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CONVERTIBLE DEBT | 9 Months Ended
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Sep. 30, 2021
CONVERTIBLE DEBT |
NOTE 10 - CONVERTIBLE DEBT | NOTE 10 – CONVERTIBLE DEBT A summary of the Company’s convertible debt during the nine months ended September 30, 2021 and the year ended December 31, 2020 is presented below:
|  | 2021 |  |  | 2020 |
Beginning balance convertible notes |  | $ | 1,447,000 |  |  | $ | 1,500,000 |
New notes |  |  | 625,000 |  |  |  | 540,000 |
Payments |  |  | (529,000 | ) |  |  | (593,000 | )
Conversion to common stock |  |  | (350,000 | ) |  |  |  |
Subtotal notes |  |  | 1,193,000 |  |  |  | 1,447,000 |
Debt discount at year end |  |  | (407,206 | ) |  |  | (494,973 | )
Convertible note payable, net of discount |  | $ | 785,794 |  |  | $ | 952,027 |
All of the convertible debt is classified as short-term within the consolidated balance sheet as it all matures and will be paid back within fiscal year 2021. Securities Purchase Agreement executed on May 15, 2019 On May 15, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor (the “Buyer”), as amended on March 23. 2020 and September 23, 2020. Upon the closing of this financing, on May 17, 2019, the Company issued for a purchase price of $1,500,000 in principal amount a Senior Convertible Note (the “May 2019 Note”) to the Buyer. On June 18, 2021, the Company modified the terms of its outstanding debt by entering into a Third Forbearance Agreement (the “Third Agreement”) whereby the Company agreed to make certain payments to the creditor and the creditor will accept such payments as full discharge of the outstanding debt. The Agreement provides that the Buyer will (a) forbear (i) from taking any action with respect to the Existing Default and (ii) from issuing any demand for redemption of the Note on the basis of the Existing Default until the earlier of: (1): November 16, 2021 (or, if earlier, such date when all amounts outstanding under the Note shall be paid in full or converted into shares of Common Stock in accordance therewith) and (2) the time of any breach by the Company of the Agreement or the occurrence of an Event of Default that is not an Existing Default (the “Forbearance Expiration Date), (b) during the Forbearance Period (as defined) waive the prepayment premium to any Company Optional Redemption (which will result in the 120% redemption premium effectively replaced with 100%), and (c) during the Forbearance Period, waive the repayment in full of the Note other than the Required Payments (as defined) prior to November 16, 2021. The Scheduled Required Prepayments are $62,000 upon the first scheduled required prepayment and five (5) payments thereafter aggregating $287,000 with the remainder outstanding under the Note due on November 16, 2021. In addition, there are mandatory prepayments in the event the Company completes a Subsequent Placement (as defined) or long-term debt (other than from the Buyer or from officers, directors and 10% or greater shareholders of the Company) or factoring and purchase order indebtedness, the Company shall effect a Company Optional Redemption amount equal to 50% of the gross proceeds (less reasonable expenses of counsel and any investment bank) together with all Scheduled Required Payments. The Company performed an analysis to determine if at least a 10% difference between the present value of the new loan’s cash flows and the present value of the old loan’s remaining cash flows and determined that yes there is more than a 10% difference. The Company will experience a cash flow increase of approximately 15% due to the modification; therefore, the cash flow is considered substantially different, and the Company has applied extinguishment accounting. As of December 31, 2019, the Company had a principal balance of $907,000 on the May 2019 Note and the Company had accrued $15,420 in interest expense. During the nine months ended September 30, 2021, the Company repaid $529,000 such that as of September 30, 2021, the Company had a principal balance $378,000 on the May 2019 Note and the Company had accrued $9,570 in interest expense. December 21, 2020 Securities Purchase Agreement On December 21, 2020 (the “Issue Date”), Cosmos Holdings, Inc. (“Cosmos”, the “Borrower” or the “Company”) entered into a convertible promissory note with Platinum Point Capital, LLC (the “Holder”, “Lender” or “Platinum”). The Company issued the $540,000 Note in exchange for $500,000 in cash and included a $40,000 Original Issue Discount (“OID”) and paid $3,000 in financing costs. The principal amount together with interest at the rate of eight percent (8.0%) per annum, compounded annually (the “Interest Rate”), will be paid to the Lenders on or before the Maturity Date (December 31, 2021 or as defined below). Accrued interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. In the event that on or before the Maturity Date, the Note either (i) have not been converted or have not been otherwise satisfied in full or (ii) an Event of Default occurs, then the applicable rate of interest on the outstanding amount of the Note since inception shall be the Interest Rate plus eighteen percent (18.0%), the Default Interest. Unless previously converted, the principal and accrued interest on the Note is due and payable in cash (USD) upon the earlier of (i) December 31, 2021, (ii) a Change of Control (as defined below) or (iii), an Event of Default (as defined below) (collectively, the “Maturity Date”). On July 14, 2021 and August 16, 2021 the Company converted an aggregate total of $350,000 in principal and $24,144 in accrued interest into 126,501 shares of the Company’s common stock at an average price per share of $2.98. As of September 30, 2021, the Company had a principal balance of $190,000 and had accrued $3,156 in interest expense. The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature and a derivative liability which is accounted for separately. The Company measured the beneficial conversion feature’s intrinsic value on December 16, 2020 and determined that the embedded derivative was valued at $456,570 which was recorded as a debt discount, and together with the original issue discount and transaction expenses of $43,000, in the aggregate of $499,570, is being amortized over the life of the loan. For the three and nine months ended September 30, 2021, $71,641 and $109,865, respectively has been amortized. As of September 30, 2021, the fair value of the derivative liability was $88,576. The Company recorded a decrease in the derivative of $194,784 related to the conversion, which was recorded to additional paid-in capital and for the three and nine months ended September 30, 2021, the Company recorded a gain of $111,581 and $177,369, respectively from the change in fair value of derivative liability as other income in the consolidated statements of operations and comprehensive income (loss). January 7, 2021 Subscription Agreement On January 7, 2021 (the “Issue Date”), the Company entered into a subscription agreement with an unaffiliated third party, whereby the Company issued for a purchase price of $100,000 in principal amount, a convertible promissory note. The note bears an interest rate of 8% per annum and matures on the earlier of (i) consummation of the Company listing its common shares on the NEO Stock Exchange or October 31, 2021. Upon the consummation of a NEO listing, the total principal and accrued interest outstanding on the note will convert into shares of the Company’s common stock at a 25% discount to the prices of the common shares sold in the financing to be conducted in conjunction with the NEO listing. In the event that a NEO listing is not consummated on or before October 31, 2021, the note holder will have the option, in part or in full, to have the note repaid with interest, or convert the note into Company common stock at a 25% discount to the 30-day volume-weighted average price of the Common Shares on the most senior stock exchange in North American on which the common shares are trading prior to conversion. As of September 30, 2021, the Company had a principal balance of $100,000 and had accrued $5,736 in interest expense. The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature and a derivative liability which is accounted for separately. The Company measured the beneficial conversion feature’s intrinsic value on January 7, 2021 and determined that the embedded derivative was valued at $62,619 which was recorded as a debt discount and is being amortized over the life of the loan. For the nine months ended September 30, 2021, $29,223 has been amortized. As of September 30, 2021, the fair value of the derivative liability was $26,497 and for the three and nine months ended September 30, 2021, the Company recorded a gain of $14,040 and $36,122, respectively from the change in fair value of derivative liability as other income in the consolidated statements of operations and comprehensive income (loss). Convertible Promissory Note and Securities Purchase Agreement On September 17, 2021 (the “Issue Date”), the Company entered into a convertible promissory note and securities purchase agreement with an unaffiliated third party. Convertible Promissory Note The Company issued the convertible promissory note for a purchase price of $525,000 in principal amount for cash proceeds of $500,000. The note was issued with an original issue discount (“OID”) of $25,000, bears an interest rate of 10% per annum and matures on the earlier of the consummation of the Company listing its common shares on the Nasdaq Stock Exchange or September 17, 2022. Upon the consummation of a Nasdaq listing, the total principal and accrued interest outstanding on the note will convert into shares of the Company’s common stock at a 30% discount to the prices of the common shares sold in the financing to be conducted in conjunction with the Nasdaq listing, subject to a conversion floor of $3.00. The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature which is accounted for separately. The Company measured the beneficial conversion feature’s intrinsic value on September 17, 2021 at $294,000 which, together with the OID of $25,000 was recorded as a debt discount and is being amortized over the life of the loan. For the nine months ended September 30, 2021, $7,161 of the debt discount has been amortized. As of September 30, 2021, the Company had accrued a principal balance of $525,000, had accrued $2,041 in interest expense, and had remaining debt discount of $311,839 which resulted in a net convertible note payable of $213,161. Securities Purchase Agreement On September 17, 2021, the Company entered into a Securities Purchase Agreement (the “SPA”) with the third party whereby the Company agree to issue 5,000,000 shares of Series A Preferred Stock at a purchase price of $1.00 per share or $5,000,000 in the aggregate, and a Warrant (the “Warrant”) to purchase 100% of the number of shares of the Company’s Common Stock issuable upon conversion of the Series A Preferred Stock. The Series A Preferred Stock will be convertible into the Company’s Common Stock as determined by multiplying the number of shares of Series A Preferred Stock to be converted by the lower of (i) $4.00 or (ii) 80% of the average volume weighted average price for the Company’s Common Stock for the five (5) days prior to the date of Uplisting, subject to a floor of $3.00 per share. The shares of common stock issuable upon conversion of Series A Preferred Stock and exercise of the Warrants are subject to a Registration Right Agreement. The Warrant has an exercise price equal to 110% of the Conversion Price of the Series A Preferred Stock and expires five (5) years from the date of issuance. The SPA is subject to certain conditions to close. As of September 30, 2021 and the date of this filing, the conditions to close had not been met, the funds have not been transferred, the preferred shares and the warrant was not issued. Derivative Liabilities The table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2021:
|  | Amount |
Balance on December 31, 2020 |  | $ | 460,728 |
Issuances to debt discount |  |  | 62,619 |
Reduction of derivative related to conversions |  |  | (194,784 | )
Change in fair value of derivative liabilities |  |  | (213,490 | )
Balance on September 30, 2021 |  | $ | 115,073 |
The fair value of the derivative conversion features and warrant liabilities as of September 30, 2021 were calculated using a Monte-Carlo option model valued with the following assumptions:
|  | September 30, 2021 |
Dividend yield |  |  | 0 | %
Expected volatility |  |  | 70.3%-139.0 | %
Risk free interest rate |  |  | 0.15%-0.18 | %
Contractual terms (in years) |  |  | 0.08 – 0.75 |

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