1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
APPlife Digital Solutions Inc. (the “Company”) is a business incubator and portfolio manager that uses digital technology to create and invest in e-commerce and cloud-based solutions. The Company was formed March 5, 2018 in Nevada and has offices in San Francisco, California and Shanghai, China. The Company’s mission is using digital technology to create APPs and websites that make life, business and living easier, more efficient and just smarter. Shanghai APPlife Technology Consulting Inc. (“APPlife Shangai”), is a wholly foreign-owned enterprise created for the benefit of doing business is China on behalf of the Company.
Rooster Essentials APP SPV, LLC (the “Rooster”), incorporated on April 9, 2019, is a wholly owned subsidiary of the Company. Rooster is a fully customizable men’s subscription service that delivers daily use grooming needs and essential items.
B2BCHX SPV LLC (the “B2BCHX”), incorporated on June 5, 2019, is a wholly owned subsidiary of the Company. B2BCHX does an independent background check on mainland Chinese companies for small businesses globally.
Going Concern
The Company has generated losses and negative cash flows from operations since inception. The Company has historically financed its operations from equity financing. The Company anticipates additional equity financings to fund operations in the future. Should management fail to adequately address the issue, the Company may have to reduce its business activities or curtail its operations. There can be no assurance that any additional financings, would be available to the company unsatisfactory terms and conditions if at all. The current pandemic known as COVID-19 as described in Note 9, creates additional uncertainty.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and classification of liabilities and commitments in the normal course of business. The accompanying unaudited condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern.
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for the interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited condensed consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement date. All intercompany transactions have been eliminated in consolidation. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position and operating results have been included in these statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended June 30, 2019, as filed with the SEC on September 30, 2019. Operating results for the nine months ended March 31, 2020 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the fiscal year ending June 30, 2020.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers cash equivalents to include cash and investments with an original maturity of three months or less.
Income Taxes
The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. The Company had no accrual for interest or penalties as of March 31, 2020. The Company files income tax returns with the Internal Revenue Service (“IRS”) and the state of California.
Use of Estimates
Generally accepted accounting principles require that the consolidated financial statements include estimates by management in the valuation of certain assets and liabilities. Significant matters requiring the use of estimates and assumptions include, but are not necessarily limited to, fair value of the Company’s stock and stock-based compensation. Management uses its historical records and knowledge of its business in making these estimates. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made. Accordingly, actual results could differ from those estimates.
Stock Based Compensation
The Company accounts for share-based compensation in accordance with the fair value recognition provision of FASB ASC 718, Compensation – Stock Compensation (“ASC 718”), prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on the estimated grant date fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505, Equity–based Payments to Non-Employees (“ASC 505”). Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period, increased by potentially dilutive common shares ("dilutive securities") that were outstanding during the period. Dilutive securities include stock options and warrants granted, convertible debt, and convertible preferred stock. There were no potentially dilutive securities for the period ended March 31, 2020 and year ended June 30, 2019.
Fair Value of Financial Instruments
The Company follows FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) to measure and disclosure the fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of fair value hierarchy defined by ASC 820 are described below:
Level 1Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3Pricing inputs that are generally unobservable inputs and not corroborated by market data.
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts reported in the Company’s consolidated financial statements for cash, accounts payable and accrued expenses approximate their fair value because of the immediate or short-term nature of these consolidated financial instruments.
Equity Method Investments
We began accounting for our ownership in Smartrade Exchange Services, Inc (“Smartrade”) using the equity method of accounting during the quarter ended March 31, 2019. In prior periods, the investment was accounted for under the cost method. The equity method states that if the investment provides us the ability to exercise significant influence, but not control, over the investee, we account for the investment under the equity method. Significant influence is generally deemed to exist if the Company’s ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on the investee’s board of directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is recorded at its initial carrying value in the balance sheet and is periodically adjusted for capital contributions, dividends received and our share of the investee’s earnings or losses together with other-than-temporary impairments which are recorded as a component of other income (expense), net in the statements of operations. The Company’s effective ownership in Smartrade was 30% and 25% at December 31, 2019 and June 30, 2019, respectively. In addition, the Company fully impaired its investment in Smartade as of December 31, 2019 see note 2.
Derivative Liability
FASB ASC 815, Derivatives and Hedging requires all derivatives to be recorded on the consolidated balance sheet at fair value. As of June 30, 2019, we used the Black-Scholes-Merton (BSM) model to estimate the fair value of the conversion feature of the convertible note. Key assumptions of the BSM model include the market price of our stock, the conversion price of the debt, applicable volatility rates, risk-free interest rates and the instrument’s remaining term. These assumptions require significant management judgment. In addition, changes in any of these variables during a period can result in material changes in the fair value (and resultant gains or losses) of this derivative instrument.
