Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2022
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Digital Locations, Inc. (the “Company”) was incorporated in the State of Nevada on August 25, 2006 as Zingerang, Inc. On April 2, 2007, the Company changed its name to Carbon Sciences, Inc. and on November 14, 2017, the Company changed its name to Digital Locations, Inc.
As further discussed in Note 3, on January 7, 2021, the Company, SmallCellSite.com LLC, a Virginia limited liability company (“SCS LLC”) and SmallCellSite, Inc., a newly formed Nevada corporation and wholly owned subsidiary of the Company (“SCS”) entered into an asset purchase agreement (“APA”) to acquire SCS LLC’s wireless communications marketing and database services business. SCS LLC is a source of more than 80,000 cell sites offered by property owners for use by wireless network operators.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information refer to the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2021.
Going Concern
The accompanying financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. As of June 30, 2022, our current liabilities exceeded our current and total assets by $2,565,043 and we had an accumulated deficit of $49,108,095. The Company currently does not have the cash resources to meet its operating commitments for the next twelve months and expects to have ongoing requirements for capital investment or debt to implement its business plan. These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time.
The ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. The Company has obtained operating funds primarily from the issuance of convertible debt. Management believes this funding will continue and will provide the additional cash needed to meet the Company’s obligations as they become due. There can be no assurance, however, that the Company will be successful in accomplishing its objectives. Without such additional capital we may be required to cease operations. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are disclosed in Note 2 to the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2022. The following summary of significant accounting policies of the Company is presented to assist in understanding the Company’s interim financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment and intangible assets, operating lease obligations, impairment of assets, the deferred tax valuation allowance, the fair value of stock options and derivative liabilities. Actual results could differ from those estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and, effective January 7, 2021, the accounts of SCS, its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Intangible Assets
The identifiable intangible assets acquired in the APA are amortized using the straight-line method over an estimated life of 5 years.
Derivative Liabilities
We have identified the conversion features of our convertible notes payable and certain stock options as derivatives. Where the number of common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional options, convertible debt and equity are included in the value of the derivatives. We estimate the fair value of the derivatives using the Black-Scholes pricing model and a multinomial lattice model based on projections of various potential future outcomes. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments, require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2022 and December 31, 2021, we believe the amounts reported for cash, accounts payable, accounts payable - related party, accrued expenses and other current liabilities, accrued interest, notes payable and certain notes payable approximate fair value because of their short maturities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASC”) Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| · | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
| | |
| · | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
| | |
| · | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
We measure certain financial instruments at fair value on a recurring basis. Liabilities measured at fair value on a recurring basis are as follows as of June 30, 2022 and December 31, 2021:
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
June 30, 2022: | | | | | | | | | | | | |
Derivative liabilities | | $ | 2,216,843 | | | $ | - | | | $ | - | | | $ | 2,216,843 | |
| | | | | | | | | | | | | | | | |
Total liabilities measured at fair value | | $ | 2,216,843 | | | $ | - | | | $ | - | | | $ | 2,216,843 | |
| | | | | | | | | | | | | | | | |
December 31, 2021: | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | 5,925,214 | | | $ | - | | | $ | - | | | $ | 5,925,214 | |
| | | | | | | | | | | | | | | | |
Total liabilities measured at fair value | | $ | 5,925,214 | | | $ | - | | | $ | - | | | $ | 5,925,214 | |
During the six months ended June 30, 2022, the Company had the following activity in its derivative liabilities account:
| | Convertible Notes Payable | | | Stock Options | | | Total | |
| | | | | | | | | |
Derivative liabilities as of December 31, 2021 | | $ | 1,512,336 | | | $ | 4,412,878 | | | $ | 5,925,214 | |
Addition to liabilities for new debt/shares issued | | | 103,446 | | | | 545,462 | | | | 648,908 | |
Elimination of liabilities in debt conversions | | | (166,841 | ) | | | - | | | | (166,841 | ) |
Change in fair value | | | (577,118 | ) | | | (3,613,320 | ) | | | (4,190,438 | ) |
| | | | | | | | | | | | |
Derivative liabilities as of June 30, 2022 | | $ | 871,823 | | | $ | 1,345,020 | | | $ | 2,216,843 | |
Revenue Recognition
We have adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) pursuant to which revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
| · | identification of the contract, or contracts, with a customer; |
| · | identification of the performance obligations in the contract; |
| · | determination of the transaction price; |
| · | allocation of the transaction price to the performance obligations in the contract; and |
| · | recognition of revenue when, or as, we satisfy a performance obligation. |
Through its wholly owned subsidiary and effective January 7, 2021 (see Note 3), the Company acts as an intermediary or agent to facilitate a platform through which property owners market billboards to wireless telephone carriers for placement of wireless communications network equipment. Contracts have been signed among the Company, the property owner, and the wireless telephone operator. Monthly payments are received by the Company from the wireless carriers, with the Company paying the property owner a percentage of revenues ranging from 70% to 85%. The net amount is retained by the Company as consideration for its intermediary services and recorded as revenues in the accompanying statements of operations.
