|9 Months Ended|
Sep. 30, 2022
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
8. DERIVATIVE LIABILITIES
As of September 30, 2022, the warrant liabilities represent aggregate fair value of publicly traded 3,088,198 Series A warrants, 135,999 representative’s warrants and 4,106,418 Debenture Warrants. The fair value of the IPO warrants and representative’s warrants amount to $692,877 (December 31, 2021 - $1,418,964) and were categorized as a Level 1 financial instrument. The fair value of the Debenture Warrants amounted to $3,650,000 (June 30, 2022 - $4,080,958) and were categorized as a Level 3 financial instrument. As at September 30, 2022 the Company utilized the Monte Carlo option-pricing model (June 30, 2022 – Black-Scholes option-pricing model) for the Debenture Warrants using the following assumptions: stock price $ (June 30, 2022 - $ ), dividend yield – nil (June 30, 2022 – nil), expected volatility 90.0% (June 30, 2022 – 58.3%), risk free rate of return 4.25% (June 30, 2022 - 3.14%), and expected term of 3.25 years (June 30, 2022 – expected term of 3.5 years).
The representative’s warrants are exercisable one year from the effective date of the registration statement for the IPO and will expire three years after the effective date. The exercise price of the representative’s warrant is $6 per share. The warrants have been deemed compensation by FINRA and are therefore subject to a six-month lock-up pursuant to Rule 5110(e)(1) of FINRA. The underwriter (or permitted assignees under Rule 5110(e)(1)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of six-month from the date of this prospectus. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or recapitalization, reorganization, merger or consolidation.
The fair value change on the IPO and representative’s warrant liabilities amounted to $640,540 and is recorded in the statement of comprehensive loss for the nine months ended September 30, 2022.
Debenture Convertible Feature
On June 30, 2022, the Company issued Debentures with an equity conversion feature, see Note 6. The fair value of the Debentures’ convertible features were $2,249,000 on September 30, 2022 (June 30, 2022 - $3,336,535) and were categorized as a Level 3 financial instrument. As at September 30, 2022 the Company utilized the Monte Carlo option-pricing model (June 30, 2022 – Black-Scholes option-pricing model) for the convertible feature using the following assumptions: stock price $ (June 30, 2022 - $ ), dividend yield – (June 30, 2022 – nil), expected volatility 90.0% (June 30, 2022 – 101.0%), risk free rate of return 4.22% (June 30, 2022 - 3.14%), discount rate 18.93% (June 30, 2022 – not applicable), and expected term of 2.25 year (June 30, 2022 – 1 year).
Changes in the fair value of Company’s Level 3 financial instruments for the nine months ended September 30, 2022 were as follows:
SCHEDULE OF CHANGES IN THE FAIR VALUE OF COMPANY'S LEVEL 3 FINANCIAL INSTRUMENTS
The fair value of the debenture warrants and debenture convertible feature includes the volatility and risk-free rate.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef