Notes Payable

3 Months Ended

Mar. 31, 2023

Debt Disclosure [Abstract]

Notes Payable

Note 5. Notes Payable

September 2022 Note

On September 12, 2022, the Company entered into a securities purchase agreement, pursuant to which the Company borrowed $1,335 and in exchange issued a secured convertible promissory note (the “September 2022 Note”) in the principal amount of $1,500 with an original issue discount of $165. Any time prior to a change of control transaction, the September 2022 Note is convertible into 30% of the outstanding shares of the Company’s common stock on the conversion date on a post-conversion basis (the “Conversion Shares”). The September 2022 Note matures December 31, 2023 and bears interest at a rate of 6% per annum. The September 2022 Note provides for customary events of default, the occurrence of which would result in 110% the principal and other accrued amounts outstanding under the September 2022 Note to become immediately due and payable, with the interest rate increasing to 12%.

At inception the Company recorded a debt discount of $1,500 and non-cash interest as accretion of debt discount of $5,324. During 2022, the Company recorded additional accretion of debt discount of $82, and the total accretion of debt discount for the year ended December 31, 2022 was $5,406. During the three months ended March 31, 2023, the Company recorded accretion of debt discount of $123.

Additionally, the Company issued to the lender three series of warrants (collectively, the “Warrants”). Each of the Series of Warrants is exercisable into 60% of the Conversion Shares and has a term of three years. The Warrants have exercise prices as follows:

● Series X Warrant, the lower of $0.02 and 120% of the closing price on the date of issuance;

● Series Y Warrant, the lower of $0.04 and 150% of the closing price on the date of issuance; and

● Series Z Warrant, the lower of $0.06 and 200% of the closing price on the date of issuance.

In addition to the warrants described above, the Company has previous warrants outstanding whereby it cannot conclude that it has enough authorized and unissued shares to satisfy the settlement requirements for those already outstanding warrants. As a result, the equity environment would be considered tainted, and the conversion feature and the attached warrants are treated as derivative liabilities.

Derivative Liabilities

The Company valued the derivative liability relating to the embedded conversion feature using the Monte Carlo Simulation Method because of the unknown stock price at the future time of conversion. The Monte Carlo Simulation was calculated using the following assumptions:

	March 31, 2023			December 31, 2022
Stock price	$	0.007		$	0.004
Term (years)		0.75			1.00
Annual volatility		172.21	%		152.48	%
Annual expected return		11.65	%		11.89	%
Discount rate		4.79	%		4.73	%
Dividend yield		0	%		0	%

The Company’s activity in its convertible debt related derivative liability was as follows for the three months ended March 31, 2023:

Balance of derivative liability at January 1, 2022	$	-
Transfer in due to issuance of warrants with embedded conversion features		4,207
Change in fair value of derivative liability		(984	)
Balance of derivative liability at December 31, 2022		3,223
Change in fair value of derivative liability		1,347
Balance of derivative liability at March 31, 2023	$	4,570

As of March 31, 2023, the fair value of the derivative liability was $4,570 and for the three months ended March 31, 2023 the Company recorded a loss of $1,347 from the change in fair value of derivative liability as non-operating income in the statements of operations. There was no outstanding derivative liability relating to convertible debt outstanding for the three months ended March 31, 2022.

Warrant Derivative Liabilities

As of March 31, 2023, the fair value of the warrant derivative liabilities was $3,392 and for the three months ended March 31, 2023 the Company recorded a loss of $1,696 from the change in fair value of derivative warrant liability as non-operating expense in the statements of operations. The Company valued the warrant derivative liabilities other than the warrants issued as part of the debt financing using the Black-Scholes option pricing model using the following assumptions as of March 31, 2023: 1) stock price of $0.007, 2) exercise prices of $0.03 - 0.12, 3) remaining lives of 2.35 – 3.31 years, 4) dividend yields of 0%, 5) risk free rates of 3.81 – 4.06%, and 6) volatility of 172.2 – 186.8%. The Company valued the warrant derivative liability relating to warrants issued in the 2022 debt financing using the binomial lattice model because of the variable exercise price with the following assumptions as of March 31, 2023: 1) stock price of $0.007, 2) remaining life of 2.45 years, 3) dividend yield of 0%, 4) risk free rate of 3.94%, and 5) volatility of 183.9%.

As of December 31, 2022, the fair value of the warrant derivative liabilities was $1,727 and for the year ended December 31, 2022 the Company recorded a gain of $1,726 from the change in fair value of derivative warrant liability as non-operating income in the statements of operations. The Company valued the warrant derivative liabilities other than the warrants issued as part of the debt financing using the Black-Scholes option pricing model using the following assumptions as of December 31, 2022: 1) stock price of $0.004, 2) exercise prices of $0.03 - 0.12, 3) remaining lives of 2.60 – 3.56 years, 4) dividend yields of 0%, 5) risk free rates of 4.22%, and 6) volatility of 166.3 - 174.3%. The Company valued the warrant derivative liability relating to warrants issued in the 2022 debt financing using the binomial lattice model because of the variable exercise price with the following assumptions as of December 31, 2022: 1) stock price of $0.004, 2) remaining life of 2.70 years, 3) dividend yield of 0%, 4) risk free rate of 4.22%, and 5) volatility of 174%.

The Company’s activity in its warrant derivative liabilities was as follows for the three months ended March 31, 2023:

Balance of warrant derivative liability at January 1, 2022	$	1,130
Transfer in due to issuance of warrants with embedded conversion features		2,554
Transfer out upon conversion of convertible notes and warrants with embedded conversion provisions		(231	)
Change in fair value of warrant derivative liability		(1,726	)
Balance of derivative liability at December 31, 2022		1,727
Transfer out upon conversion of convertible notes and warrants with embedded conversion provisions		(31	)
Change in fair value of warrant liability		1,696
Balance of warrant derivative liabilities at March 31, 2023	$	3,392

The Company recorded loss on settlement of derivative liability in the amount of $169 for the three months ended March 31, 2023. The Company recorded loss on settlement of derivative liability in the amount of $417 for the three months ended March 31, 2022.

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.

	March 31, 2023
	Level 1		Level 2		Level 3		Fair Value
Liabilities
Derivative liability	$	-	$	-	$	4,570	$	4,570
Warrant derivative liability	$	-	$	-	$	3,392	$	3,392

	December 31, 2022
	Level 1		Level 2		Level 3		Fair Value
Liabilities
Derivative liability	$	-	$	-	$	3,223	$	3,223
Warrant derivative liability	$	-	$	-	$	1,727	$	1,727