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) established ASC Topic 842, “Leases”, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessees to now recognize operating leases on the balance sheet and disclose key information about leasing arrangements. ASC Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Lessor accounting under the new standard is substantially unchanged. Additional qualitative and quantitative disclosures are also required. Adoption of this standard did not result in any material changes to the financial statements.
Inventories
Inventories, consisting of raw materials, work in process and products available for sale, are primarily accounted for using the first-in, first-out method (“FIFO”), and are valued at the lower of cost or net realizable value. This valuation requires management to make judgements based on currently available information, about the likely method of disposition, such as through sales to individual customers and returns to product vendors. As of March 31, 2020, the Company had inventories of $37,455. The Company has no allowance for inventory reserves.
2.INVESTMENT IN SMARTRADE EXCHANGE SERVICES, INC.
On May 3, 2018, the Company entered into an agreement (“Subscription Agreement”) to purchase 21% of “Smartrade” for $450,000 in various tranches based on defined milestones. Payment shall be made in five installments, each are 45 days apart, over six months beginning on October 15, 2018, as each milestone is completed. On the date the agreement, Smartrade issued 4.66% of its common stock, on a fully diluted basis, to the Company. In exchange, the Company paid the first installment to Smartrade of $100,000 on October 16, 2018.
On September 4, 2018, the Company acquired an additional 3% of Smartrade’s common stock for $64,286. On October 18, 2018, the Company entered into an agreement to purchase an additional 1% of Smartrade’s common stock for $21,429 and receive a royalty of 2.5% of gross revenues of Smartrade to be distributed on a quarterly basis. On December 7, 2018, the Company paid the second installment of $100,000 for an additional 4.66% of Smartrade’s common stock. On January 18, 2019, the Company paid the third installment of 100,000 for an additional 4.66 % of Smartrade’s common stock.
On March 5, 2019, the Company amended the Subscription Agreement that changed the final two payments. In accordance with the terms of the amendment, on March 6, 2019, the Company paid $32,000 for 7.02% and the remaining $118,000 will be paid in agreed upon monthly payments. This payment brought the total equity position in Smartrade to 25%. Accordingly, at March 5, 2019, the Company changed its method of accounting the investment in Smartrade to the equity method. In October 2019, Company gained an additional 5% of Smartrade, in exchange for providing marketing services, bringing its equity position to 30%.
During the quarter ended December 31, 2019, Smartrade suspended operations. Because of this and other factors, the Company considered its investment in Smartrade more than temporarily impaired and recorded an impairment charge of $500,055 as of December 31, 2019 bringing the carrying value of this investments to $0.
At March 31, 2020 and June 30, 2019, the Company owned 30% and 25% of Smartrade’s common stock.
3.NOTES PAYABLE
In March 2018, the Company issued notes that carry an 8% annual interest rate and mature through December 31, 2019. In December 2019, $5,119 of principal was converted into Company common stock and payments
were made of $11,381. The balance of the March 2018 notes was $67,500 and $84,000 at March 31, 2020 and June 30, 2019. The note is currently past due, and the Company is in discussion with the note holder to renegotiate the terms.
On July 3, 2019, the Company issued a $250,000 convertible promissory note (the “July 2019 Note”) to a lender (the “Lender”). According to the terms the Lender funded the July 2019 Note as follows: $100,000 upon the execution of the Note, $50,000 on August 1, 2019, $50,000 on September 1, 2019, and the remaining $50,000 on October 1, 2019. The outstanding principal balance of the Note shall bear interest at the rate of twelve percent (12%) per annum. The balance of the Note was $250,000 at March 31, 2020.
On October 1, 2019, the Company entered into a securities purchase agreement with an investor (“Investor”) to issue up to $220,000 of convertible promissory notes in monthly tranches of $55,000 at the Investor’s discretion. As of March 31, 2020, the balance of these promissory notes was $177,500. These notes accrue interest at 10% per annum.
On November 22, 2019, Company issued a $170,000 convertible promissory note (the “November 2019 Note”) to the Lender that accrues interest at 12% per annum. The July and November Notes contain embedded derivatives, see Note 8.
4.RELATED PARTY TRANSACTIONS
Due to Officer
The balance due to the officer at March 31, 2020 and June 30, 2019 was $6,428 and $9,580. There are no definitive repayment terms and no interest is accruing on these advances.
Due to Smartrade
At March 31, 2020 and June 30, 2019, the Company had a balance payable totaling $1,136 and $61,034, respectively, for the purchase of interest in Smartrade (See note 2).
5.CONCENTRATIONS
Cash Concentration
The Company maintains its cash and cash equivalents at a financial institution which may, at times, exceed federally insured limits. At March 31, 2020, the Company’s cash balance did not exceed the FDIC insurance limit. The Company has not experienced any losses in such accounts.
6.COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time the Company may be involved in certain legal actions and claims arising in the ordinary course of business. The Company was not a party to any specific legal actions or claims at March 31, 2020.
Agreements
On April 4, 2018, the Company entered into an agreement with GHS, where the Company is entitled, at its sole discretion, to request equity investments of up to $5 million over twenty-four months following an effective registration of the underlying shares.
