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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2021

 

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

 

For the transition period from ____________ to ____________

 

Commission file number: 000-54867

 

LGBTQ LOYALTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   80-0671280

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2435 Dixie Highway, Wilton Manors, FL 33305

(Address of principal executive offices, including zip code)

 

Tel: (858)-577-1746

(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 definition 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 this 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

 

As of August 16, 2021 the Company had 682,553,402 shares of common stock, $0.001 par value, issued and outstanding.

 

 

 

 
 

 

LGBTQ Loyalty Holdings, Inc.

 

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021

TABLE OF CONTENTS

 

    PAGE
     
  PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
     
Item 4. Controls and Procedures 24
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 26
     
Item 1A. Risk Factors 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. Mine Safety Disclosures 27
     
Item 5. Other Information 27
     
Item 6. Exhibits 27
     
  SIGNATURES 28

 

i

 

 

LGBTQ Loyalty Holdings, Inc.

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

  PAGE
   
Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 (unaudited) 2
   
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (unaudited) 3
   
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited) 4
   
Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2021 and 2020 (unaudited) 5
   
Notes to Condensed Consolidated Financial Statements (unaudited) 6

 

1
 

 

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,   December 31, 
   2021   2020 
ASSETS          
Current assets:          
Cash  $179,192   $30,312 
Other receivables   305,000    100,000 
Other current assets   6,925    20,983 
Total current assets   491,117    151,295 
Intangible assets, net   66,139    78,285 
Total assets  $557,256   $229,580 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable  $814,869   $920,569 
Accrued salaries and consulting fees   468,719    605,857 
Accrued interest and dividends   313,506    226,108 
Notes payable   126,986    127,986 
Notes payable to related party   1,800    17,885 
Convertible notes payable, net of debt discount   1,897,277    1,661,520 
Derivative liability on convertible notes payable   3,154,374    1,930,235 
Series D preferred stock   577,356    - 
Total liabilities   7,354,887    5,490,160 
           
Commitments and contingencies          
           
Stockholders’ equity (deficit):          
Preferred stock, $0.001 par value, 10,000,000 shares authorized          
Series A, 1 share designated, no shares issued or outstanding as of June 30, 2021 and December 31, 2020   -    - 
Series B, 500,000 shares designated, 50,000 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively   50    50 
Series C, 129,559 shares designated, 76,559 and no shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively   77    130 
Series D, 1,000 shares designated, 550 and no shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively   1    - 
Common stock, $0.001 par value, 2,000,000,000 shares authorized, 669,390,677 and 263,725,234 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively   669,389    263,725 
Additional paid-in capital   11,721,866    7,714,704 
Accumulated deficit   (18,614,915)   (13,239,189)
Total stockholders’ equity (deficit)   (6,797,631)   (5,260,580)
Total liabilities and stockholders’ equity (deficit)  $557,256   $229,580 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

2
 

 

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

                 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
Revenue  $-   $-   $-   $560 
Cost of net revenue   -    -    -    - 
Gross profit   -    -    -    560 
                     
Operating expenses:                    
Personnel costs   93,121    284,507    1,389,121    499,462 
Consulting fees   38,500    93,515    71,500    168,015 
Legal and professional fees   153,527    95,347    258,650    222,342 
Sales and marketing   40,500    45    40,500    7,590 
General and administrative   28,392    20,736    56,514    70,728 
Depreciation and amortization   6,448    6,448    12,896    12,896 
Total operating expenses   360,488    500,598    1,829,181    981,033 
                     
Loss from operations   (360,488)   (500,598)   (1,829,181)   (980,473)
                     
Other income (expense):                    
Interest expense   (727,642)   (376,473)   (1,289,328)   (737,312)
Other income   -    3,000    -    3,000 
Change in derivative liability   (2,658,949)   442,626    (2,245,976)   324,872 
Total other income (expense), net   (3,386,591)   69,154    (3,535,304)   (409,440)
                     
