CONVERTIBLE NOTES

6 Months Ended

Jun. 30, 2022

NOTE 7. CONVERTIBLE NOTES

Convertible Notes Payable

On March 22, 2021, the Company entered into a convertible promissory note agreement with Claudia Villalta for the issuance of a convertible promissory note with a principal balance of $30,000. The note carries a 10% interest rate per annum and is convertible at a fixed price of $0.06 a share into a total of 500,000 common shares. Due to the variable conversion feature on the other notes, this note is tainted with no net share settlement available, the note conversion feature was bifurcated from the note and recorded as a derivative liability. This note was in default as of June 30, 2022.

On June 4, 2021, the Company entered into a securities purchase agreement (the “Labrys SPA”) with Labrys Fund, LP (“Labrys”), pursuant to which the Company issued a 12% promissory note (the “Labrys Note”) with a maturity date of June 3, 2022 (the “Labrys Maturity Date”), in the principal sum of $1,000,000. Pursuant to the terms of the Labrys Note, the Company agreed to pay to $225,000 (the “Principal Sum”) to Labrys and to pay interest on the principal balance at the rate of 12% per annum. The Labrys Note carries an original issue discount (“OID”) of $22,500. Accordingly, on the Closing Date (as defined in the Labrys SPA), Labrys paid the purchase price of $202,500 in exchange for the Labrys Note. Labrys may convert the Labrys Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Labrys Note) at any time at a fixed conversion price equal to $0.023 per share but can be reset if the Company issues instruments at a lower price. The Company paid $14,650 of deferred financing costs which are amortized through the maturity date of the note. During the year ended December 31, 2021 the company made payments of $77,000, reducing the outstanding note balance to $148,000. Due to the dilutive issuance clauses on the conversion price, the note conversion feature was bifurcated from the note and recorded as a derivative liability. During the six months ended June 30, 2022, $139,500 of principal and $27,000 in accrued interest was converted into 54,369,190 shares of common stock. In addition the company repaid $8,500 in principal to settle the note in full.

On August 23, 2021, the Company entered into a securities purchase agreement (the “Blue Lake SPA”) with Blue Lake Partners, LLC (“Blue Lake”), pursuant to which the Company issued a 12% promissory note (the “Blue Lake Note”) with a maturity date of August 23, 2022 (the “Blue Lake Maturity Date”), in the principal sum of $150,000. Pursuant to the terms of the Blue Lake Note, the Company agreed to pay to $150,000 (the “Principal Sum”) to Blue Lake and to pay interest on the principal balance at the rate of 12% per annum. The Blue Lake Note carries an original issue discount (“OID”) of $15,000. Accordingly, on the Closing Date (as defined in the Blue Lake SPA), Blue Lake retained an additional $9,450 of legal fees and paid the purchase price of $125,500 in exchange for the Blue Lake Note. Blue Lake may convert the Blue Lake Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Blue Lake Note) at any time at a fixed conversion price equal to $0.02 per share but can be reset if the Company issues instruments at a lower price. Due to the dilutive issuance clauses on the conversion price, the note conversion feature was bifurcated from the note and recorded as a derivative liability. During the six months ended June 30, 2022, $70,410 of principal was converted into 45,719,047 shares of common stock.

The Company may prepay the Blue Lake Note at any time prior to the date that an Event of Default (as defined in the Blue Lake Note) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium) plus $7,530 for administrative fees. The Blue Lake Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Blue Lake Note or Blue Lake SPA.

Upon the occurrence of any Event of Default, the Blue Lake Note shall become immediately due and payable and the Company shall pay to Blue Lake, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 16% per annum or the highest rate permitted by law.

The Blue Lake Note requires that the Company reserve from its authorized and unissued common stock a number of shares equal to the greater of: (a) 11,250,000 shares of our common stock, or (b) the sum of (i) the number of shares of common stock issuable upon conversion of or otherwise pursuant to the Blue Lake Note and such additional shares of common stock, if any, as are issuable on account of interest on the Note pursuant to the Blue Lake SPA issuable upon the full conversion of the Blue Lake Note (assuming no payment of the principal amount or interest) as of any issue date multiplied by (ii) one and a half. The Company is subject to penalties for failure to timely deliver shares to Blue Lake following a conversion request.

The Blue Lake SPA and the Blue Lake Note contain covenants and restrictions common with this type of debt transaction. Furthermore, the Company are subject to certain negative covenants under the Blue Lake SPA and the Blue Lake Note, which we believe are customary for transactions of this type. At June 30, 2022, we were in compliance with all covenants and restrictions.

