Convertible Note and Derivative Liabilities

12 Months Ended

Dec. 31, 2021

Convertible Note and Derivative Liabilities

Convertible Note and Derivative Liabilities

 Note 5 – Convertible Note and Derivative Liabilities

(1) 8% Convertible notes with warrants issued in December 2019 and February 2020

In December 2019, we issued and sold in a private offering 8% convertible notes in the aggregate principal amount of $70,000. Such notes were due on December 31, 2021 and are convertible into shares of our common stock at a conversion price for each share of common stock equal to the lesser of: (a) $0.50; (b) the lowest price at which the Company has converted any convertible security of the Company (to the holder or to any third party) within 30 trading days prior to the date of delivery of the applicable notice of conversion; and (c) so long as lower than (a) or (b), such other price as the Company and the holder may agree. In connection with the 8% convertible note issuance, we issued warrants to purchase an aggregate of 70,000 shares of common stock at an exercise price of $1.00. 

On February 19, 2020 we issued and sold in a private offering an 8% convertible note in the principal amount of $10,000. The note is due on February 19, 2022 and is convertible into shares of common stock at a conversion price per share equal to the lesser of: (a) $0.50; (b) the lowest price at which the Company has converted any convertible security of the Company within 30 trading days prior to the date of delivery of the applicable notice of conversion; or (c) such other price as the Company and the holder may agree. In connection with the 8% convertible note issuance, we issued warrants to purchase an aggregate of 10,000 shares of common stock at an exercise price of $1.00.

The carrying value of these convertible notes is as follows: 

	December 31,  2021			December 31, 2020
Face value of certain convertible notes	$	80,000		$	80,000
Less: unamortized discount		(541	)		(36,364	)
Carrying value	$	79,459		$	43,636

Interest expenses associated with the convertible notes are as follows: 

	Years Ended
	December 31,
	2021		2020
Amortization on debt discount	$	35,823	$	35,380
Interest on the convertible notes		5,496		7,212
Total	$	41,319	$	42,592

As of December 31, 2021 and December 31, 2020, the unpaid interest balance under Accounts payable and accrued liabilities was $12,869 and $7,373, respectively. 

Note 5 – Convertible Note and Derivative Liabilities (continued)

(1) 8%Convertible notes with warrants issued in December 2019 and February 2020 (continued)

The convertible notes qualify for derivative accounting and bifurcation under ASC 815. The derivative liability of the $80,000 convertible notes was calculated using the Black-Scholes pricing model to be $72,689.

As a result of the application of ASC 815, as of December 31, 2021 and 2020, the fair value of the derivative liability associated with the conversion feature is summarized as follows: 

Balance at December 31, 2019	$	52,185
Derivative addition associated with convertible notes		7,915
Change in fair value		32,703
Balance at December 31, 2020		92,803
Change in fair value		48,727
Balance at December 31, 2021	$	141,530

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2020 and December 31, 2021 and the commitment date: 

	Commitment Date			December 31, 2020			December 31, 2021
Expected dividends		0			0			0
Expected volatility	154% ~173		%	280% ~296		%	203%~301		%
Expected term	2.10 years			1.05 ~ 1.25 years			1.08 ~ 1.22 years
Risk free interest rate	1.42 ~ 1.65		%		0.10	%		0.39	%

(2) 8% Convertible note with warrants issued on June 15, 2021

On June 15, 2021, the Company entered into a note purchase agreement with Quick Capital, LLC (“Quick Capital”) pursuant to which the Company issued a twelve-month convertible promissory note in the principal amount of $115,000 for a $100,000 investment (the “Quick Note”), which included an original issuance discount of 10% and a $3,500 credit for legal and transaction costs. In connection with the Quick Note issuance, Quick Capital was also issued a five-year warrant (the “Quick Warrant”) to purchase up to an aggregate of 115,000 shares of the Company’s common stock at an exercise price of $1.00 per share (the “Quick Warrant Shares”) subject to adjustments for dilutive issuances at lower prices.

The Quick Note is convertible into shares of common stock at a conversion price of $0.50 per share. If delivery of the conversion shares is not timely made, the Company is obligated to pay Quick Capital $2,000 for each day that the delivery is late as liquidated damages. The conversion price of the Quick Note will be reduced if the Company issues common stock or grants derivative securities for consideration at a price less than the conversion price to the amount of the consideration of such dilutive issuance. The Quick Note may not be prepaid.

The Company is subject to significant cash penalties if the Company defaults on the Quick Note or in the event shares are not issued timely when a notice of conversion is provided. If an event of default occurs, the Quick Note will become immediately due and payable in an amount equal to 150% of the then outstanding principal amount of the Quick Note plus any interest or amounts owing to Quick Capital. The default provisions are based on the type of default and include a penalty of 50% of the principal plus accrued interest due (the “Default Sum”) and a parity value of the Default Sum based on the effective conversion of the Quick Note on the date of payment of the default and the maximum stock value during the period between the default date and the payment date.

Note 5 – Convertible Note and Derivative Liabilities (continued)

(2) 8% Convertible note with warrants issued on June 15, 2021

The Company valued the embedded default derivative liability of the Quick Note and the Quick Warrant liability, including the full ratchet reset feature, using Monte Carlo models.

The carrying value of the Quick Note is as follows:

	December 31, 2021			June 15, 2021
Face value of certain convertible notes	$	115,000		$	115,000
Less: unamortized discount		52,774	)		115,000	)
Carrying value	$	62,226		$	-

Interest expenses associated with the conversion feature is as follows:

	Years ended
	December 31,
	2021		2020
Amortization on debt discount	$	62,226	$	-
Day one loss associated with derivative liability		79,332		-
Interest on the convertible notes		5,016		-
Total	$	146,574	$	-

As a result of the application of ASC 815 as of December 31, 2021 and June 15, 2021, the fair value of the derivative liability associated with the conversion feature is summarized as follows:

Derivative liability associated with convertible note on commitment date	$	51,009
Derivative liability associated with warrants on commitment date		143,323
Derivative liability at June 15, 2021		194,332
Change in fair value – convertible note		(21,597	)
Change in fair value – warrants		2,633
Balance at December 31, 2021	$	175,368

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2021 and the commitment date:

Convertible note:	Commitment Date			December 31, 2021
Expected dividends		0			0
Expected volatility		307.10	%		215.7	%
Expected term	1 years			0.45 years
Risk free interest rate		0.18	%		0.43	%

Warrants;	Commitment Date			December 31, 2021
Expected dividends		0			0
Expected volatility		201.70	%		200.90	%
Expected term	5 years			4.45 years
Risk free interest rate		0.65	%		0.82	%