Footnotes
to Consolidated Financial Statements
September
30, 2020
NOTE
1. ORGANIZATION AND OPERATIONS
Life
Clips, Inc. (the “Company”) was incorporated in Wyoming on March 20, 2013 as Blue Sky Media Corporation and its principal
business was developing, financing, producing and distributing motion pictures and related entertainment products. Following the
Company’s October 2, 2015 acquisition of Klear Kapture, Inc. (“Klear Kapture”), the Company continued Klear
Kapture’s business of developing a body camera and an auditable software solution suitable for use by law enforcement. The
Company changed its name to Life Clips, Inc. on November 3, 2015 in order to better reflect its business operations at the time.
On
July 11, 2016, the Company completed its acquisition (the “Acquisition”) of all of the outstanding equity securities
of Batterfly Energy Ltd. (“Batterfly”), an Israel-based corporation that develops and distributes a single-use, cordless
battery under the brand name Mobeego for use with cellular phones and other mobile devices. Batterfly is now a wholly owned subsidiary
of the Company. The Acquisition was completed pursuant to a Stock Purchase Agreement, dated as of June 10, 2016 (the “Purchase
Agreement”), among the Company, Batterfly and all of the shareholders of Batterfly, as amended.
The
Company is currently open to and pursuing alternative business opportunities.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Consolidation – The consolidated financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates the
financial statements of its wholly-owned subsidiaries and all intercompany transactions and account balances have been eliminated
in consolidation.
Interim
Disclosures – These unaudited consolidated financial statements should be read with the Company’s audited financial
statements and footnotes included in the Company’s Report on Form 10-K for the year ended June 30, 2020, filed with the
Securities and Exchange Commission (“the Commission”) on November 25, 2020. The results of operations for the three
month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the entire year ending
June 30, 2021 or for any future period.
Use
of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Cash
and Cash equivalents – For financial statement presentation purposes, the Company considers all short-term investments
with a maturity date of three months or less to be cash equivalents.
Income
Tax – The Company accounts for income taxes under Accounting Standards Codification (“ASC”) 740 “Income
Taxes” (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain
deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Basic
and Diluted Net Income (Loss) Per Share – The Company computes net income (loss) per share in accordance with ASC 260
“Earnings Per Share” (“ASC 260”). ASC 260 requires presentation of both basic and diluted earnings per
share “EPS” on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to
common shareholders (numerator) by the weighted average number of shares of common stock outstanding during the period. If applicable,
diluted earnings per share assume the conversion, exercise or issuance of all common stock instruments such as options, warrants
and convertible securities, unless the effect is to reduce a loss or increase earnings per share. Diluted EPS excludes all dilutive
potential shares if their effect is anti-dilutive.
Fair
Value of Financial Instruments – The Company measures assets and liabilities at fair value based on an expected exit
price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received
on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants.
As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative
guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring
basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
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Level
1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
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●
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Level
2 – Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for
similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities;
or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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●
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Level
3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine
fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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The
carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts payable, accrued expenses and
interest, certain notes payable and notes payable – related party, approximate their fair values because of the short maturity
of these instruments.
The
Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 3 (See Note 6).
Embedded
Conversion Features – The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives
and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted
for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require
derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options”
for consideration of any beneficial conversion feature.
Derivative
Financial Instruments – The Company does not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks. The Company evaluates all of its financial instruments, including stock purchase warrants, to determine
if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued
at each reporting date, with changes in the fair value reported as charges or credits to income.
For
option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative
instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Debt
Issue Costs and Debt Discount – The Company may record debt issue costs and/or debt discounts in connection with raising
funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are
amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share
of the unamortized amounts is immediately expensed.
Stock
Based Compensation – ASC 718 “Compensation - Stock Compensation” prescribes accounting and reporting standards
for all stock-based compensation plan payments awarded to employees, including employee stock options, restricted stock, employee
stock purchase plans and stock appreciation rights, which may be classified as either equity or liabilities. The Company should
determine if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation
to settle in cash or other assets exists if: (a) the option to settle by issuing equity instruments lacks commercial substance
or (b) the present obligation is implied because of an entity’s past practices or stated policies. If a present obligation
exists, the transaction should be recognized as a liability; otherwise, the transaction should be recognized as equity.
The
Company accounts for stock-based compensation issued to nonemployees and consultants in accordance with the provisions of ASC
505-50 “Equity-Based Payments to Non-Employees”. Measurement of share-based payment transactions with nonemployees
shall be 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 should be determined at the earlier of performance
commitment date or performance completion date.
Recognition
of Revenues – The Company recognizes revenue in accordance with Accounting Standards Update (“ASU”) No.
2014-09 “Revenue from Contracts with Customers”. The Company recognizes as revenues the amount of the transaction
price that is allocated to the respective performance obligations when the performance obligation is satisfied, or as it is satisfied.
The Company primarily sells disposable and recyclable cell phone batteries. The Company’s performance obligation is satisfied
when the goods have been delivered, which is at a point in time. The Company applies the following five steps in order to determine
the appropriate amount of revenue recognized as it fulfills its obligations under each of its agreements:
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identify
the contract with a customer;
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identify
the performance obligations in the contract;
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determine
the transaction price;
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allocate
the transaction price to performance obligations in the contract; and
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recognize
revenue as the performance obligation is satisfied.
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Recently
Issued Accounting Pronouncements – Management has evaluated other recently issued accounting pronouncements and does
not believe that any of these pronouncements will have a significant impact on the Company’s consolidated financial statements
and related disclosures.
Subsequent
Events – The Company follows the guidance in ASC 855 “Subsequent Events” for the disclosure of subsequent
events. The Company will evaluate subsequent events through the date when the financial statements are issued. Pursuant to ASU
2010-09 of the FASB ASC, the Company, as an SEC filer considers its financial statements issued when they are widely distributed
to users, such as through filing them on EDGAR.
NOTE
3. UNCERTAINTY OF ABILITY TO CONTINUE AS A GOING CONCERN
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
consolidated financial statements, the Company has no revenues, net accumulated losses since inception and an accumulated deficit
of $22,373,754. These factors raise doubt about its ability to continue as a going concern. The ability of the Company to continue
as a going concern is dependent on management funding operating costs. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE
4. NOTES PAYABLE – IN DEFAULT
At
September 30, 2020 and June 30, 2020, the Company had two notes payable in the amount of $530,000, with the following terms:
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1.
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The
Batterfly Acquisition Note required the Company to make two payments of $250,000 on October 6, 2017 and February 13, 2017.
Upon failure to pay the payment due, the balance began to accrue interest at 11% per annum.
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2.
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On
July 14, 2016, the Company issued a new promissory note to NUWA Group, LLC., from which the Company received $30,000 in gross
proceeds, has a maturity date of October 14, 2016, and bears interest at 5% per annum. This promissory note does not have
a conversion feature.
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NOTE
5. CONVERTIBLE DEBT
Convertible
Notes
As
of September 30 and June 30, 2020, $2,428,960 of the Company’s convertible notes were in default.
Balance at
September 30,
2020
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Balance at
June 30,
2020
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Due Date
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Interest Rate at September 30,
2020
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$
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2,236,806
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$
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1,931,806
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Range from 05/13/2017 to 09/17/2021
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Range from 3.85% to 22%
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Conversion price equal to fifty percent (50%) of the lowest trading price during the twenty (20) trading day period prior to the date of conversion - $0.00015 at September 30, 2020, convertible into 38,636 million shares not including interest.
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32,154
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332,154
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06/09/2017
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10%
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Conversion price equal to seventy five percent (75%) of the lowest trading price during the five (5) trading day period prior to the date of conversion - $0.00029 at September 30, 2020, convertible into 2,214 million shares not including interest.
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165,000
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165,000
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Range from 01/27/2018 to 11/15/2019
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Range from 10% to 22%
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Conversion price equal to fifty percent (50%) of the lowest trading price during the five (5) trading day period prior to the date of conversion - $0.00015 at September 30, 2020, convertible into 1,650 million shares not including interest.
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2,433,960
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2,428,960
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(4,822
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)
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-
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Less: Discount
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$
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2,429,138
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$
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2,428,960
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As
of September 30 and June 30, 2020, $2,428,960 of the Company’s convertible notes were in- default.
The
Company evaluated the convertible promissory notes under ASC 815 Derivatives and Hedging (“ASC 815”). ASC 815
generally requires the analysis of embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation
and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the
risks of the host contract. The material embedded derivative consists of the embedded conversion feature. The conversion option
bears risks of equity which were not clearly and closely related to the host debt agreement and required bifurcation. See Note
6 for further discussion.
Debt
Discount
The
Company recorded the debt discount to the extent of the gross proceeds raised and expensed immediately the remaining fair value
of the derivative liability, as it exceeded the gross proceeds of the note.
Future
Commitments
At
September 30, 2020 the Company has outstanding convertible debt of $2,433,960, which is due within the next 12 months.
NOTE
6 –DERIVATIVE FINANCIAL INSTRUMENTS
The
Company’s convertible promissory notes and detachable warrants gave rise to derivative financial instruments. The notes
embodied certain terms and conditions that were not clearly and closely related to the host debt agreement in terms of economic
risks and characteristics. These terms and features consist of the embedded conversion option. Additionally, the detachable warrants
contained terms and features that gave rise to derivative liability classification. As of September 30, 2020, the Company does
not have enough authorized shares to settle all potential conversion and warrant transactions.
