PRIVATE PLACEMENT AND JH DARBIE FINANCING

12 Months Ended

Dec. 31, 2021

Private Placement And Jh Darbie Financing

PRIVATE PLACEMENT AND JH DARBIE FINANCING

NOTE 7 - PRIVATE PLACEMENT AND JH DARBIE FINANCING

Since July 2020 to March 2021, the Company entered into subscription agreements with certain accredited investors pursuant to the JH Darbie Financing, whereby the Company issued and sold a total of 100 Units, for total gross proceeds of approximately $5 million, pursuant to the JH Darbie Placement Agreement, with each Unit consisting of:

■ 25,000 shares of Edgepoint Common Stock for a price of $1.00 per share of Edgepoint Common Stock.

■ One convertible promissory note, convertible into up to 25,000 shares of Edgepoint Common Stock, at a conversion price of $1.00 per share or up to 138,889 shares of the Company’s Common Stock, at a conversion price of $0.18 per share.

■ 50,000 warrants to purchase an equivalent number of shares of Edgepoint Common Stock at $1.00 per share or an equivalent number of shares of the Company’s Common Stock at $0.20 per share with a three-year expiration date.

As of December 31, 2021 and 2020, debt recorded under the JH Darbie Financing, net of debt discounts, consist of the following amounts:

	December 31, 2021		December 31, 2020
Convertible promissory notes
Subscription agreements - accredited investors	$	2,353,253	$	943,586
Subscription agreements – related party		109,046		67,992
Total convertible promissory notes	$	2,462,299	$	1,011,578

The Company incurred approximately $0.64 million of issuance costs, including legal costs of approximately $39,000, that are incremental costs directly related to the issuance of the various instruments bundled in the offering.

Concurrently with the sale of the Units, JH Darbie was granted, for nominal consideration, a warrant, exercisable over a five-year period, to purchase 10% of the number of Units sold in the JH Darbie Financing. As such, the Company granted 10 Units to JH Darbie pursuant to the JH Darbie Placement Agreement.

The terms of convertible notes are summarized as follows:

■ Term: Through March 31, 2022.

■ Coupon: 16%.

■ Convertible at the option of the holder at any time in the Company’s Common Stock or Edgepoint Common Stock.

■ The conversion price is initially set at $0.18 per share for the Company’s Common Stock or $1.00 for Edgepoint Common Stock, subject to adjustment.

The Company allocated the proceeds among the freestanding financial instruments that were issued in the single transaction using the relative fair value method, which affects the determination of each financial instrument initial carrying amount. The Company utilized the relative fair value method as none of the freestanding financial instruments issued as part of the single transaction are measured at fair value. Under the relative fair value method, the Company made separate estimates of the fair value of each freestanding financial instrument and then allocated the proceeds in proportion to those fair value amounts. The Company recorded aggregate non-controlling interests of approximately $1.8 million in Edgepoint between 2021 and 2020. Non-controlling interests represent the portion of net assets in consolidated entities that are not owned by the Company and are reported as a component of equity in the consolidated balance sheets.

As of the multiple closings of the Company, during the year ended December 31, 2021, under the private placement memorandum with JH Darbie, the estimated volume weighted grant date fair value of approximately $0.23 per share associated with the warrants to purchase up to 2,035,000 shares of common stock issued in this offering, or a total of approximately $0.5 million, was recorded to additional paid-in capital on a relative fair value basis. All warrants sold in this offering had an exercise price of $0.20 per share of the Company stock or $1.00 per share of Edge Point, subject to adjustment, are exercisable immediately and expire three years from the date of issuance. The fair value of the warrants was estimated using a Black Scholes valuation models using the following input values

Expected Term	1.5 years
Expected volatility		152.3%-164.8	%
Risk-free interest rates		0.09%-0.11	%
Dividend yields		0.00	%

As of the multiple closings of the Company, during the year ended December 31, 2020, under the private placement memorandum with JH Darbie, the estimated grant date fair value of approximately $0.18 per share associated with the warrants to purchase up to 3,465,000 shares of common stock issued in this offering, or a total of approximately $0.4 million, was recorded to additional paid-in capital on a relative fair value basis. All warrants sold in this offering had an exercise price of $0.20 per share of the Company stock or $1.00 per share of Edge Point, subject to adjustment, are exercisable immediately and expire three years from the date of issuance. The fair value of the warrants was estimated using a Black Scholes valuation models using the following input values.

Expected Term	1.5 years
Expected volatility	168.5%-191.9	%
Risk-free interest rates	0.12%-0.15	%
Dividend yields	0.00	%

The Company recorded an initial debt discount of approximately $0.6 and $0.7 million during the years ended December 31, 2021 and 2020, respectively, representing the intrinsic value of the conversion option embedded in the convertible debt instrument based upon the difference between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

The Company recognized amortization expense related to the debt discount and debt issuance costs of $1,229,865 and $412,318 for the years ended December 31, 2021, and 2020, respectively, which is included in interest expense in the statements of operations.

In June 2021, the Company executed amendment #4 to the private placement memorandum. Originally, the investor was granted 50,000 of the Company’s warrants to purchase an equivalent number of shares of the Company’s common stock at a strike price of $0.20 or 50,000 warrants to purchase an equivalent number of Edgepoint’s common share at strike price of $1.00. However, the PPM was written in a way that the investor could only invest in $10,000 of common stock of the Company (50,000 shares of common stock at $0.20 per share) or $50,000 (50,000 shares of common stock in Edgepoint AI, Inc. at $1.00 per share). In conjunction with amendment #4, the Company approved the issuance of an additional 20,000,000 warrants to purchase shares of common stock of the Company to the investors in the 100 Units and 2,000,000 warrants to purchase shares of common stock of the Company to the Placement Agent at the same terms and conditions of the PPM. To clarify further, each unit will receive additional 200,000 warrants to purchase an equivalent number of shares of the Company’s common stock at $0.20 per share, so as to make it overall 250,000 warrants to buy an equivalent number of shares of the Company’s common stock, for which the investor would pay a total of $50,000 per unit invested upon exercise.

In connection with the additional 22 million warrants issued by the Company pursuant to amendment #4, the Company recorded a charge to earnings of approximately $2.0 million during the year ended December 31, 2021. No similar expense was recorded during the same period of 2020. The fair value of the warrants was estimated using a Black Scholes valuation model using the following input values.

Expected Term	1-2 years
Expected volatility		94.4%-130.0	%
Risk-free interest rates		0.08%-0.25	%
Dividend yields		0.00	%

In February 2022, the Company and all except one of the Investors agreed to extend the maturity date of the Notes from March 31, 2022, to March 31, 2023. In consideration for the extension of the Notes, the Company issued to the Investors an aggregate of 33,000,066 Oncotelic Warrants at a price of $0.15 per share of Company’s Common Stock. Each Investor will be entitled to receive 333,334 Oncotelic Warrants for each Unit purchased.