In conjunction with the issuance of the Blue Lake Note, the Company issued a five year warrant exercisable for 6,000,000 shares of common stock at an exercisable price of $0.025 per share subject to anti-dilution and price protection adjustments. The warrants are accounted for as a liability based on the variable number of shares issuable under outstanding convertible debt and the warrants.

On August 23, 2021, the Company entered into a securities purchase agreement (the “Coventry SPA”) with Coventry Enterprises, LLC (“Coventry”), pursuant to which the Company issued a 10% promissory note (the “Coventry Note”) with a maturity date of May 9, 2023 (the “Coventry Maturity Date”), in the principal sum of $150,000. Pursuant to the terms of the Coventry Note, the Company agreed to pay $150,000 (the “Principal Sum”) to Coventry and to pay interest on the principal balance at the rate of 10% per annum. The Coventry Note carries an original issue discount (“OID”) of $30,000. Accordingly, on the Closing Date (as defined in the Coventry SPA), Coventry retained an additional $7,200 of legal fees and paid the purchase price of $112,800 in exchange for the Coventry Note. Coventry may convert the Coventry Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Coventry Note) in the event of default at a variable conversion price equal to 90% of the lowest per-share during the 20 trading day period before the conversion. The note requires monthly payments of $23,571 commencing on November 8, 2022.

In conjunction with the issuance of the Coventry Note, the Company issued 10,000,000 shares of common stock. The shares are accounted for as deferred financing costs with a value of $30,000 which will be amortized through the maturity date of the note.

Convertible notes payable are comprised of the following:

Schedule of convertible notes payable
	June 30,			December 31,
	2022			2021
Convertible note payable – Claudia Magdalena Villalta	$	30,000		$	30,000
Convertible note payable – Labrys	$	—		$	148,000
Convertible notes payable- Blue Lake Holdings	$	79,590		$	150,000
Convertible note payable – Coventry	$	150,000		$	—
Total	$	259,590		$	328,000
Less debt discounts	$	(79,977	)	$	(198,781	)
Net	$	179,613		$	129,219
Less current portion	$	(179,613	)	$	(129,219	)
Long term portion	$	—		$	—

As of June 30, 2022, there were 1,118,265,306 shares of common stock that may be issued under the convertible notes payable described above.

As of June 30, 2022 and December 31, 2021, unamortized debt discount was $79,977 and $198,781, respectively. During the six months ended June 30, 2022, the Company amortized debt discount of $186,004 to interest expense. Accrued interest on convertible notes was $34,159 as of June 30, 2022.

Convertible Notes Payable – Related Parties

On March 1, 2016, the Company executed two convertible notes of $4,902 each with former executives of the Company. These notes are each convertible into 50,000,000 shares of common stock. These notes are non-interest bearing. On October 14, 2019, one of these notes converted into common stock. In May 2020, Robert L. Hymers purchased half of the remaining convertible promissory note and its related conversion rights from John English in a private transaction. In May 2020, John English converted principal of $2,451 into 25,000,000 shares of common stock. The remaining principal balance owed to Robert L. Hymers of $2,451 was convertible into 25,000,000 shares of stock at December 31, 2021. On January 10, 2022, the Company issued 18,500,000 shares of common stock to Hymers upon partial conversion of the principal balance of the promissory note, so that as of the date of this filing, the note is convertible into 6,500,000 shares of common stock.

On December 9, 2019, the Company executed a convertible note with Pinnacle Consulting Services Inc.(“Pinnacle”), which is owned by Robert Hymers, for $40,000 which matured on June 9, 2020. This note bears interest at 5% per annum, which is convertible into shares of the Company’s common stock. The note is convertible at the option of the holder, into such number of fully paid and non-assessable shares of common stock as is determined by dividing that portion of the outstanding principal balance under the note by the Conversion Price, which is a 35% discount of the lowest reported sale price of the common stock for the 15 trading days immediately prior to the date of conversion. Due to the variable conversion feature, the note conversion feature was bifurcated from the note and recorded as a derivative liability. This note was in default as of June 30, 2022.

On June 30, 2020, the Company executed a convertible note with Pinnacle for $21,000 due on June 30, 2021. This note bears interest at 10% per annum and is convertible (in whole or in part), at the option of the Holder, into such number of fully paid and non-assessable shares of common stock as is determined by dividing that portion of the outstanding principal balance under this Note by the Conversion Price, which is a 35% discount of the lowest reported sale price of the common stock for the 15 trading days immediately prior to the date of conversion. Due to the variable conversion feature, the note conversion feature was bifurcated from the note and recorded as a derivative liability. This note was in default as of June 30, 2022.