Provision for income taxes   -    -    -    - 
Net loss  $(3,747,079)  $(431,445)  $(5,364,485)  $(1,389,913)
                     
Weighted average common shares outstanding -basic and diluted   553,901,386    190,052,683    432,821,915    187,427,874 
Net loss per common share - basic and diluted  $(0.01)  $(0.00)  $(0.01)  $(0.01)

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

3
 

  

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

           
   Six Months Ended 
   June 30, 
   2021   2020 
Cash flows from operating activities:          
Net loss  $(5,364,485)  $(1,389,913)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of debt discount and original issue discount   704,007    403,267 
Change in fair value of derivative liability   2,245,976    (324,872)
Financing related costs - debt   460,780    257,158 
Stock-based compensation expense   1,218,114    213,276 
Depreciation and amortization   12,896    12,896 
Changes in operating assets and liabilities:          
Other current assets   14,058    - 
Bank overdraft   

-

    

1,279

 
Accounts payable   (105,699)   89,514 
Accrued salaries and consulting fees   201,470    304,115 
Accrued interest and dividends   93,663    60,250 
Net cash used in operating activities   (519,220)   (373,030)
Cash flows from investing activities:           
Other receivables   (205,000)   - 
Investment in intangible assets   -    (31,000)
Net cash used in investing activities   (205,000)   (31,000)
Cash flows from financing activities:           
Proceeds from issuance of convertible debenture agreements   300,000    250,000 
Net proceeds (repayments) from promissory note agreements   (1,000)   47,500 
Proceeds from issuance of Series D preferred stock   574,100    - 
Proceeds from exercise of warrants   -    93,342 
Net cash provided by financing activities   873,100    390,842 
Net increase (decrease) in cash    148,880    (13,888)
Cash at beginning of period   30,312    13,188 
Cash at end of period  $179,192   $-
           
Supplemental disclosure of cash flow information:           
Cash paid for income taxes  $-   $- 
Cash paid for interest  $-   $12,500 
           
Supplemental disclosure of non-cash financing activities:           
Conversion of accrued consulting fees into common shares  $338,608   $617,750 
Conversion of related party notes payable into common shares  $16,085   $- 
Conversion of Series C preferred stock into common stock  $53,000   $- 
Exercise of common stock warrants - derivative liability  $-   $32,742 
Amortization of preferred stock discount  $-   $31,820 
Dividends on preferred stock  $11,241   $10,400 

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

4
 

 

LGBTQ LOYALTY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

                                                                  
   Preferred Stock        Additional     Total
   Series A  Series B  Series C  Series D  Common Stock  Paid-in  Accumulated  Stockholders’
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Deficit
                                        
Balances at December 31, 2020   -   $-    50,000   $50    129,559   $130    -   $-    263,725,234   $263,725    7,714,704   $(13,239,189)  $(5,260,580)
Common shares issued to board of directors   -    -    -    -    -    -    -    -    140,000,000    140,000    980,000    -    1,120,000 
Common shares issued for services and compensation   -    -    -    -    -    -    -    -    31,834,386    31,834    204,614    -    236,448 
Debenture conversions   -    -    -    -    -    -    -    -    37,538,998    37,539    318,815    -    356,354 
Dividends on preferred stock   -    -    -    -    -    -    -    -    -    -    -    (1,722)   (1,722)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (1,617,405)   (1,617,405)
Balances at March 31, 2021   -   $-    50,000   $50    129,559   $130    -   $-    473,098,618   $473,098    9,218,133   $(14,858,316)  $(5,166,906)
Debenture conversions   -    -    -    -    -    -    -    -    100,448,779    100,449    1,821,061    -    1,921,510 
Conversion of notes and payables   -    -    -    -    -    -    -    -    11,956,004    11,956    192,408    -    204,364 
Exercise of warrants             -    -    -    -    -    -    30,887,276    30,887    (30,887)   -    - 
Conversion of Series C preferred stock into common stock   -    -    -    -    (53,000)   (53)   -    -    53,000,000    53,000    (52,947)   -    - 
Dividends on preferred stock   -    -    -    -    -    -    -    -    -    -    -    (9,519)   (9,519)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (3,747,079)   (3,747,079)
Balances at June 30, 2021   -   $-    50,000   $50    76,559   $77    550   $1    669,390,677   $669,390   $11,147,767   $(18,614,915)  $(6,797,631)
                                                                  
