NOTE 11 – CONVERTIBLE PROMISSORY NOTES PAYABLE
a) Convertible promissory notes
In October, November, and December 2021, the Company, issued seven (7) convertible promissory notes of US$2,250,000 aggregate principal amount, due in one year (the ‘Notes’) with issuance price discounted 90.0%. The Notes bear interest at a rate of 8.0% per annum, payable in one year and will mature on October 27, November 5, November 16, November 29 and December 2 of 2022. Net proceeds after debt issuance costs and debt discount were approximately US$1,793,000. Debt issuance costs in the amount of US$162,000 are recorded as deferred charges and included in the other current assets on the consolidated balance sheet. The debt discount and debt issuance costs are amortized into interest expense using the effective interest method over the terms of the Notes.
The details of convertible notes are as follows:
Unless the Notes are converted, the principal amounts of the Notes, and accrued interest at the rate of 8% per annum, are payable on the one-year anniversary of the issuance of the Notes (the “Maturity Date”). If the Company fails to satisfy its loan obligation by the Maturity Date, the default interest rate will be 16%.
The Lenders have the right to convert any or all of the principal and accrued interest on the Notes into shares of common stock of the Company on the earlier of (i) 180 calendar days after the issuance date of the Notes or (ii) the closing of a listing for trading of the common stock of the Company on a national securities exchange offering resulting in gross proceeds to the Company of $15,000,000 or more (an “Uplist Offering”). If the Company closes an Uplist Offering on or before the 180th calendar date after the issuance date of the Notes, the conversion price shall be 70% of the per share offering price in the Uplist Offering; otherwise, the conversion price is $0.75 per share.
Subject to customary exceptions, if the Company issues shares or any securities convertible into shares of common stock at an effective price per share lower than the conversion price of the Notes, the conversion rate of the Notes shall be reduced to such lower price.
Until the Notes are either paid or converted in their entirety, the Company agreed with the Lenders not to sell any securities convertible into shares of common stock of the Company (i) at a conversion price that is based on the trading price of the stock or (ii) with a conversion price that is subject to being reset at a future date or upon an event directly or indirectly related to the business of the Company or the market for the common stock. The Company also agreed to not issue securities at a future determined price.
The Lenders have the right to require the Company to repay the Notes if the Company receives cash proceeds, including proceeds from customers and the issuance of equity (including in the Uplist Offering). If the Company prepays the Notes prior to the Maturity Date, the Company shall pay a 10% prepayment penalty.
For the year ended December 31, 2021, the Company recognized interest expenses of the Notes in the amount of US$27,447.
The following is the summary of outstanding promissory notes as of December 31, 2021:
Interest rate Principal Amount Net Proceeds Warrants Shares Maturity Date
Convertible Note- Tarlos Victory (Note 9 (b)) 8 % $ 250,000 $ 197,000 200,000 October 27, 2022
Convertible Note-Mast Hill (Note 9 (b)) 8 % 750,000 601,000 600,000 November 5, 2022
Convertible Note-First Fire (Note 9 (b)) 8 % 250,000 197,000 200,000 November 16, 2022
Convertible Note-LGH Note 9 (b)) 8 % 250,000 207,000 200,000 November 24, 2022
Convertible Note -Fourth Man (Note 9 (b)) 8 % 250,000 197,000 200,000 November 29, 2022
Convertible Note-Jeffery Street Note 9 (b)) 8 % 250,000 197,000 200,000 December 2, 2022
Convertible Note -Blue Lake Note 9 (b)) 8 % 250,000 197,000 200,000 December 2, 2022
Total 2,250,000 1,793,000 1,800,000
Debt Discounts (225,000 )
Amortization of discounts for the year ended December 31, 2021 5,550
Convertible Promissory Notes payable as of December 31, 2021 $
2,030,550
*The Company prepaid $10,000 legal deposit for each note till the repayment of the notes.
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b) Warrants
Accounting for Warrants
In connection with the issuance of a convertible promissory notes (see Note 11 (a) in October, November and December, 2021, the Company also issued seven (7) three-year warrant (the “Warrant”) to purchase an aggregate of 1,800,000 shares of the Company’s common stock (the “Warrant Shares”).
The Warrants issued to the Lenders granted each of the Lenders the right to purchase up to 200,000 shares of common stock of the Company at an exercise price of $1.25 per share. However, if the Company closes an Uplist Offering on or before the 180th calendar date after the issuance date of the Warrants, then the exercise price shall be 125% of the offering price of a share in the Uplist Offering. If the adjusted exercise price as a result of the Uplist Offering is less than $1.25 per share, then the number of shares for which the Warrants are exercisable shall be increased such that the total exercise price, after taking into account the decrease in the per share exercise price, shall be equal to the total exercise price prior to such adjustment.
The Lenders have the right to exercise the Warrants on a cashless basis if the highest traded price of a share of common stock of the Company during the 150 trading days prior to exercise of the Warrants exceeds the exercise price, unless there is an effective registration statement of the Company which covers the resale of the Lenders.
If the Company issues shares or any securities convertible into shares at an effective price per share lower than the exercise price of the Warrants, the exercise price of the Warrants shall be reduced to such lower price, subject to customary exceptions.
The Lenders may not convert the Notes or exercise the Warrants if such conversion or exercise will result in each of the Lenders, together with any affiliates, beneficially owning in excess of 4.9% of the Company’s outstanding common stock immediately after giving effect to such exercise unless the Lenders notify the Company at least 61 days prior to such exercise.
The fair values of these warrants as of December 31, 2021 were calculated using the Black-Scholes option-pricing model with the following assumptions:
December 31, 2021
Volatility (%) Expected dividends yield (%) Weighted average expected life (year) Risk-free interest rate (%) (per annum) Initial value of common stock purchase warrants liability (US$) Changes of fair value of common stock purchase warrants liability (- (gains)/+ losses(US$) Common stock purchase sarrants liability as of December 31, 2021(US$)
Convertible Note- Tarlos Victory (Note 9 (a)) 187.3 % $ 0.0 % $ 2.8 0.97 % 311,649 (186,893 ) 124,756
Convertible Note-Mast Hill (Note 9 (a)) 187.3 % 0.0 % 2.8 0.97 % 576,233 (201,077 ) 375,156
Convertible Note-First Fire (Note 9 (a)) 187.3 % 0.0 % 2.9 0.97 % 196,037 (70,629 ) 125,408
Convertible Note-LGH Note 9 (a)) 187.3 % 0.0 % 2.9 0.97 % 214,644 (88,980 ) 125,664
Convertible Note -Fourth Man (Note 9 (ab)) 187.3 % 0.0 % 2.9 0.97 % 214,867 (89,046 ) 125,821
Convertible Note-Jeffery Street Note 9 (a)) 187.3 % 0.0 % 2.9 0.97 % 187,338 (61,423 ) 125,915
Convertible Note -Blue Lake Note 9 (a)) 187.3 % 0.0 % 2.9 0.97 % 187,338 (61,423 ) 125,915
Total Total 1,888,106 (759,471 ) 1,128,635
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