The
following tables summarize the components of the Company’s derivative liabilities and linked common shares as of September
30, 2020 and June 30, 2020 and the amounts that were reflected in income related to derivatives for the period ended:
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September 30, 2020
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The financings giving rise to derivative financial instruments
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Indexed
Shares*
(in millions)
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Fair
Values
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Embedded derivatives
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24,863
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$
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6,150,834
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Total
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24,863
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$
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6,150,834
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*including
principal and interest
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June 30, 2020
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The financings giving rise to derivative financial instruments
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Indexed
Shares*
(in millions)
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Fair
Values
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Embedded derivatives
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68,617
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$
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13,249,507
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Total
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68,617
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$
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13,249,507
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*including
principal and interest
The
following table summarizes the effects on the Company’s gain (loss) associated with changes in the fair values of the derivative
financial instruments by type of financing for the three months ended September 30, 2020 and 2019:
The financings giving rise to derivative financial instruments and the gain (loss) effects:
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For the Three Months Ended
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September 30, 2020
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September 30, 2019
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Embedded derivatives
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$
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7,103,673
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$
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(319,649
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)
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Derivative warrants
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-
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-
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Total
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$
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7,103,673
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$
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(319,649
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)
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Current
accounting principles that are provided in ASC 815 - Derivatives and Hedging require derivative financial instruments to
be classified in liabilities and carried at fair value with changes recorded in income. The Company has selected the Binomial
Lattice Model, which approximates the Monte Carlo Simulations, valuation technique to fair value the compound embedded derivative
because it believes that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that
market participants would likely consider in transactions involving compound embedded derivatives. Such assumptions include, among
other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional inputs for
option models such as market trading volatility and risk-free rates. The Binomial Lattice Model technique is a level three valuation
technique because it requires the development of significant internal assumptions in addition to observable market indicators.
For instruments in which the time to expiration has expired, the Company has utilized the intrinsic value as the fair value. The
intrinsic value is the difference between the quoted market price on the valuation date and the applicable conversion price.
Significant
inputs and results arising from the Monte Carlo Simulation process are as follows for the embedded derivatives that have been
bifurcated from the convertible notes and classified in liabilities:
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September 30, 2020
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June 30, 2020
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Quoted market price on valuation date
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$
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0.0004
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|
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$
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0.0003
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Range of effective contractual conversion rates
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$
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0.00015 - $0.00029
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$
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0.00005 - $0.00029
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Contractual term to maturity
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0.96
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NA
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Market volatility:
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|
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Volatility
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127.83% - 486.79%
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NA
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Risk-adjusted interest rate
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0.12
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%
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NA
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The
following table reflects the issuances of compound embedded derivatives and detachable warrants and changes in fair value inputs
and assumptions related to the embedded derivatives and detachable warrants during the three months ended September 30, 2020 and
year ended June 30, 2020.
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Period Ended
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Year Ended
|
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September 30, 2020
|
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|
June
30, 2020
|
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Balances at beginning of period
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|
$
|
13,249,507
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|
|
$
|
3,230,842
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|
Issuances:
|
|
|
|
|
|
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Embedded derivatives
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|
5,000
|
|
|
|
-
|
|
Detachable warrants
|
|
|
-
|
|
|
|
-
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|
Conversions:
|
|
|
|
|
|
|
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Embedded derivatives
|
|
|
-
|
|
|
|
-
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|
Detachable warrants
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|
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-
|
|
|
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-
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Expirations:
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|
|
|
|
|
|
|
|
Detachable warrants
|
|
|
-
|
|
|
|
-
|
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Changes in fair value inputs and assumptions reflected in income
|
|
|
(7,103,673
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)
|
|
|
10,018,665
|
|
|
|
|
|
|
|
|
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Balances at end of period
|
|
$
|
6,150,834
|
|
|
$
|
13,249,507
|
|
NOTE
7. EQUITY
Authorized
Capital
On
September 28, 2017, the Company filed Articles of Amendment authorizing 5,000,000,000 shares of common stock, par value $0.001
per share (the “Common Stock”) and 20,000,000 shares of Preferred Stock, par value $0.001 (the “Preferred Stock”).