                                                                  
Balances at December 31, 2019   -   $-    75,000   $75    129,559   $130    -   $-    169,217,460   $169,217    6,035,547   $(9,077,614)  $(2,872,645)
Common shares issued in connection with notes payable   -    -    -    -    -    -    -    -    294,994    295    9,705    -    10,000 
Common shares issued for accrued services   -    -    -    -    -    -    -    -    6,662,312    6,662    311,338    -    318,000 
Common shares issued to board of directors   -    -    -    -    -    -    -    -    1,000,000    1,000    16,800    -    17,800 
Exercise of common stock warrants   -    -    -    -    -    -    -    -    4,170,000    4,170    121,914    -    126,084 
Amortization of preferred stock discount   -    -    -    -    -    -    -    -    -    -    15,910    (15,910)   - 
Dividends on preferred stock   -    -    -    -    -    -    -    -    -    -    -    (2,588)   (2,588)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (958,468)   (958,468)
Balances at March 31, 2020   -   $-    75,000   $75    129,559   $130    -   $-    181,344,766   $181,344    6,511,211   $(10,054,580)  $(3,361,820)
Common shares issued to board of directors   -    -    -    -    -    -    -    -    11,942,161    11,942    202,652    -    214,595 
Common shares issued for services and compensation   -    -    -    -    -    -    -    -    16,279,273    16,279    264,353    -    280,632 
Exercise of stock options   -    -    -    -    -    -    -    -    4,000,000    4,000    6,400    -    10,400 
Conversion of Series B preferred stock for common shares   -    -    (25,000)   (25)   -    -    -    -    958,333    958    (933)   -    - 
Issuance of Series B dividend common shares   -    -    -    -    -    -    -    -    90,216    90    3,360    -    3,450 
Amortization of preferred stock discount   -    -    -    -    -    -    -    -    -    -    15,910    (15,910)   - 
Dividends on preferred stock   -    -    -    -    -    -    -    -    -    -    -    (1,725)   (1,725)
Net loss   -    -    -    -    -    -    -    -    -    -    -    (431,445)   (431,445)
Balances at June 30, 2020   -   $-    50,000   $50    129,559   $130    -   $-    214,614,749   $214,615   $7,002,953   $(10,503,660)  $(3,285,912)

 

See the accompanying notes to the unaudited condensed consolidated financial statements

 

5
 

 

LGBTQ LOYALTY HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2021

 

Note 1. Nature of Business

 

Throughout this report, the terms “our,” “we,” “us,” and the “Company” refer to LGBTQ Loyalty Holdings, Inc. (formerly LifeApps Brands Inc.), including its subsidiaries.

 

On January 25, 2019, we acquired LGBT Loyalty LLC, a New York limited liability company, with the goal of creating the first LGBTQ Loyalty Preference Index ETF (the “Index ETF”) to provide the LGBTQ community with the power to influence the allocation of capital within a financial Index ETF based upon LGBTQ consumer preferences. The Index ETF is intended to link the growing economic influence of the LGBTQ community and their allies with many of the top Fortune 500 companies that support and implement diversity, inclusion and equality policies within their organizations. The incorporation of diversity and inclusion in a company’s recruitment and human resource policies is becoming a key concern to investors as part of their growing focus on ESG allocations. Our data and analytics unequivocally reinforce that corporations that have embraced diversity and inclusion policies within their corporate culture perform at a higher level financially than their peers. This includes advancing a more invigorated workforce that attracts and retains the best talent. Innovation and agility have been identified as great benefits of diversity, and there is an increasing awareness of what has come to be known as ‘the power of difference’.

