Fair Value Measurement

3 Months Ended

Mar. 31, 2022

11. Fair Value Measurement

The following table presents information about the Company's financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation:

Fair Value Measurements as of March 31, 2022
Using:

Level 1

Level 2

Level 3

Total

Assets:

Liabilities:

Convertible promissory notes

6,063,926

During each of the three-month periods ended March 31, 2022 and 2021, there were no transfers between Level 1, Level 2, or Level 3. There were no financial assets or liabilities measured at fair value on a recurring basis as of March 31, 2022.

The following table summarizes the change in Level 3 financial instruments during the three-month period ended March 31, 2022.

Fair value at December 31, 2021	$	3,798,516
Fair value at issuance		2,159,525
Repayments		(66,876	)
Conversion		(463,862	)
Mark to market adjustment		636,623
Fair value at March 31, 2022	$	6,063,926

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value of the convertible promissory notes at issuance and subsequent financial reporting dates was estimated based on significant inputs not observable in the market, which represent level 3 measurements within the fair value hierarchy.

The fair value of the convertible promissory notes at issuance and at each reporting period was estimated based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company used a scenario-based binomial model to estimate the fair value of the convertible promissory notes. The model determines the fair value from a market participant's perspective by evaluating the payouts under hold, convert, or call decisions. The most significant estimates and assumptions used as inputs are those concerning type, timing and probability of specific scenario outcomes. Specifically, the Company assigned a probability of default, which would increase the required payout as described in note 9 and calculated the fair value under each scenario. At the issuance dates of the convertible promissory notes, the probability of default ("PD") was assumed to be 50%, except for the convertible promissory notes issued in the last quarter of the 2021 year and for those issued during the three-month period ended March 31, 2022, which had a PD of 50% and for all convertible promissory notes, a PD of 50% at March 31, 2022 and at December 31, 2021. The probability of default was determined in reference to a 1-year PD rate for a 'CCC+' rating at issuance, and a combination of 'CC' and 'CCC-' credit ratings at March 31, 2022 and December 31, 2021. Increasing (decreasing) the probability of default would result in a significantly higher (lower) fair value measurement.

Other significant unobservable inputs include the expected volatility, discount for lack of marketability and the credit spread. The expected volatility was based on the historical volatility over a look-back period that was consistent with the balance-remaining term of the instruments. A range of 95% to 160% was used for the expected volatility. The discount for lack of marketability was determined using a range of option pricing methodologies using the remaining restriction term corresponding to each instrument on the relevant valuation date. A range of 0% to 40% was used for the discount for lack of marketability. The credit spread was determined in reference to credit yields of companies with similar credit risk at the date of valuation. A premium of 10% was added to the credit spread as an instrument specific adjustment to reflect the Company's risk of default. A range of 15.25% to 18.39% was used for the credit spread.

Refer also to going concern, note 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details