4. Convertible Notes Payable

12 Months Ended

Dec. 31, 2019

NOTE 4 – CONVERTIBLE NOTES PAYABLE

On January 10, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $126,000. The Company received net cash proceeds of $102,000 after an original issue discount of $21,000 and fees of $3,000. The convertible note bears interest at 8% and matures on January 10, 2020, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 85% of the lowest trading price during the 15 trading days prior to the conversion date. The Company determined that the conversion feature should be accounted for as a derivative liability beginning six months after the issuance of the note. The Company estimated the fair value of the derivative liability at issuance to be $186,895, resulting in a day one loss of $84,895 using a Black Scholes model and the following assumptions: volatility of 54% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of six months, an exercise price of $0.09 based on the lowest trading price during the previous 30 days, and a risk-free rate of 2.15%. The initial value of the derivative liability was recorded as debt discount. On July 12, 2019, the Company paid $157,099 related to the full extinguishment of the January 2019 PowerUp note including accrued interest at the time of retirement and additional fee of $26,073. As part of this extinguishment, remaining unamortized discount and deferred financing costs were expensed to interest expense.

On February 7, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $83,000. The Company received net cash proceeds of $80,000 after payment fees of $3,000. The convertible note bears interest at 10% and matures on February 7, 2020, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. On August 6, 2019, the Company paid $120,996 related to the full extinguishment of the February 2019 PowerUp note including accrued interest at the time of retirement and additional fee of $34,722. As part of this extinguishment, remaining unamortized discount and deferred financing costs were expensed to interest expense.

On March 29, 2019, the Company entered into an unsecured convertible promissory note which allowed for up to $750,000 of principal, with a total original issue discount of up to $150,000, with a principal amount of $250,000. In April 2019, the Company received net cash proceeds of $200,000 after an original issue discount of $50,000. In July 2019, the Company received additional proceeds of $200,000 after an original issue discount of $50,000, and received an additional $200,000 of net proceeds after $50,000 original issue discount in August 2019. The convertible note bears interest at 8% and all principal amounts matured on September 30, 2019, with interest accruing at a rate of 22% if the Company is in default. As of December 31, 2019 and the date of this filing, the Company has not been provided with a notice of default as required of the lender. Beginning at the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is the lesser of $2 or 70% of the lowest trading price during the 30 trading days prior to the conversion date. On April 3, 2019, the Company issued 35,000 shares to this lender and recognized expense of $45,500. During the year ended December 31, 2019, the lender converted $50,000 of principal into 714,296 shares of common stock.

The Company determined that the conversion features should be accounted for as a derivative liability at the time of issuance of the notes. The Company estimated the fair value of the derivative liability at issuance to be $1,620,093, resulting in a day one loss of $1,071,339 using a Black Scholes model and the following assumptions: volatility of between 55% and 58% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of six to nine months, an exercise price of $0.07 or $0.84 based on the lowest trading price during the previous 30 days, and a risk-free rate of between 1.9% and 2.5%. The initial value of the derivative liability was recorded as debt discount. The derivative liability is adjusted to fair value at each reporting period. Unamortized discount related to this convertible note was $0 as of December 31, 2019.

On May 22, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $78,000. The Company received net cash proceeds of $75,000 after payment fees of $3,000. The convertible note bears interest at 10% and matures on May 22, 2020, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. The Company estimated the fair value of the derivative liability at issuance to be $227,487, resulting in a day one loss of $152,487 using a Black Scholes model and the following assumptions: volatility of 49% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of six months, an exercise price of $0.12 based on the lowest trading price during the previous 15 days, and a risk-free rate of 1.6%. The initial value of the derivative liability was recorded as debt discount. On November 26, 2019, the Company paid $113,826 related to the full extinguishment of the May 2019 PowerUp note including accrued interest at the time of retirement and additional fee of $31,809. As part of this extinguishment, remaining unamortized discount and deferred financing costs were expensed to interest expense.

