
limitations and restrictions, of the Series C Convertible Preferred Stock.
On
January 14, 2019, the Company filed a Certificate of Designations for a Series C Convertible Preferred Stock. The authorized number
of Series C Convertible Preferred Stock is 1,000,000 shares, par value 0.001. The Series C Preferred Stock will, with respect
to dividend rights and rights upon liquidation, winding-up or dissolution, rank: (a) senior with respect to dividends and right of liquidation
with the Company’s common stock, (b) junior with respect to dividends and right of liquidation with respect to the Company’s
Series B Preferred Stock; and (c) junior with respect to dividends and right of liquidation to all existing indebtedness of the
Company. Series C Preferred Stock will carry an annual ten percent (10%) cumulative dividend, compounded daily, payable solely
upon redemption, liquidation or conversion. The Company will have a right, at any time in the period of 180 days from the date
of the issuance, at the Company’s option, to redeem all or any portion of the Series C Preferred Stock at prices ranging
from 105% to 130%, based on the passage of time.
NOTE
7 - MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
The
number of Series C, mandatory redeemable convertible preferred stock shares issued and outstanding were 143,050 and 117,200, respectively,
for December 31, 2020 and June 30, 2020.
The
Holder shall have the right at any time during the period beginning on the date which is six (6) months following the Issuance
Date, to convert all or any part of the outstanding Series C Preferred Stock into fully paid and non-assessable shares of Common
Stock at the Variable Conversion Price. The “Variable Conversion Price” shall mean 71% multiplied by the Market Price
(representing a discount rate of 29%). “Market Price” means the average of the two (2) lowest Trading Prices (as defined
here) for the Common Stock during the fifteen (15) Trading Day period ending on the latest complete Trading Day prior to the Conversion
Date.
The Preferred shares
are convertible at 71% of the average market price of the Company’s stock based on the lowest two (2) market closes fifteen
(15) days prior. Consequently, the shares were converted at different rates. The Company analyzed the conversion feature
and determined it was required to be bifurcated and recognized as a derivative liability. Three batches of Preferred shares were
subject to derivative liability valuation based on the Black Scholes Merton pricing model. As the fair value of each of the three
derivative and the shares issued at inception were in excess of the face amount of the Preferred shares, the Company recorded
a discount in the amount of $35,000 to be amortized utilizing the effective interest method of accretion over the term
of the note.
Balance, June 30, 2020:
|
|
$
|
42,767
|
|
Unamortized discount originated from derivative liabilities:
|
|
|
(29,585
|
)
|
Financing costs recorded:
|
|
|
(13,831
|
)
|
Derivative liability:
|
|
|
1,064
|
|
Preferred stock dividend:
|
|
|
(415
|
)
|
Balance, December 31, 2020
|
|
$
|
-0-
|
|
On
the date which is eighteen (18) months following the Issuance Date or upon the occurrence of an Event of Default (the “Mandatory
Redemption Date”), the Company shall redeem all of the shares of Series C Preferred Stock of the Holder (which have not
been previously redeemed or converted). With five (5) days of the Mandatory Redemption Date, the Company shall make payment to
each Holder of an amount in cash equal to the total number of shares of Series C Preferred Stock held by such Holder multiplied
by the then current Stated Value.
All
shares of mandatorily redeemable convertible preferred stock have been presented outside of permanent equity in accordance with
ASC 480, Classification and Measurement of Redeemable Securities. The Company accretes the carrying value of its Series
C mandatory redeemable convertible preferred stock to its estimate of fair value (i.e. redemption value) at period end.
The carrying value of
the Series C mandatory redeemable convertible preferred stock at December 31, 2020 and 2019 was $119,083 and $86,564 net of discount,
respectively. There were 73,150 Preferred C shares issued for net proceeds of $66,500 and 78,100 Preferred C shares converted
to 16,034,876 Common shares for the three months ended December 31, 2020.
NOTE
8 - INCOME TAXES
The
Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal
year. Cumulative adjustments to the Company’s estimate are recorded in the interim period in which a change in the estimated
annual effective rate is determined.
The
Company has estimated its effective tax rate to be 0%, based primarily on losses incurred and the uncertainty of realization of
the tax benefit of such losses.
NOTE
9 - SUBSEQUENT EVENTS
In accordance with ASC
855-10, the Company has reviewed its operations subsequent to December 31, 2020 to the date these financial statements were issued.
Between January 1, 2021 and February 22, 2021, the Company issued 4,808,975 shares of common stock. Of this amount, all 4,808,975
shares were issued from Preferred C shares that were converted.