Lease Accounting
Pursuant to the underlying contracts, the Company does not own the property and equipment which is leased by the cell phone carriers but acts as an intermediary or agent between the property owner and the cell phone carriers. Therefore, in accordance with ASC 840 and 841, “Leases,” the Company records revenues net of amounts received from cell phone carriers and payments made to property owners.
Concentrations of Credit Risk, Major Customers, and Major Vendors
During the three months and six months ended June 30, 2022 and 2021, the Company received payments from two cell phone carriers, with one carrier representing substantially all payments.
During the three months and six months ended June 30, 2022 and 2021, the Company had one landlord receiving all Company payments for lease of billboard site locations.
Income (Loss) per Share
Basic net income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential dilutive common share equivalents consist of shares issuable upon the exercise of outstanding stock options to acquire common stock, using the treasury stock method and the average market price per share during the period, and shares issuable upon exercise of convertible notes payable.
Basic weighted average number of common shares outstanding is reconciled to diluted weighted average number of common shares outstanding as follows:
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | |
Basic weighted average number of shares | | | 371,466,210 | | | | 174,373,718 | | | | 337,081,707 | | | | 165,324,147 | |
Dilutive effect of: | | | | | | | | | | | | | | | | |
Series B preferred stock | | | 949,400,000 | | | | - | | | | 949,400,000 | | | | - | |
Series E preferred stock | | | 2,503,333,333 | | | | - | | | | 2,503,333,333 | | | | - | |
Convertible notes payable | | | 196,946,452 | | | | - | | | | 196,946,452 | | | | - | |
| | | | | | | | | | | | | | | | |
Diluted weighted average number of shares | | | 4,021,145,995 | | | | 174,373,718 | | | | 3,986,761,492 | | | | 165,324,147 | |
For the three months and six months ended June 30, 2021, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share; therefore, basic net loss per share is the same as diluted net loss per share.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the value of the award granted using either the Black-Scholes option pricing model or a multinomial lattice model based on projections of various potential future outcomes and recognized over the period in which the award vests or straight-line. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses.
Recently Issued Accounting Pronouncements
There were no new accounting pronouncements issued by the FASB during the six months ended June 30, 2022 and through the date of filing of this report that the Company believes will have a material impact on its financial statements.
Reclassifications
Certain amounts in the condensed consolidated financial statements for the prior year periods have been reclassified to conform to the presentation for the current year periods.
NOTE 3 - BUSINESS ACQUISITION
On January 7, 2021, the Company, SCS LLC, and SCS entered into the APA to acquire substantially all of the assets of SCS LLC’s wireless communications marketing and database services business in consideration for a total purchase price of $10,000 in cash and a 5-year convertible promissory note in the amount of $1,000,000 made in favor of SCS or its assignees (the “Note”). SCS LLC is a source of more than 80,000 cell sites offered by property owners for use by wireless network operators. The business acquisition has been recorded as a purchase.
Pursuant to the APA, SCS LLC instructed the Company to assign $500,000 of principal amount of the Note to each of SCS LLC’s two members (the “Assigned Notes”).
