Convertible Notes Payable and Derivative Liabilities

9 Months Ended

Sep. 30, 2021

Convertible Notes Payable and Derivative Liabilities

Note 6 Convertible Notes Payable and Derivative Liabilities

Note 6: Convertible Notes Payable and Derivative Liabilities

Convertible Notes Payable

The following table summarizes outstanding convertible notes as of September 30, 2021 and December 31, 2020:

	September 30, 2021			December 31, 2020
June 2019 Notes, maturing March 25, 2020	$	444,444		$	448,888
June 2020 Note 1, maturing June 4, 2021		-			119,078
June 2020 Note 2, maturing June 24, 2021		-			87,779
June 2020 Note 3, maturing June 24, 2021		-			87,779
November 2020 Note, maturing November 23, 2021		-			305,000
February 2021 Note, maturing February 15, 2022		300,000			-
Total		744,444			1,048,524
Less: Debt discount and deferred finance costs on short-term convertible notes		(167,670	)		(239,282	)
Less: Current convertible notes payable, net of discount		(576,774	)		(809,242	)
Total long-term convertible notes payable, net	$	-		$	-

In June and July 2019, the Company issued convertible notes to 10 investors with an original principal amount of $2,388,889, receiving $1,583,333 in net cash proceeds (the “June 2019 Notes”). The June 2019 Notes matured on March 25, 2020 and are convertible into the Company’s common stock at a per share price of $0.35 at any time subsequent to the issuance date. The June 2019 Notes contain a down round feature, whereby any sale of common stock or common stock equivalent at a price per share lower than the conversion price of the June 2019 Notes will result in the conversion price being lowered to the new price. The warrants contain the same down round feature as the notes. As a result of a dilutive issuance during the year ended December 31, 2020, the exercise price of the remaining notes payable and the warrants is currently $0.18 per share.

During the year ended December 31, 2020, $1,500,000 of the principal on the June 2019 Notes was converted into the right to receive 7,883,599 shares of common stock, of which 5,105,821 were issued by September 30, 2021 and 2,777,778 were part of subscriptions payable liability balance of $499,999.

Following two previous extensions and on July 9, 2021, the holder of $444,444 of the notes agreed to extend the repayment period to December 31, 2021. There were no other changes to terms of the convertible notes payable, and the amendments were accounted for as a debt modification.

On February 15, 2021, the Company entered into a convertible note agreement with an institutional investor for a principal amount of $675,000 (the “February 2021 Note”) bearing interest at 10% with an original issue discount of $67,500 and a maturity date of February 15, 2022. The Company paid $37,500 of deferred finance costs and issued 200,000 shares of common stock to the lender of the February 2021 Note as deferred finance costs, valued at $72,000 based on the closing price of the stock at the date of borrowing. This lender also received 767,045 common stock warrants with an exercise price of $0.44 and a term of 3 years valued at $179,699. If the note is in default, the holder has the right to convert the outstanding principal and accrued interest balance into shares of common stock at the closing bid price of the Company’s common stock immediately prior to conversion. As a result of the variable conversion price on the Company’s outstanding notes payable and reset provisions, the conversion option and the warrants were accounted for as a derivative liability. The original balance of this note was $675,000 as of September 30, 2021. The Company used proceeds from this note payable to pay in full the June 2020 Notes and the November 2020 Note. To date, the Company has repaid $375,000 of the note balance in cash and the balance of this note was $300,000 as of September 30, 2021.

On February 22, 2021, the Company entered into a settlement agreement with the holder of the June 2020 Note 2. The agreement allowed for the holder to convert all principal into 414,930 shares of common stock in full settlement of the note. The holder also received 207,465 warrants to purchase shares of common stock at an exercise price of $0.18 per share. The warrants had a fair value of $55,273 and were recorded as a derivative liability due to the variable number of shares to be issued under the Company’s dilutive instruments. The Company recognized a loss of $137,506 under this settlement agreement.

The Company amortized $579,978 and $1,594,924 of debt discount and deferred finance costs to interest expense related to convertible notes payable during the nine months ended September 30, 2021 and 2020, respectively. Accrued interest on notes payable and convertible notes payable was $35,108 and $4,931 as of September 30, 2021 and December 31, 2020, respectively.

Derivative Liabilities

The fair values of the conversion option of outstanding convertible notes payable and common stock warrants with reset provisions were estimated using a binomial model with the following assumptions:

	As of September 30, 2021
	Conversion Option			Warrants
Volatility		114.32	%	114.32-117.50		%
Dividend Yield		0	%		0	%
Risk-free rate		0.05	%	0.09-0.53%
Expected term	0.50 year			1-3 years
Stock price	$	0.10		$	0.10
Exercise price	$	0.18-0.20		$	0.18-0.44
Derivative liability fair value	$	57,497		$	497,080

All fair value measurements related to the derivative liabilities are considered significant unobservable inputs (Level 3) under the fair value hierarchy of ASC 820.

The table below presents the change in the fair value of the derivative liability during the nine months ended September 30, 2021:

Fair value as of December 31, 2020	$	1,305,106
Fair value on the date of issuance of new derivatives		493,671
Extinguishment due to repayment of debt		(19,747	)
Extinguishment due to exercise of warrant		(72,958	)
Gain on change in fair value of derivatives		(1,151,494	)
Fair value as of September 30, 2021	$	554,577