On October 19, 2021, the Company executed a convertible note with Pinnacle, for $180,000, to settle outstanding consulting fees, due on April 19, 2022. This note bears interest at 10% per annum and is convertible (in whole or in part), at the option of the Holder, into such number of fully paid and non-assessable shares of common stock as is determined by dividing that portion of the outstanding principal balance under this Note by the Conversion Price of $0.0075 but can be reset if the Company issues instruments at a lower price. Due to the dilutive issuance clauses on the conversion price, the note conversion feature was bifurcated from the note and recorded as a derivative liability.

On March 23, 2022, the Company executed a convertible note with Robert Hymers for $55,000 due on September 19, 2022. This note bears interest at 10% per annum and is convertible (in whole or in part), at the option of the Holder, into such number of fully paid and non-assessable shares of common stock as is determined by dividing that portion of the outstanding principal balance under this Note by the Conversion Price, $0.000098. On April 21, 2022, the Company and Hymers entered into a debt exchange agreement, whereby the Company exchanged the $55,000 Note convertible at a Conversion Price of $0.000098 per share for a $60,000 note convertible at $0.002 per share, all other note terms remaining unchanged. The Company determined that due to the change in fair value of the conversion option being significant, the modification of the note should be accounted for as a debt extinguishment, with the resulting loss on extinguishment being recorded in additional paid-in capital because Hymers is a related party.

On March 25, 2022, the Company executed a convertible note with Alma Otey, a related party, for $23,000, due on July 13, 2022. This note bears interest at 10% per annum and is convertible (in whole or in part), at the option of the Holder, into such number of fully paid and non-assessable shares of common stock as is determined by dividing that portion of the outstanding principal balance under this Note by the Conversion Price of $0.000098 but can be reset if the Company issues instruments at a lower price. Due to the dilutive issuance clauses on the conversion price, the note conversion feature was bifurcated from the note and recorded as a derivative liability. The note requires monthly payments of $7,333.34 until the balance is paid in full. During the six months ended June 30, 2022, the Company has made payments of $5,000 on the note

Convertible notes payable – related parties are comprised of the following:

Schedule of convertible notes payable
	June 30,			December 31,
	2022			2021
Convertible notes payable – Pinnacle Consulting Services	$	241,000		$	241,000
Convertible notes payable – Robert Hymers	$	63,153		$	4,875
Convertible notes payable- Alma Otey	$	18,000		$	—
Total	$	322,153		$	245,875
Less debt discounts	$	(24,714	)	$	(107,802	)
Net	$	297,439		$	138,073
Less current portion	$	(297,439	)	$	(138,073	)
Long term portion	$	—		$	—

As of June 30, 2022, there were 361,481,161 shares of common stock that may be issued under the convertible notes payable described above.

As of June 30, 2022 and December 31, 2021, unamortized debt discount was $24,714 and $107,802, respectively. During the quarter ended June 30, 2022, the Company amortized debt discount of $197,081 to interest expense. Accrued interest on convertible notes was $13,494 as of June 30, 2022.

Derivative liabilities

The Company determined that the conversion options in the certain of the notes discussed above met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock. The Company bifurcated the embedded conversion option in the note once the note becomes convertible and account for it as a derivative liability.

During the quarter ended June 30, 2022, the fair value of new derivative liabilities on the new issuance of debt amounted to $103,993 upon inception, with debt discount of $103,993 recognized. The Company recognized a combined loss on the change in fair value of the derivative liability and settlement of derivatives through payment of convertible notes of $664,902 during the six months ended June 30, 2022. The Black Scholes valuation model included inputs of volatility of between 209% and 625%, a dividend yield of 0%, risk free rate of 0.28%-3.01% and a term of between 0.5 years and 4.5 years.

The table below presents the change in the fair value of the derivative liability:


Fair Value as of January 1, 2022	$	2,328,234
Initial recognition of derivative added as debt discount		317,631
Settlement of derivative liability as a result of payment on convertible notes		(6,108	)
Settlement of derivative liability as a result of conversion of convertible notes		(460,003	)
Settlement of derivative liability as a result of extinguishment of convertible notes		(1,126,619	)
Loss on change in fair value		671,010
Fair Value as of June 30, 2022		1,724,145

ECO INNOVATION GROUP, INC. 10-Q