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CONVERTIBLE DEBT | 9 Months Ended
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Sep. 30, 2022
CONVERTIBLE DEBT |
CONVERTIBLE DEBT | NOTE 11 – CONVERTIBLE DEBT A summary of the Company’s convertible debt at September 30, 2022 and December 31, 2021 is presented below:
|  | September 30, 2022 |  |  | December 31, 2021 |
Beginning balance convertible notes |  | $ | 640,000 |  |  | $ | 1,447,000 |
Proceeds |  |  | - |  |  |  | 625,000 |
Payments |  |  | - |  |  |  | (907,000 | )
Conversion to common stock |  |  | (15,000 | ) |  |  | (525,000 | )
Subtotal notes |  |  | 625,000 |  |  |  | 640,000 |
Debt discount at year end |  |  | - |  |  |  | (258,938 | )
Convertible note payable, net of discount |  | $ | 625,000 |  |  | $ | 381,062 |
All of the convertible debt is classified as short-term within the condensed consolidated balance sheet as it all matures and will be paid back within fiscal year 2022. December 21, 2020 Securities Purchase Agreement On December 21, 2020 the Company entered into a convertible promissory note with Platinum Point Capital, LLC (the “Holder”, “Lender” or “Platinum”) pursuant to a Securities Purchase Agreement (the “SPA”). 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) had not been converted or have not been otherwise satisfied in full or (ii) an Event of Default (as defined in the SPA) 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 in the SPA) or (iii), an Event of Default (collectively, the “Maturity Date”). During the year ended December 31, 2021, the Company converted an aggregate total of $525,000 in principal and $25,144 in accrued interest and fees into 213,382 shares of the Company’s common stock at an average price per share of $2.58. Upon conversion, the 213,382 shares were issued at a fair value of $959,024 which was recorded as equity. Accordingly, upon conversion, the Company reduced its outstanding debt by $550,144, reduced its derivative liability by $284,169, and recorded a loss on extinguishment of $124,711. On May 1, 2022 the Company issued 39,339 shares of common stock to convert $26,515 principal and accrued interest. Following the conversion, the outstanding balance of the above Note is $0. Upon conversion, the 39,339 shares were issued at a fair value of $38,144 which was recorded as equity. Accordingly, upon conversion, the Company reduced its derivative liability by $11,629 (see Note 8). The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a derivative liability which is accounted for separately. The Company determined a derivative liability exists 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. As of September 30, 2022 and December 31, 2021 the full amount of the debt discount has been amortized. As of September 30, 2022 and December 31, 2021, the fair value of the derivative liability was $0 and $5,822, respectively. For the nine months ended September 30, 2022 and 2021, the Company record a loss on the change in fair value of the derivative of $5,807 and a gain of $111,581, respectively. 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 matured on the earlier of (i) consummation of the Company listing its common shares on the NEO Stock Exchange or (ii) 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, 2022, the Company had a principal balance of $100,000 and had accrued $13,740 in interest expense. The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a derivative liability which is accounted for separately. The Company measured the embedded derivative valued at $62,619 which was recorded as a debt discount and additional paid-in capital and is being amortized over the life of the loan. As of September 30, 2022 and December 31, 2021, $62,619 of the debt discount has been amortized. As of September 30, 2022 and December 31, 2021, the fair value of the derivative liability was $40,663 and $39,843, respectively. For the nine months ended September 30, 2022, the Company recorded a loss of $820 from the change in fair value of derivative liability as other income in the consolidated statements of operations and comprehensive income (loss) compared to a gain of $36,122 for the nine-month period ended September 30, 2021. 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 (i) the consummation of the Company listing its common shares on the Nasdaq Stock Market or (ii) 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 as of December 31, 2021. 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. On January 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method. As a result of the adoption, on January 1, 2022, the Company recorded an increase to additional paid-in capital of $294,000 and a decrease to accumulated deficit of $53,248. For the year ended December 31, 2021, $60,063 of the debt discount has been amortized. As of December 31, 2021, the Company had accrued a principal balance of $525,000, had accrued $15,166 in interest expense, and had remaining debt discount of $258,938 which resulted in a net convertible note payable of $266,063. For the nine months ended September 30, 2022, $294,000 of the debt discount was reduced and recorded as a reduction to additional paid-in capital and has been amortized. As of September 30, 2022, the Company had accrued a principal balance of $525,000, had accrued $54,833 in interest expense, and had remaining debt discount of $0 which resulted in a net convertible note payable of $525,000. 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 months ended September 30, 2022:
|  | Amount |
Balance on January 1, 2022 |  | $ | 45,665 |
Issuances to debt discount |  |  | - |
Reduction of derivative related to conversions |  |  | (11,629 | )
Change in fair value of derivative liabilities |  |  | 6,627 |
Balance on September 30, 2022 |  | $ | 40,663 |
The fair value of the derivative conversion features and warrant liabilities as of September 30, 2022 and December 31, 2021 were calculated using a Monte-Carlo option model valued with the following assumptions:
|  | September 30, |  |  | December 31, |
|  | 2022 |  |  | 2021 |
Dividend yield |  |  | 0 | % |  |  | 0 | %
Expected volatility |  |  | 157.2 | % |  | 106.8%-107.3% |
Risk free interest rate |  |  | 3.75 | % |  | 0.41%-0.44% |
Contractual terms (in years) |  |  | 0.50 |  |  | 0.50 – 0.52 |

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