DERIVATIVE LIABILITIES

12 Months Ended

Dec. 31, 2023

Derivative Liabilities

DERIVATIVE LIABILITIES

13. DERIVATIVE LIABILITIES

On December 21, 2023, the Company sold a note to Generating Alpha Ltd. in the aggregate principal amount of $4,000,000 with a five-year maturity, interest at 9% per calendar year, and carries a 9% original issue discount (the “First Alpha Note”). The First Alpha Note is convertible at the discretion of Alpha into shares of the Company’s common stock at a price of $1.50. Alpha may choose the alternate conversion price equal to 85% of the average of the three lowest trading prices during the previous ten trading day period ending on the latest complete trading day prior to notice of conversion.

The Company assessed the alternate conversion price and determined that it represented a derivative liability with a fair value of $1,310,394. The fair value of derivative liability was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

	December 31, 2023
Stock price	$	1.13
Strike price		1.50
Risk-free rate		3.77%
Annualized volatility		100%
Forecast horizon in years		5.0
Alternative Conversion Price		85.0%
Implied Discount Rate		27.3%

On January 20, 2022, the Company sold a second tranche note to L1, as described within Note 12 – Debt. The terms of the transaction included a provision that in the event the stock price is below $324.00 (the “Floor Price”) at the time for so long as stock price continues below the Floor Price, the Second L1 Note would be convertible at a rate of 80% of the lowest VWAP in the ten prior trading days, provided, that if the stock prices elevate back to the normal Floor Price. On May 9, 2022, stock price fell below $324.00 and the default provision was triggered.

As a result of the default, the Company recorded a derivative liability for $1,052,350 which represented the fair value transferred to the note holder from the down round feature being triggered. The fair value of derivative liability was calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies:

	May 9, 2022
Stock price	$	17.10
Strike price		16.20
Risk-free rate		2.12%
Annualized volatility		150%
Forecast horizon in years		1.20
Alternative Conversion Discount		20.0%
Maximum Shares to be Delivered		108,025

During the year ended December 31, 2022, L1 converted $1,750,000 of the Second L1 Note for 5,401 shares and a cash settlement of $1,146,901, resulting in a $143,598 loss on settlement of derivative. As of December 31, 2023 and 2022, the fair value of this derivative liability was $0.

Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.