At any time after December 31, 2021, each month, each holder of the Assigned Notes may convert the principal amount of the Assigned Note into a number of shares of the Company’s common stock not exceeding 5% of the total trade volume of the Company’s common stock publicly reported for the previous calendar month at a conversion price of $0.013 per share. Each Assigned Note also imposes an overall limitation on the number of conversions to common stock that the holder may affect such that it prohibits the holder from beneficially owning more than 4.99% of the total issued and outstanding common stock of the Company at any time that the Assigned Note is outstanding.
The business acquisition closed on January 7, 2021.
Based on the report of an independent valuation firm, the notes payable were discounted to $0 and a derivative liability of $2,096,089 was calculated for the conversion feature of the notes. The total value of the consideration paid of $2,106,089, including cash paid of $10,000, was allocated to the following assets based on the report:
Identifiable intangible assets: | | | |
IP technology | | $ | 4,000 | |
Customer base | | | 6,000 | |
Total identifiable intangible assets | | | 10,000 | |
| | | | |
Goodwill | | | 2,096,089 | |
| | | | |
Total | | $ | 2,106,089 | |
During the three months and six months ended June 30, 2022 and 2021, consolidated revenues were comprised of revenues from SCS.
The excess of the total purchase price paid over the value assigned to the identifiable intangible assets acquired in the APA was recorded as goodwill. The goodwill was not amortized but evaluated periodically for impairment. Management of the Company determined that, as of December 31, 2021, it was more likely than not that the recorded amount of goodwill of $2,096,089 would not be recovered; therefore, an impairment of assets expense for this amount was recorded in the statement of operations for the year ended December 31, 2021.
4. CONVERTIBLE NOTES PAYABLE
Convertible Promissory Note - $29,500 in Default
On March 14, 2013, we entered into an agreement to issue a 5% convertible promissory note in the principal amount of $29,500, which is convertible into shares of our common stock at a conversion price equal to the lesser of $1.50 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The note, with a principal balance of $29,500 as of June 30, 2022 and December 31, 2021 matured on March 14, 2015, and is currently in default.
August 29, 2019 Convertible Promissory Note - $25,000 in Default
Effective August 29, 2019, the Company entered into an agreement to issue a 10% convertible note with an institutional investor in the principal amount of $25,000. The note matured on August 29, 2020. The Company received proceeds of $22,000 after an original issue discount of $1,500 and payment of $1,500 in legal fees. The lender, at its option, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 50% discount from the lowest trading price during the 25 days prior to conversion. The Company had no right of prepayment. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. The debt discount has been fully amortized to interest expense. As of December 31, 2021, the note had a principal balance of $395 included in convertible notes payable and was in default. In April 2022, the Company and the lender entered into a settlement to extinguish the principal of $395 and related accrued interest payable of $2,320 with a cash payment totaling $2,715.
July 8, 2020 Convertible Promissory Note - $40,000 in Default
Effective July 8, 2020, the Company entered into an agreement to issue a 10% convertible note with an institutional investor in the principal amount of $40,000. The note matured on July 8, 2021. The Company received proceeds of $35,000 after an original issue discount of $2,200 and payment of $2,800 in legal fees. The lender, at its option, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 50% discount from the lowest trading price during the 25 days prior to conversion. The Company had no right of prepayment. We recorded a debt discount of $40,000 related to the conversion feature of the note, along with a derivative liability at inception. The debt discount has been fully amortized to interest expense and the note had a principal balance of $40,000 as of December 31, 2021 included in convertible notes payable, in default. Pursuant to an agreement with the lender, the Company agreed to extinguish the debt with four principal payments of $10,000, which were made in the months of February, March, April and May 2022. Accrued interest payable of $6,034 was forgiven by the lender, which amount is reported in other income for the three months ended June 30, 2022.
Convertible Promissory Notes - Related Parties of $58,600
On December 31, 2012, we issued 5% convertible promissory notes to two employees in exchange for services rendered in the aggregate amount of $58,600. The notes are convertible into shares of our common stock at a conversion price equal to the lesser of $2.00 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We recorded a total debt discount of $57,050 related to the conversion feature of the notes, which has been fully amortized to interest expense, along with a derivative liability at inception. One of the notes with a principal balance of $25,980 as of June 30, 2022 and December 31, 2021matured on December 31, 2014 and is currently in default. The maturity date of a second note with a principal balance of $32,620 as of June 30, 2022 and December 31, 2021 has been extended to December 31, 2022.