On September 6, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $153,000. The Company received net cash proceeds of $150,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on September 6, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. Unamortized discount and deferred financing costs were $2,524 as of December 31, 2019 related to this convertible note.

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $78,000. The Company received net cash proceeds of $75,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on November 25, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. Unamortized discount and deferred financing costs were $2,852 as of December 31, 2019 related to this convertible note.

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $150,000. The Company received net cash proceeds of $131,000 after an original issue discount of $15,000 and fees of $4,000. The convertible note bears interest at 5% and matures on November 25, 2020, with interest accruing at a rate of 15% if the Company is in default. The note is convertible upon issuance through the maturity date into shares of common stock at a fixed price of $1.00 per share to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. Beginning six months after the issuance of the note, the holder may convert the note at any time, at a price based on the lower of the fixed price of $1.00 per share or 75% of the lowest trading price during the 15 trading days prior to the conversion date. Unamortized discount and deferred financing costs were $17,132 as of December 31, 2019 related to this convertible note.

On December 10, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $110,000. The Company received net cash proceeds of $97,000 after an original issue discount of $10,000 and fees of $3,000. The lender also received 35,000 shares of common stock as a deferred finance cost, with a fair value of $8,407. The convertible note bears interest at 10% and matures on December 10, 2020, with interest accruing at a rate of 24% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on the lessor of 1) $0.24, or 2) the lesser of 62% of the lowest trade price or the closing bid price during the 20 trading days prior to the conversion date. Unamortized discount and deferred financing costs were $20,179 as of December 31, 2019 related to this convertible note.

The following table summarizes outstanding convertible notes as of December 31, 2019 and 2018:

	December 31, 2019			December 31, 2018
Convertible note dated March 29, 2019, maturing September 30, 2019	$	700,000		$	–
Convertible note dated September 6, 2019, maturing September 6, 2021		153,000			–
Convertible note dated November 25, 2019, maturing November 25, 2021		78,000			–
Convertible note dated November 25, 2019, maturing November 25, 2020		150,000			–
Convertible note dated December 10, 2019, maturing December 10, 2020		110,000			–
Total		1,191,000			–
Debt discount and deferred finance costs on long-term convertible notes		(5,376	)		–
Debt discount and deferred finance costs on short-term convertible notes		(37,310	)		–
Current convertible notes payable, net of discount		(922,690	)		–

Total long-term convertible notes payable, net	$	225,624		$	–

The following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of December 31, 2019:

Fair value measured at December 31, 2019
	Total carrying value at December 31 2019		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant Unobservable inputs (Level 3)
Liabilities:
Derivative liabilities	$	470,331	$	–	$	–	$	470,331

The fair values of derivatives at the date of issuance during the year ended December 31, 2019 were estimated using a Black Scholes model and the following assumptions: volatility of between 49% and 58% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of six months to one year, an exercise price of between $0.07 and $0.84, and a risk-free rate of between 1.6% and 2.5%.

The fair value of derivatives as of December 31, 2019 was estimated using a Black Scholes model and the following assumptions: volatility of 46% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of three months, an exercise price of $0.126, and a risk-free rate of 1.6%. There were no liabilities measured at fair value on a recurring basis as of December 31, 2018. There were no transfers between Level 1, 2 or 3 during the year ended December 31, 2019.

The table below presents the change in the fair value of the derivative liability during the year ended December 31, 2019:

Fair value as of December 31, 2018	$	–
Fair value on the date of issuance recorded as a debt discount		725,753
Fair value on the date of issuance recorded as a loss on derivative		1,308,722
Extinguishment of liability due to conversion to equity		(163,774	)
Extinguishment of liability due to cash payment of debt		(414,383	)
Gain on change in fair value of derivatives		(985,987	)
Fair value as of December 31, 2019	$	470,331

Vitalibis, Inc. 10-K