Common Stock Payable
As of March 31, 2020, and June 30, 2019, the Company owes a vendor $54,999 and $80,416 worth of common stock for services rendered, respectively.
7. SHAREHOLDERS’ EQUITY (DEFICIT)
Common Stock
As of March 31, 2020, and June 30, 2019, there were 124,787,531 and 119,059,674 shares of common stock issued and outstanding, respectively.
In December 2019, the Company issued $200,000 of common stock for the conversion of $6,994 of debt and accrued interest.
On March 23, 2020, the Company sold 1,000,000 shares of common stock to an existing shareholder at $0.10 per share, or $100,000.
During the nine months ended March 31, 2020, the Company issued 4,527,857 shares of common stock to consultants and board members for services valued between $0.10 and $0.21 per share, or $736,451.
During the 2018 fiscal year, the Company issued 90,000,000 shares of restricted common stock to the officer as compensation for services as Chief Executive Officer. The shares vest over four years and were valued at $0.0625 per share. The shares are being expensed over four years, or $1.4 million per year. For the three and nine months ended March 31, 2020, $351,563 and $1,054,688 of stock compensation was recognized, respectively. The Company determined fair value of its shares of common stock based on the price at which the Company was selling its shares of common stock to third party investors.
8.CONVERTIBLE DEBT AND DERIVATIVE LIABILITY
The Company issued debts that consist of the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and shares to be issued were recorded as derivative liabilities on the issuance date.
The Company recognized a derivative liability which it valued using the Black-Scholes-Merton model. A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s common stock purchase warrants that are categorized within Level 3 of the fair value hierarchy at March 31, 2020 is as follows:
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|
|
March 31, 2020
|
|
|
Stock price
|
|
$
|
0.19
|
|
|
Exercise price
|
|
$
|
0.24 – 0.401
|
|
|
Contractual term (in years)
|
|
|
1.25 – 1.64
|
|
|
Volatility (annual)
|
|
|
290.7%
|
|
|
Risk-free rate
|
|
|
0.23%
|
|
The foregoing assumptions are reviewed quarterly and are subject to change based primarily on management’s assessment of the probability of the events described occurring. Accordingly, changes to these assessments could materially affect the valuations.
Financial Liabilities Measured at Fair Value on a Recurring Basis
Financial liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheet under Derivative liability – warrants and derivative liabilities:
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|
|
Fair value measured at March 31, 2020
|
|
|
|
|
Quoted prices in active
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
|
markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
Fair value at
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
March 31, 2020
|
|
|
Derivative liability – convertible note
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248,155
|
|
|
$
|
248,155
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248,155
|
|
|
$
|
248,155
|
|
The fair value accounting standards define fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is determined based upon assumptions that market participants would use in pricing an asset or liability. Fair value measurements are rated on a three-tier hierarchy as follows:
|
|
●
|
Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
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|
|
●
|
Level 2 inputs: Inputs, other than quoted prices included in Level 1, that are observable either directly or indirectly; and
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|
|
●
|
Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
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There were no transfers between Level 1, 2 or 3 during the nine months ended March 31, 2020.
During the nine months ended March 31, 2020, the Company recorded a loss from change in fair value of derivative liability of $50,323.
The following table presents changes in Level 3 liabilities measured at fair value for the period ended March 31, 2020:
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|
Derivative Liability
|
|
|
|
|
|
Balance – June 30, 2018
|
$
|
—
|
|
Liabilities
|
|
21,021
|
|
Change in fair value of warrant liability
|
(1,197)
|
|
Balance – June 30, 2019
|
$
|
19,824
|
|
Changes due to issuances and redemptions
|
|
178,008
|
|
Change in fair value of warrant liability
|
50,323
|
|
Balance – March 31, 2020
|
$
|
248,155
|
The balance of the derivative liability at March 31, 2020 and June 30, 2019 was $248,155 and $19,824, respectively.
9.SUBSEQUENT EVENTS
Subsequent to March 31, 2020, the global economy has continued to be severely impacted by the COVID-19 pandemic and the Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business, including how it will impact the Company’s ability to raise capital, develop future projects and /or market existing ecommerce platforms. While we did not incur significant disruptions from the COVID-19 pandemic during the nine months ended March 31, 2020, we expect this situation could have an impact on our
future business and results of operations in later periods of 2020 that may be material, but cannot be reasonably estimated at this time due to numerous uncertainties.
On April 7, 2020, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company sold a convertible note bearing 8% interest in the principal amount of $111,290.
On April 22, 2020, the Company, entered into a letter agreement with Maxim Group, LLC (“Maxim”) for Maxim to provide general financial advisory, investment banking, and digital marketing services for the Company. The fees paid to Maxim in exchange for the services under the agreement are a combination of cash and common stock. On May 7, 2020, the Company issued 2,250,000 shares of common stock to Maxim.