July 12, 2021 Convertible Promissory Note - $43,750
Effective July 12, 2021, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $43,750 with a maturity date of July 12, 2022. The Company received net proceeds of $40,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $41,798 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $22,101 and the debt discount has been fully amortized. During the six months ended June 30, 2022, we issued the lender shares of our common stock in consideration for the conversion of principal of $43,750 and accrued interest of $2,625, extinguishing the debt in full. No gain or loss on extinguishment of debt was recorded since the conversion was completed within the terms of the convertible note.
August 31, 2021 Convertible Promissory Note - $43,750
Effective August 31, 2021, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $43,750 with a maturity date of August 31, 2022. The Company received net proceeds of $40,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $41,559 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $27,668 and the debt discount has been fully amortized. During the six months ended June 30, 2022, we issued the lender shares of our common stock in consideration for the conversion of principal of $43,750 and accrued interest of $2,625, extinguishing the debt in full. No gain or loss on extinguishment of debt was recorded since the conversion was completed within the terms of the convertible note.
October 7, 2021 Convertible Promissory Note - $43,750
Effective October 7, 2021, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $43,750 with a maturity date of October 7, 2022. The Company received net proceeds of $40,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $42,293 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $32,444 and the debt discount has been fully amortized. During the six months ended June 30, 2022, we issued the lender shares of our common stock in consideration for the conversion of principal of $43,750 and accrued interest of $2,625, extinguishing the debt in full. No gain or loss on extinguishment of debt was recorded since the conversion was completed within the terms of the convertible note.
November 8, 2021 Convertible Promissory Note - $43,750
Effective November 8, 2021, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $43,750 with a maturity date of November 8, 2022. The Company received net proceeds of $40,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $42,123 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $36,007 and the debt discount has been fully amortized. The note had a principal balance of $43,750 as of December 31, 2021. During the six months ended June 30, 2022, we issued the lender shares of our common stock in consideration for the conversion of principal of $43,750 and accrued interest of $2,625, extinguishing the debt in full. No gain or loss on extinguishment of debt was recorded since the conversion was completed within the terms of the convertible note.
December 14, 2021 Convertible Promissory Note - $43,750
Effective December 14, 2021, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $43,750 with a maturity date of December 14, 2022. The Company received net proceeds of $40,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $39,616 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $37,771 and the debt discount has been fully amortized. The note had a principal balance of $43,750 as of December 31, 2021. During the six months ended June 30, 2022, we issued the lender shares of our common stock in consideration for the conversion of principal of $43,750 and accrued interest of $2,625, extinguishing the debt in full. No gain or loss on extinguishment of debt was recorded since the conversion was completed within the terms of the convertible note.
January 6, 2022 Convertible Promissory Note - $38,750
Effective January 6, 2022, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $38,750 with a maturity date of January 6, 2023. The Company received net proceeds of $35,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $35,771 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $17,150, resulting in a remaining debt discount of $18,621 as of June 30, 2022. The note had a principal balance of $38,750 as of June 30, 2022.
March 1, 2022 Convertible Promissory Note - $43,750
Effective March 1, 2022, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $43,750 with a maturity date of March 1, 2023. The Company received net proceeds of $40,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $39,514 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $13,099, resulting in a remaining debt discount of $26,415 as of June 30, 2022. The note had a principal balance of $43,750 as of June 30, 2022.
May 3, 2022 Convertible Promissory Note - $43,750
Effective May 3, 2022, the Company entered into a 12% convertible note with an institutional investor in the principal amount of $43,750 with a maturity date of May 3, 2023. The Company received net proceeds of $40,000 after payment of $3,750 in legal fees and fees to the lender. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 45% discount from the lowest trading price during the 20 trading days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at a redemption premium of 150%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $39,411 related to the conversion feature of the note, along with a derivative liability at inception. During the six months ended June 30, 2022, amortization of debt discount was recorded to interest expense in the amount of $6,263, resulting in a remaining debt discount of $33,148 as of June 30, 2022. The note had a principal balance of $43,750 as of June 30, 2022.
