Notes Payable

9 Months Ended

Sep. 30, 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 received $1,335 in exchange for the issuance of 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 and nine months ended September 30, 2023, the Company recorded accretion of debt discount of $373 and $715, respectively.

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.

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.

On July 25, 2023, the lender converted $65 of the September 2022 Note into 20,000,000 shares of Common Stock with a fair value of $140. As a result of the conversion of the $65 of the September 2022 Note, net of $43 of debt discount and the settlement of $118 of the related derivative liability, the Company recorded $10 as a gain on the settlement of debt.

In addition to the conversion, the Company issued 36,000,000 warrants to purchase shares of Common Stock, with exercise prices of $0.0083, $0.0104, $0.0138 each for 12,000,000 warrants. The warrants are exercisable at any time and have a three-year exercise period. As 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:

	September 30, 2023			December 31, 2022
Stock price	$	0.004		$	0.004
Term (years)		0.25			1.00
Annual volatility		122.99	%		152.48	%
Annual expected return		11.85	%		11.89	%
Discount rate		5.47	%		4.73	%
Dividend yield		0	%		0	%

The Company’s activity in its convertible debt related derivative liability was as follows for the nine months ended September 30, 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
Settlement of derivative liability at debt conversion		128
Change in fair value of derivative liability		(1324	)
Balance of derivative liabilities at September 30, 2023	$	1,771

As of September 30, 2023, the fair value of the derivative liability was $1,771 and for the three and nine months ended September 30, 2023 the Company recorded a gain of $1,080 and $1,324, respectively, 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 and nine months ended September 30, 2022.

Warrant Derivative Liabilities

As of September 30, 2023, the fair value of the warrant derivative liabilities was $1,407, and for the three and nine months ended September 30, 2023, the Company recorded a gain of $250 and of $166, respectively, 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 September 30, 2023: 1) stock price of $0.004, 2) exercise prices of $0.03 - 0.12, 3) remaining lives of 2.05 – 2.81 years, 4) dividend yields of 0%, 5) risk free rates of 4.82 – 5.03%, and 6) volatility of 157.7 – 174.4 %. 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 September 30, 2023: 1) stock price of $0.004, 2) remaining life of 1.95 years, 3) dividend yield of 0%, 4) risk free rate of 5.03%, and 5) volatility of 157.94%.

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 nine months ended September 30, 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		(154	)
Transfer in due to issuance of warrants		215
Change in fair value of warrant liability		(381	)
Balance of warrant derivative liabilities at September 30, 2023	$	1,407

The Company recorded a gain on settlement of derivative liability in the amount of $47 and a loss of $215 for the three and nine months ended September 30, 2023, respectively. The Company recorded loss on settlement of derivative liability in the amount of $178 and $757 for the three and nine months ended September 30, 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.

	September 30, 2023
	Level 1		Level 2		Level 3		Fair Value
Liabilities
Derivative liability	$	-	$	-	$	1,771	$	1,771
Warrant derivative liability	$	-	$	-	$	1,407	$	1,407

	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