The Board may issue shares of Preferred Stock in one or more series and fix the rights, preferences and privileges thereof, including
voting rights, terms of redemption, redemption prices, liquidation preferences, number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
Preferred
Stock
Effective
May 19, 2017, the Company amended its Articles of Incorporation to designate 1,000,000 shares of preferred stock as Series A Preferred
Stock, with a par value of $0.001 per share (the “Series A Stock”). Each share of Series A Stock ranks, with respect
to dividend rights and rights upon liquidation, winding up or dissolution of the Company, the same as the common stock of the
Company, par value $0.001 per share (the “Common Stock”) and is not entitled to any specific dividends or other distributions,
other than those declared by the Board of Directors. Each share of Series A Stock has 400 votes on any matter submitted to the
shareholders of the Company, and the Series A Stock votes together with the holders of the outstanding shares of all other capital
stock of the Company (including the Common Stock and any other series of preferred stock then outstanding), and not as a separate
class, series or voting group on any such matter. The Series A Preferred Stock is not transferrable by the holder, and may be
redeemed by the Company at any time for the par value. In the event that the holder of Series A Preferred Stock who is an employee
or officer of the Company leaves their position as an employee or officer of the Company for any reason, the Series A Preferred
Stock held by that holder will be automatically cancelled and will revert to being authorized and unissued shares of Series A
Preferred Stock. The Series A Stock is not convertible into any other class of shares of the Company.
Stock
and Incentive Plan
On
April 20, 2017, the Company adopted the Life Clips, Inc. 2017 Stock and Incentive Plan under which the Company may issue nonqualified
stock options, incentive stock options, stock appreciation rights, restricted stock grants and units, performance units and awards
of cash. A maximum of 20,000,000 shares of common stock may be issued under the plan, representing in excess of 35% of the number
of the Company’s currently outstanding shares. Awards under the plan will be made at the discretion of the Board of Directors,
although no awards have been made to date. Accordingly, the Company cannot currently determine the amount of awards that will
be made under the plan.
NOTE
8. COMMITTMENTS AND CONTINGENCIES
From
time to time, the Company may be a party to other legal proceedings. Management currently believes that the ultimate resolution
of these matters will not have a material adverse effect on consolidated results of operations, financial position, or cash flow.
On
January 11, 2017, the Company received a default notice related to a $500,000 promissory note (the “Batterfly Acquisition
Note”) issued to the sellers of Batterfly Energy, Ltd. (“Batterfly”) as partial consideration for the Company’s
July 11, 2016 acquisition of Batterfly. The Batterfly Acquisition Note requires the Company to make a payment of $250,000 on October
6, 2016 and $250,000 on February 13, 2017. The default letter states that the Company failed to pay the $250,000 payment due on
October 6, 2016, which began to accrue interest of 11% from October 6, 2016. In addition, the default notice states that the Company
owes $20,000 in aggregate to two of the Batterfly shareholders related to consulting fees associated with the Batterfly acquisition.
Finally, the default notice states that a payment of $250,000, as well as an additional payment of $20,000 must be paid by January
23, 2017. The Company filed a claim against the sellers of Batterfly with the London Court of International Arbitration (LCIA
Arbitration No: 173692) and on September 7, 2017 the parties entered into a Stipulation for Stay of Arbitration in the matter
as they seek to negotiate a settlement of their claim. The claim was settled during 2019 for which the Company agreed to issue
62,991,567 shares of common stock to the sellers of Batterfly. As of the date of this filing, the shares are still pending issuance.
NOTE
9. SUBSEQUENT EVENTS
On
November 12, 2020, the Company entered into an 18% Convertible Promissory Note with Long Side Ventures LLC, an unaffiliated third
party. The note was in a principal amount of $5,000, and is convertible at a price equal to fifty percent (50%) of the lowest
trading price during the twenty-trading day period prior to the date of conversion. The note maturity date is November 12, 2021.
On
November 13, 2020, the Company entered into an 18% Convertible Promissory Note with RT Acquisitions LLC, an unaffiliated third
party. The note was in a principal amount of $10,000, and is convertible at a price equal to fifty percent (50%) of the lowest
trading price during the twenty-trading day period prior to the date of conversion. The note maturity date is November 13, 2021.
On
December 14, 2020, the Company entered into an 18% Convertible Promissory Note with Taconic Group LLC, an unaffiliated third party.
The note was in a principal amount of $10,000, and is convertible at a price equal to fifty percent (50%) of the lowest trading
price during the twenty-trading day period prior to the date of conversion. The note maturity date is December 14, 2021.
On
January 13, 2021, the Company held a meeting of the board of directors. Victoria Rudman resigned as the Company’s Interim
Chief Executive Officer and was replaced by Robert Grinberg. Mr. Grinberg was also appointed to the Company’s board of directors.
Ms. Rudman remains as the Company’s Chief Financial Officer and a director. Ms. Rudman had no disputes with the Company.
While the Company intends to enter into an employment agreement with Mr. Grinberg, it has not yet done so. On February 5,
2021 a Form 8-K was filed reporting this event.
On
January 20, 2021, the Company entered into an 18% Convertible Promissory Note with RT Acquisitions, LLC, an unaffiliated third
party. The note was in a principal amount of $10,000, and is convertible at a price equal to fifty percent (50%) of the lowest
trading price during the twenty-trading day period prior to the date of conversion. The note maturity date is January 20, 2022.