Total accrued interest payable on notes payable was $52,186 and $57,958 as of June 30, 2022 and December 31, 2021, respectively.
5. LONG-TERM CONVERTIBLE NOTES PAYABLE
As discussed in Note 3, on January 7, 2021, the Company issued two long-term convertible notes payable each in the principal amount of $500,000 in conjunction with the business acquisition of SCS LLC. The Assigned Notes bear interest at an annual rate of 0.39% and mature January 7, 2026. The Assigned Notes were discounted to a principal balance of $0 and a debt discount of $1,000,000 was recorded at inception. Amortization of the discount to interest expense was $99,124 during the six months ended June 30, 2022, resulting in a debt discount of $701,533 as of June 30, 2022.
At any time after December 31, 2021, each month, each holder of the Assigned Notes may convert the principal amount of the Assigned Note into a number of shares of the Company’s common stock not exceeding 5% of the total trade volume of the Company’s common stock publicly reported for the previous calendar month at a conversion price of $0.013 per share. Each Assigned Note also imposes an overall limitation on the number of conversions to common stock that the holder may affect such that it prohibits the holder from beneficially owning more than 4.99% of the total issued and outstanding common stock of the Company at any time that the Assigned Note is outstanding.
6. MEZZANINE
Series B Preferred Stock
On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.
The total face value of this entire series is three million dollars ($3,000,000). Each share of Series B Preferred Stock has a stated face value of $100, and effective April 2, 2021, is convertible into shares of fully paid and non-assessable shares of common stock of the Company at $0.0015 per share. The terms of the Series B Preferred Stock were amended effective March 31, 2021 to change the conversion price from a defined variable price to a fixed conversion price of $0.0015 per share.
During the year ended December 31, 2021, the holder converted a total of 593 shares of Series B Preferred Stock valued at $59,300 into 39,533,334 shares of the Company’s common stock. There was no gain or loss on settlement of debt due to the conversions occurring within the terms of the Series B Preferred Stock.
During the six months ended June 30, 2022, the holder converted a total of 221 shares of Series B Preferred Stock valued at $22,100 into 14,733,333 shares of the Company’s common stock. During the six months ended June 30, 2021, the holder converted 127 shares of Series B Preferred Stock valued at $12,700 into 8,466,667 shares of the Company’s common stock. There was no gain or loss on settlement of debt due to the conversions occurring within the terms of the Series B Preferred Stock. There was no gain or loss on settlement of debt due to the conversions occurring within the terms of the Series B Preferred Stock.
As of June 30, 2022 and December 31, 2021, the Company had 14,241 and 14,462 shares of Series B Preferred Stock outstanding, respectively, and recorded as mezzanine at face value of $1,424,100 and $1,446,200, respectively, due to certain default provisions requiring mandatory cash redemption that are outside the control of the Company. These shares were originally issued in March 2016 for the redemption and cancellation of convertible promissory notes and accrued interest payable.
The holders of outstanding shares of the Series B Preferred Stock (the “Series B Holders”) are entitled to receive dividends pari passu with the holders of Common Stock, except upon a liquidation, dissolution and winding up of the Company, in which case the Series B Preferred Stock has a preference. Such dividends will be paid equally to all outstanding shares of Series B Preferred Stock and Common Stock, on an as-if-converted basis with respect to the Series B Preferred Stock. The Series B Holders may elect to use the most favorable conversion price for the purpose of determining the as-if-converted number of shares.
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Series B Holder shall be entitled to receive, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to $100 for each such share of the Series B Preferred Stock (as adjusted for any combinations, consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, before any payment is made or any assets distributed to the holders of the Common Stock. After such payment, the remaining assets of the Company will be distributed to the holders of Common Stock.
