Convertible Note and Derivative Liabilities

6 Months Ended

Jun. 30, 2022

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: 

	June 30,  2022		December 31, 2021
Face value of certain convertible notes	$	80,000	$	80,000
Less: unamortized discount		-		(541	)
Carrying value	$	80,000	$	79,459

Interest expenses associated with the convertible notes are as follows: 

	For Three Months Ended June 30,				For Six Months Ended June 30,
	2022		2021		2022		2021
Interest on the convertible notes	$	1,596	$	1,895	$	3,174	$	2,569
Amortization of debt discount		-		8,931		541		17,764
Total	$	1,591	$	10,826	$	3,715	$	20,333

As of June 30, 2022 and December 31, 2021, the unpaid interest balance under Accounts payable and accrued liabilities was $16,043 and $12,869, respectively. 

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 June 30, 2022 and December 31, 2021, the fair value of the derivative liability associated with the conversion feature is summarized as follows: 

Balance at December 31, 2020	$	92,803
Change in fair value		64,687
Balance at December 31, 2021		157,490
Change in fair value		(69,796	)
Balance at June 30, 2022	$	87,694

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 June 30, 2022 and December 31, 2021 and the commitment date: 

	Commitment Date	December 31, 2021	June 30, 2022
Expected dividends	0	0	0
Expected volatility	154% ~173%	203%~301%	262%~237%
Expected term	2.10 years	1.08 ~ 1.22 years	0.58 ~ 0.72 years
Risk free interest rate	1.42 ~ 1.65%	0.39%	1.72%

(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.

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.

While the Company has not received a notice of default, the Quick Note matured on June 15, 2022, and the fair value of the Quick Note and Quick Warrant embedded default derivatives liability has been valued as of June 30, 2022.

The carrying value of the Quick Note is as follows:

	June 30, 2022		December 31, 2021
Face value of Quick Note	$	115,000	$	115,000
Less: unamortized discount		-		(52,774	)
Carrying value	$	115,000	$	62,226

Interest expenses associated with the conversion feature is as follows:

	For Three Months Ended June 30,				For Six Months Ended June 30,
	2022		2021		2022		2021
Interest on Quick Note	$	2,294	$	378	$	4,562	$	378
Day one loss associated with derivatively liability		-		79,332		-		79,332
Amortization of debt discount		24,024		4,726		52,774		4,726
Total	$	26,318	$	84,436	$	57,336	$	84,436

As a result of the application of ASC 815 as of June 30, 2022 and December 31, 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
Change in fair value – convertible note		(21,597	)
Change in fair value – warrants		2,633
Balance at December 31, 2021		175,368
Change in fair value – convertible note		50,282
Change in fair value – warrants		93,009
Balance at June 30, 2022	$	318,659

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 June 30, 2022 and December 31, 2021 and the commitment date:

Convertible note:	Commitment Date	December 31, 2021		June 30, 2022
Expected dividends	0		0		0
Expected volatility	307.10%		215.70%		196.50%
Expected term	1 years	0.45 years		0.01 years
Risk free interest rate	0.18%		0.43%		1.28%

Warrants:	Commitment Date	December 31, 2021	June 30, 2022
Expected dividends	0	0	0
Expected volatility	201.70%	200.90%	229.40%
Expected term	5 years	4.45 years	3.9 years
Risk free interest rate	0.65%	0.82%	2.430%