 

On October 30, 2019, through our wholly-owned subsidiary Loyalty Preference Index, Inc. (“LPI”) and our strategically aligned partnerships with crowd sourced data and analytic providers, we launched the LGBTQ100 ESG Index which integrates LGBTQ community survey data into the methodology for a benchmark listing of the nation’s highest financially performing large-cap publicly listed corporations that our respondents believe are most committed to advancing equality. LPI is the index provider for the LGBTQ + ESG100 ETF; LGBTQ Loyalty was the Sponsor for the prospectus that was filed by the licensed Fund Adviser ProcureAM, and was approved by the Securities and Exchange Commission (“SEC”) in early January 2020. The LGBTQ + ESG100 ETF (the “Fund”) launched in May 2021 on the NASDAQ. The Fund seeks to track the investment results (before fees and expenses) of the LGBTQ100 ESG Index and earns management fees based on assets under management (“AUM”).

 

In late 2020, LPI was renamed to Advancing Equality Preference, Inc.

 

6
 

 

Note 2. Summary of Significant Accounting Policies

 

Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“US GAAP”), which contemplates our continuation as a going concern. We have incurred losses to date of $18,614,915 and have negative working capital of $6,863,770 as of June 30, 2021. To date we have funded our operations through advances from a related party, issuance of convertible debt, and the sale of our common stock. We intend to raise additional funding through third party equity or debt financing. There is no certainty that funding will be available as needed. These factors raise substantial doubt about our ability to continue operating as a going concern. Our ability to continue our operations as a going concern, realize the carrying value of our assets, and discharge our liabilities in the normal course of business is dependent upon our ability to raise capital sufficient to fund our commitments and ongoing losses, and ultimately generate profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Basis of Presentation

 

We have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These condensed consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for fiscal year 2021. Certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries, LGBTQ Loyalty, LLC, and Advancing Equality Preference, Inc. All material inter-company transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

 

7
 

 

Fair Value Measurements

 

ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.

 

Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.

 

Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights and derivative liabilities.

 

Our financial instruments consist of cash, other current assets, accounts payables, accruals, and notes payable. The carrying values of these instruments approximate fair value because of the short-term maturities. The fair value of the Company’s convertible debentures and promissory notes approximates their carrying values as the underlying imputed interest rates approximates the estimated current market rate for similar instruments. The derivative is measured as a Level 3 instrument due to the various inputs which requires significant management judgment. Refer to Note 6 for detail.

 

The following table is a summary of our financial instruments measured at fair value:

 

   Fair Value Measurements 
   as of June 30, 2021: 
   Level 1   Level 2   Level 3   Total 
Liabilities:                    
Derivative liability on convertible notes payable  $-   $-   $3,154,374   $3,154,374 
   $-   $-   $3,154,374   $3,154,374 

 

   Fair Value Measurements 
   as of December 31, 2020: 
   Level 1   Level 2   Level 3   Total 
Liabilities:                    
Derivative liability on convertible notes payable  $-   $-   $1,930,235   $1,930,235 
   $-   $-   $1,930,235   $1,930,235 

 

Other Receivables – Related Party

 

Other receivables represent amounts held in escrow at the Fund’s custodian. In the second quarter of 2021, the Company retrieved $100,000 from the Fund’s custodian, and provided $305,000 related to the ETF launch. As of June 30, 2021, $305,000 was in escrow.