Series E Preferred Stock
Effective April 2, 2021, the Company filed a Certificate of Designation with the State of Nevada designating 45,000 shares of its authorized preferred stock as Series E Preferred Stock. The shares of Series E Preferred Stock have a par value of $0.001 per share and a stated face value of $100 per share. Holders of the Series E Preferred Stock have the right, at any time, to convert shares of Series E Preferred Stock into shares of Common Stock at a conversion price of $0.0015 per share.
On April 2, 2021, the Company entered into a Securities Purchase Agreement (the “SPA”) with an accredited investor (the “Investor”), pursuant to which the Investor agreed to purchase up to 45,000 shares of the Company’s Series E Preferred Stock (the “Series E Preferred Stock”) at a purchase price of $100 per share. In accordance with the SPA, the Investor paid for 34,900 Series E Preferred Stock by surrendering to the Company for cancellation, $2,617,690of principal, $826,566 of accrued interest, and $45,740 in fees through April 2, 2021 under various 10% convertible notes held by Investor. The Series E Preferred Stock was valued by an independent valuation firm at $23,393,601 and the Company recognized a loss on debt extinguishment of $16,490,508 and settled derivative liabilities totaling $3,413,097.
As an inducement for the Investor entering into the SPA, the Company agreed that Investor will have the right, exercisable in its sole discretion, to purchase the remaining 10,100 of authorized shares of Series E Preferred Stock at a purchase price of $100 per share at any time until April 2, 2031. In September 2021, the Investor purchased 500 additional shares of Series E Preferred Stock for cash of $50,000, the stated value of the shares. As of December 31, 2021, the Company had 35,400 shares of Series E Preferred Stock outstanding recorded as mezzanine at face value of $3,540,000 due to certain default provisions requiring mandatory cash redemption that are outside the control of the Company.
During the six months ended June 30, 2022, the Investor purchased a total of 2,150 additional shares of Series E Preferred Stock for cash of $215,000, the stated valued of the shares. As of June 30, 2022, the Company had 37,550 shares of Series E Preferred Stock outstanding recorded as mezzanine at face value of $3,755,000 due to certain default provisions requiring mandatory cash redemption that are outside the control of the Company.
The holders of outstanding Series E Preferred Stock are entitled to receive dividends pari passu with the holders of common stock, except upon a liquidation, dissolution and winding up of the Company, in which case the Shares have a preference. Such dividends will be paid equally to all outstanding Series E Preferred Stock and common stock, on an as-if-converted basis with respect to the Series E Preferred Stock.
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, holders of Shares shall be entitled to receive, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to $100 for each such share (as adjusted for any combinations, consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, after the payment of any distributions that may be required with respect to the Company’s Series B Preferred Stock, but before any payment is made or any assets distributed to the holders of common stock. After such payment, the remaining assets of the Company will be distributed to the holders of common stock.
If the assets to be distributed to holders of the Series E Preferred Stock are insufficient to permit the receipt by such holders of the full preferential amounts, then all of such assets will be distributed among such holders ratably in accordance with the number of such shares then held by each such holder.
Each share of Series E Preferred Stock is convertible into shares of fully paid and non-assessable shares of common stock of the Company at a fixed conversion price of $0.0015 per share.
In no event will holders of Series E Preferred Stock be entitled to convert any such shares, such that upon conversion the sum of (1) the number of shares of common stock beneficially owned by the holder and its affiliates (other than shares of common stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Series E Preferred Stock or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to these limitations), and (2) the number of shares of common stock issuable upon the conversion of Shares, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the outstanding shares of common stock. The limitations on conversion may be waived by the Holder upon, at the election of the holder of Shares, not less than 61 days prior notice to the Company, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the holder of Shares, as may be specified in such notice of waiver).
Except as required by law, holder of Series E Preferred Stock are not entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company, provided, however, each holder of outstanding Share will be entitled, on the same basis as holders of common stock, to receive notice of such action or meeting and so long as any Shares remain outstanding, the Company will not, without first obtaining the approval of the holders of at least a majority of the then outstanding Shares voting together as one class alter or change the rights, preferences or privileges of the Shares so as to affect materially and adversely such Shares.
