Derivative liabilities

9 Months Ended

Sep. 30, 2022

Derivative liabilities

Note 12 Derivative Liabilities

Note 12 Derivative liabilities

The Company does not use financial derivative instruments to manage risk. In June 2022, the Company exchanged the outstanding convertible debt for Series D preferred stock.  Concurrently, the warrants that were granted along with the original convertible debt were amended to provide, at the holders’ choice, the option to exercise for a to-be-issued class of our preferred stock, which shall be convertible into the same number of shares of common stock as would have been issued upon exercise of such warrants under the original terms.  This amendment caused the instruments to be treated as a derivative liability beginning on June 30, 2022.  The warrants were reclassified from equity to derivative liability and measured at fair value using a Black Scholes model (Level 2 of GAAP fair value hierarchy), which included inputs for exercise price, stock price, term to expiration, volatility, and interest rate. The impact was a derivative liability of approximately $40.4 million and a deemed dividend of approximately $32.8 million.  This derivative liability will be revalued on a recurring basis through the consolidated statement of operations.

The Company recorded a derivative liability in 2020 related to convertible debt that contained certain cash true up provisions that were not clearly and closely related to the host debt agreement in terms of economic risks and characteristics.  No cash payment was triggered, the true up provision expired on June 1, 2021, and the derivative balance was reclassed to additional paid-in-capital in the second quarter of 2021.

The activity in the derivative liability is as follows:

	Nine Months Ended September 30,
	2022			2021
Derivative liability balance at December 31,	$	-		$	749,600
Reclass of derivative		40,442,518			(749,200	)
Change in fair value of derivative liabilities		(28,669,066	)		(400	)
Derivative liability balance at September 30,	$	11,773,452		$	-

The change in fair value of the derivative liability is reflected in other income (expense), net in the consolidated statement of operations.