 

8
 

 

Earnings per Share

 

We calculate earnings per share in accordance with ASC Topic 260 Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Diluted earnings per share represent basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options and warrants. The diluted earnings per share were not calculated because we recorded net losses for the three and six months ended June 30, 2021 and 2020, and the outstanding stock options and warrants are anti-dilutive. For the three and six months ended June 30, 2021 and 2020, the following number of potentially dilutive shares have been excluded from diluted net loss since such inclusion would be anti-dilutive:

 

   Six Months Ended 
   June 30, 
   2021   2020 
Series D preferred stock   67,826    - 
Stock options outstanding   1,800,000    1,800,000 
Warrants   204,946,057    - 
Shares to be issued upon conversion of notes   203,651,096    173,870,349 
    410,464,979    175,670,349 

 

 

Recent Pronouncements

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

Note 3. Intangible Assets

 

The Company capitalizes costs pertaining to the development of the LGBTQ100 ESG Index website. The Company began amortizing these costs upon the launch of the index, and will amortize the costs over a three-year useful life.

 

At June 30, 2021 and December 31, 2020, intangible assets, net was $66,139 and $78,285, respectively. Amortization expense was $6,448 and $12,895 for both the three and six months ended June 30, 2021 and 2020, respectively.

 

9
 

 

Note 4. Notes Payable

 

As of June 30, 2021 and December 31, 2020, the Company has a note payable outstanding in the amount of $1,986 and $2,986, respectively. The note is past due at June 30, 2021 and is, therefore, in default. The note accrues interest at a rate of 2% per annum. During the six months ended June 30, 2021, the Company repaid $1,000 pertaining to this note.

 

In December 2019, the Company issued a promissory note to Pride Partners LLC (“Pride”) for $75,000. The note is secured, accrues interest at a rate of 10% per annum, and matured on June 20, 2020. As of June 30, 2021, the full principal amount was outstanding and in default.

 

Note 5. Convertible Notes Payable

 

On January 21, 2021, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up January 2021 Note”). Pursuant to the terms of the Power Up January 2021 Note, the lender agreed to purchase from the Company, for a purchase price of $75,000, a 10% convertible note in the principal amount of $86,350. The Power Up January 2021 Note matures and becomes due and payable on March 5, 2022 and accrues interest at a rate of 10% per annum. The Power Up January 2021 Note, plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.

 

The Power Up January 2021 Note is convertible into shares of the Company’s common stock at any time at a conversion price (the “Conversion Price”), which shall equal the Variable Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price, which is the lowest Trading Price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. The conversion price is subject to customary adjustments. The conversion price is not subject to a floor.

 

On March 5, 2021, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up March 2021 Note”). Pursuant to the terms of the Power Up March 2021 Note, the lender agreed to purchase from the Company, for a purchase price of $75,000, a 10% convertible note in the principal amount of $86,350. The Power Up March 2021 Note matures and becomes due and payable on March 5, 2022 and accrues interest at a rate of 10% per annum. The Power Up March 2021 Note, plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.

 

10
 

 

The Power Up March 2021 Note is convertible into shares of the Company’s common stock at any time at a conversion price (the “Conversion Price”), which shall equal the Variable Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price, which is the lowest Trading Price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. The conversion price is subject to customary adjustments. The conversion price is not subject to a floor.

 

On May 4, 2021, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd (“Power Up May 2021 Note”). Pursuant to the terms of the Power Up 2021 Note, the lender agreed to purchase from the Company, for a purchase price of $150,000, a 10% convertible note in the principal amount of $169,125. The Power Up 2021 Note matures and becomes due and payable on May 4, 2022 and accrues interest at a rate of 10% per annum. The Power Up May 2021 Note, plus all accrued but unpaid interest, may be prepaid at any time prior to the maturity date.

 

The Power Up May 2021 Note is convertible into shares of the Company’s common stock at any time at a conversion price (the “Conversion Price”), which shall equal the Variable Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price, which is the lowest Trading Price for the common stock during the twenty (20) trading day period ending on the latest complete trading day prior to the conversion date. The conversion price is subject to customary adjustments. The conversion price is not subject to a floor.