7. CAPITAL STOCK
As of June 30, 2022, the Company’s authorized stock consisted of 2,000,000,000 shares of common stock, with a par value of $0.001 per share. The Company is also authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.001 per share. The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.
Common Stock
As of June 30, 2022 and December 31, 2021, the Company had 439,243,662 and 276,383,093 shares of common stock issued and outstanding, respectively.
During the six months ended June 30, 2022, the Company issued a total of 162,860,569 shares of common stock: 144,127,236 shares in consideration for the conversion of $218,750 of principal of convertible notes payable and accrued interest payable of $13,125; 14,733,333 shares in the conversion of 221 shares of Series B preferred shares valued at $22,100 and 4,000,000 shares for services valued at $20,000. In connection with the convertible debt conversions, the Company reduced derivative liabilities by $166,841. There was no gain or loss on settlement of debt due to the conversions occurring within the terms of the convertible notes.
During the six months ended June 30, 2021, the Company issued a total of 50,941,843 shares of common stock: 37,606,169 in consideration for the conversion of $163,261 of principal of convertible notes payable and accrued interest payable of $22,219; 8,466,667 shares in the conversion of 127 shares of Series B preferred shares valued at $12,700 and 4,869,007 shares for services valued at $143,000. In connection with the convertible debt and Series B preferred stock conversions, the Company reduced derivative liabilities by $3,617,188. There was no gain or loss on settlement of debt due to the conversions occurring within the terms of the convertible notes.
8. STOCK OPTIONS
As of June 30, 2022, the Board of Directors of the Company had granted non-qualified stock options exercisable for a total of 854,177,778 shares of common stock to its officers, directors, and consultants.
On February 8, 2022, the Company issued a total of 75,000,000 non-qualified stock options to our President and a total of 45,000,000 non-qualified stock options to a consultant. These options are exercisable for a period of ten years from the date of issuance at an exercise price of $0.0081 per share. These options vest 1/36th per month over thirty-six months. These non-qualified stock options were valued by an independent valuation firm at $545,462 using a modified Black Scholes early exercise model and stock option compensation expense is recorded over the vesting period. A derivative liability and a decrease to additional paid-in capital were recorded for this amount.
We recognized stock option compensation expense of $752,097 and $353,891 for the three months ended June 30, 2022 and 2021, respectively, and $1,489,012 and $804,649 for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, we had unrecognized stock option compensation expense totaling $5,699,700.
A summary of the Company’s stock options and warrants as of June 30, 2022, and changes during the three months then ended is as follows:
| | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contract Term (Years) | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | |
Outstanding at December 31, 2021 | | | 734,177,778 | | | $ | 0.012 | | | | 8.06 | | | | |
Granted | | | 120,000,000 | | | $ | 0.008 | | | | | | | | |
Exercised | | | - | | | $ | - | | | | | | | | |
Forfeited or expired | | | - | | | $ | - | | | | | | | | |
| | | | | | | | | | | | | | | |
Outstanding as of June 30, 2022 | | | 854,177,778 | | | $ | 0.011 | | | | 7.85 | | | $ | - | |
| | | | | | | | | | | | | | | | |
Exercisable as of June 30, 2022 | | | 237,413,915 | | | $ | 0.015 | | | | 6.37 | | | $ | - | |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the closing price of our common stock of $0.0018 as of June 30, 2022, which would have been received by the holders of in-the-money options and warrants had the holders exercised their options and warrants as of that date.
The significant assumptions used in the valuation of the derivative liabilities recorded upon issuance of the February 2022 non-qualified stock options are as follows:
Expected life | | 4.31 to 5.77 years | |
Risk free interest rates | | 2.41% - 2.42% | |
Expected volatility | | 287.2% - 313.6 | % |
9. DERIVATIVE LIABILITIES
The fair value of the Company’s derivative liabilities is estimated at the issuance date and is revalued at each subsequent reporting date. We estimate the fair value of derivative liabilities associated with our convertible notes payable, Series B Preferred Stock and stock options using a multinomial lattice model based on projections of various potential future outcomes. Where the number of stock options or common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional stock options, convertible debt and equity are included in the value of the derivatives.