 

During the three and six months ended June 30, 2021, the Company recorded amortization of debt discount and original issue discount of $364,877 and $582,631, respectively, for all convertible debentures. During the three and six months ended June 30, 2020, the Company recorded amortization of debt discount and original discount of $201,028 and $403,267, respectively, for all convertible debentures. This amount is included in interest expense in our consolidated statements of operations.

 

The following is a summary of the activity of the convertible notes payable and convertible debenture for the six months ended June 30, 2021:

 

   Convertible 
   Debenture 
Balance as of December 31, 2020  $1,661,520 
Issuance of convertible debenture - principal amount   341,825 
Issuance of convertible debenture - debt discount and original issue discount   (341,825)
Amortization of debt discount and original issue discount   582,631 
Conversion to common stock, net of discount   (346,874)
Balance as of June 30, 2021  $1,897,277 

 

The following comprises the balance of the convertible debenture outstanding at June 30, 2021 and December 31, 2020:

 

   June 30,   December 31, 
   2021   2020 
Principal amount outstanding  $2,304,602   $2,458,024 
Less: Unamortized original issue discount   (55,271)   (94,857)
Less: Unamortized debt discount   (352,053)   (701,647)
Convertible note payable, net of debt discount  $1,897,277   $1,661,520 

 

11
 

 

At December 31, 2020, convertible notes payable includes a balance of $615,134 pertaining to a parity default penalty booked in 2020. The EMA Note has an original principal of $85,000. In the second quarter of 2021, EMA converted $180,447 in principal for shares of common stock, with an outstanding principal balance of $434,687 as of June 30, 2021. The Company is currently settling the remaining note into shares and warrants to be issued to EMA, and expects the ultimate value to be less than the stated balance included in the consolidated balance sheet.

 

Note 6. Derivative Liability

 

We evaluated the terms of the conversion features of each of the outstanding convertible debentures in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock, and determined they are indexed to the Company’s common stock and that the conversion features meet the definition of a liability. Therefore, we bifurcated the conversion feature and accounted for it as a separate derivative liability.

 

To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period. This variability may result in the actual derivative liability for a period either above or below the estimates recorded on our consolidated financial statements, resulting in significant fluctuations in other income (expense) because of the corresponding non-cash gain or loss recorded.

 

We value the conversion feature at origination of the notes using the Black-Scholes valuation model. We value the derivative liability at the end of each accounting period, and upon conversion of the underlying note or warrant, with the difference in value recognized as gain or loss included in other income (expense) in our consolidated statements of operations.

 

The original debentures had conversion features that resulted in derivative liabilities. We valued the conversion features at each origination date with the following assumptions, on a weighted-average basis:

 

   Six Months Ended 
   June 30, 
   2021   2020 
Risk-free interest rate   0.09%   0.78%
Expected term (in years)   1.00    0.90 
Expected volatility   237.4%   161.9%
Expected dividend yield   0%   0%
Exercise price of underlying common shares  $0.004   $0.01 

 

12
 

 

During the six months ended June 30, 2021, the entire value of the principal of the debentures were assigned to the derivative liability and recognized as a debt discount on the convertible debentures. The debt discount is recorded as reduction (contra-liability) to the debentures and are being amortized over the initial term. The balance of $460,780 was recognized as origination interest on the derivative liability and expensed on origination. In accordance with the Company’s sequencing policy, shares issuable pursuant to the convertible debentures would be settled subsequent to the Company’s Series B preferred stock.

 

The following is a summary of the activity of the derivative liability for the six months ended June 30, 2021:

 

   Derivative 
   Liability 
Balance as of December 31, 2020  $1,930,235 
Initial fair value on issuance of convertible debenture   760,740 
Conversion of debenture to common stock   (1,782,577)
Change in fair value of derivative liability   2,245,976 
Balance as of June 30, 2021  $3,154,374 

 

Note 7. Preferred Stock

 

Series D Convertible Preferred Stock

 

On April 8, 2021, the Company issued 400 shares of Series D Convertible Preferred Stock (the Series D Preferred Stock”) to GHS Investments, LLC (“GHS”) pursuant to a Securities Purchase Agreement (“GHS April Agreement”) for net proceeds of $427,600. In conjunction with the GHS Agreement, the Company issued warrants to purchase 40,000,000 shares of common stock at an exercise price of $0.001.

 

On May 12, 2021, the Company issued 150 shares of Series D Preferred Stock to GHS Investments, LLC pursuant to a Securities Purchase Agreement (“GHS May Agreement”) for net proceeds of $146,500. In conjunction with the GHS Agreement, the Company issued warrants to purchase 1,500,000 shares of common stock at an exercise price of $0.001.

 

Notwithstanding, on June 23, 2021, GHS and the Company entered into a Rescission Agreement (the “Rescission Agreement”) pursuant to which the Company and GHS agreed to rescind, ab initio, the issuances of Warrants to GHS. Pursuant to the Rescission Agreement, GHS and the Company agreed that the issuance of the Warrants are unconditionally and irrevocably rescinded ab initio by GHS and the Company, and the Warrants are neither valid nor effective in any manner whatsoever. Further, GHS and the Company acknowledged that each has been restored to the position in which such party found itself on the date that the respective GHS Agreement was executed but without any references, rights or obligations relative to the Warrants contained in, or otherwise granted in, either the GHS Agreements or the Warrants. As a result, GHS has no rights whatsoever to the Warrants and the Company has no rights whatsoever to the any exercise price that it may have received pursuant to the Warrants. In connection with the execution and delivery of the Rescission Agreement, the Company and GHS entered into two (2) Amended and Restated Purchase Agreements which each seek to amend and restate the terms and conditions contained in the April Agreement and the May Agreement.

 

In connection with the issuance of the Series D Preferred Stock, on April 7, 2021 and May 12, 2021, we filed a Certificates of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock (the “Series D COD”) with the Delaware Secretary of State to create a new class of preferred stock, $0.001 par value per share, designated Series D Convertible Preferred Stock and authorized the issuance of up to one thousand (1,000) shares of Series D Preferred Stock.

 

13
 

 

The Series D Preferred Stock has a stated value of $1,200 per share (“Stated Value”) and the holder of the Series D Preferred Stock has the right to receive a dividend equal to eight percent (8%) per annum, payable quarterly, beginning on the issuance date of the Series D Preferred Stock and ending on the date that Series D Preferred Share has been converted or redeemed. Dividends may be paid in cash or in shares of Series D Preferred Stock at the discretion of the Company. Further, the holders of the Series D Preferred Stock has the right to receive assets in the event of liquidation, dissolution or winding up before any distribution or payment shall be made to the holders of any securities junior to the Series D Preferred Stock.

 

The conversion price (the “Conversion Price”) for the Series D Preferred Stock shall be $0.008109, equal to 90% of the average VWAP for the ten (10) Trading Days immediately preceding the date of the SPA. The Conversion Price will be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the Common Stock. Following an “Event of Default,” as defined in the SPA, the Conversion price shall equal the lower of: (a) the then applicable Conversion Price; or (b) a price per share equaling eighty percent (80%) of the lowest traded price for the Company’s common stock during the fifteen (15) Trading Days immediately preceding, but not including, the Conversion Date.

 

Each share of Series D Preferred Stock is convertible, at any time and from time to time, at the option of the holder thereof, into that number of shares of Common Stock (subject in each case to a 4.99% beneficial ownership limitation) determined by dividing the Stated Value of such share of Series D Preferred Stock by the Series D Preferred Stock Conversion Price.

 

Additionally, the Company shall have the right to redeem (a “Corporation Redemption”), all (but not less than all), shares of the Series D Preferred Stock issued and outstanding at any time after the issuance date, upon five (5) business days’ notice, at a redemption price per Series D Preferred Stock then issued and outstanding (the “Corporation Redemption Price”), equal to the product of (i) the Premium