The significant assumptions used in the valuation of the derivative liabilities as of June 30, 2022 are as follows:
Conversion to stock | | Monthly | |
Stock price on the valuation date | | $ 0.0018 | |
Risk free interest rates | | 2.37% - 4.95% | |
Years to maturity | | 0.52 - 5.52 | |
Expected volatility | | 164.1% - 309.0 | % |
The value of our derivative liabilities was estimated as follows at:
| | June 30 2022 | | | December 31, 2021 | |
| | | | | | |
Convertible notes payable | | $ | 871,823 | | | $ | 1,512,336 | |
Stock options | | | 1,345,020 | | | | 4,412,878 | |
| | | | | | | | |
Total | | $ | 2,216,843 | | | $ | 5,925,214 | |
The calculation input assumptions are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liability will fluctuate from period to period, and the fluctuation may be material.
10. RELATED PARTY TRANSACTIONS
Effective December 1, 2021, the Company’s Board of Directors appointed Rich Berliner as the Chief Executive Officer of the Company and a member of the Board of Directors. Mr. Berliner serves as Chief Executive Officer pursuant to the terms of an Independent Contractor Agreement, for an initial term of six months subject to automatic renewal for six months unless terminated by the Company or Mr. Berliner. The Independent Contractor Agreement provides a base compensation of $20,000 per month, paid in equal installments twice each month. After one year of service, Mr. Berliner will be eligible to receive severance equal to three months of base compensation. The Company accrued compensation expense to Mr. Berliner of $60,000 and $120,000 for the three months and six months ended June 30, 2022, respectively. Fees payable to Mr. Berliner of $10,000 are included in accounts payable - related party as of December 31, 2021.
Pursuant to a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, William E. Beifuss, Jr., our President and Acting Chief Financial Officer and Secretary is to receive fees of $10,000 per month. The Company accrued compensation expense to Mr. Beifuss of $30,000 and $60,000 for the three months and six months ended June 30, 2022 and 2021, respectively. Fees payable to Mr. Beifuss of $20,000 are included in accounts payable - related party as of June 30, 2022 and December 31, 2021.
On February 8, 2022, the Company issued a total of 75,000,000 non-qualified stock options to Mr. Beifuss, which options are exercisable for a period of ten years from the date of issuance at an exercise price of $0.0081 per share. These options vest 1/36th per month over thirty-six months.
11. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of filing of this report, there were no pending or threatened lawsuits.
Operating Lease
As of June 30, 2022, we had no material operating leases requiring us to recognize an operating lease liability and corresponding right-of-use asset.
On September 5, 2017, we entered into an operating sublease for office space. The base rent for the sublease is $1,000 per month for a period of one year and month-to-month thereafter.
Effective February 1, 2022, the Company entered into an operating lease agreement with a term of 12 months. The lease agreement required a $500 security deposit and monthly lease payments of $500.
For the three months ended June 30, 2022 and 2021, the Company recognized operating lease cost of $2,500 and $3,000, respectively. For the six months ended June 30, 2022 and 2021, the Company recognized operating lease cost of $6,500 and $6,000, respectively.
Consulting Agreements
As further discussed in Note 10, we entered into that certain Independent Contractor Agreement with Rich Berliner, our Chief Executive Officer, for payment of monthly compensation of $20,000. The agreement has an initial term of six months, subject to automatic renewal for six months unless terminated by the Company or Mr. Berliner.
We have a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, with William E. Beifuss, Jr., our President and Acting Chief Financial Officer, for the payment of monthly compensation of $10,000 per month. The agreement may be cancelled by either party with 30 days’ notice.
12. SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
Convertible Note Conversions
Subsequent to June 30, 2022, a lender converted principal of $38,750 and $2,050 accrued interest payable into a total of 43,636,364 shares of the Company’s common stock, extinguishing in full the January 6, 2022 Convertible Note.
Sales of Series E Preferred Stock
On July 11, 2022, an investor purchased 650 additional shares of Series E Preferred Stock for cash of $65,000, the stated valued of the shares. On August 5, 2022, the investor purchased 500 additional shares of Series E Preferred Stock for cash of $50,000, the stated valued of the shares.