NOTE
7: DERIVATIVE LIABILITY
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components
of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, Derivatives and Hedging. The result
of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operation as other
income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date
then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification
under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
The
derivative liability is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from October 31,
2021 to July 31, 2022.
SCHEDULE OF DERIVATIVE LIABILITY MEASURED AT FAIR VALUE RECURRING BASIS
| | |
Conversion feature derivative liability | |
| October 31, 2021 | |
$ | 471,219 | |
| Initial fair value of derivative liability charged to other expense | |
| 143,657 | |
| Loss on change in fair value included in earnings | |
| 22,919 | |
| Derivative liability relieved by conversions of convertible promissory notes | |
| (583,659 | ) |
| July 31, 2022 | |
$ | 54,136 | |
Total
derivative liability at July 31, 2022 and October 31, 2021 amounted to $54,136 and $471,219, respectively. The change in fair value included
in earnings for the nine months ended July 31, 2022 of $22,919 is due in part to the quoted market price of the Company’s common
stock decreasing from $0.02 at October 31, 2021 to $0.0003 at July 31, 2022, coupled with substantially reduced conversion prices due
to the effect of “ratchet” provisions incorporated within the convertible notes payable.
The
Company used the following assumptions for determining the fair value of the convertible instrument granted under the binomial pricing
model with a binomial simulation at July 31, 2022:
SCHEDULE OF FAIR VALUE ASSUMPTIONS OF DERIVATIVE LIABILITY
| Expected volatility | |
| 308.8% - 375.7 |
% |
| Expected term | |
| 0.4 – 3.0 months |
|
| Risk-free interest rate | |
| 2.220% - 2.410 |
% |
| Stock price | |
$ | 0.0003 |
|
The
Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed above. While the Company
believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are
that of volatility and market price of the underlying common stock of the Company.
At
July 31, 2022, the Company did not have any derivative instruments that were designated as hedges.
VERUS
INTERNATIONAL, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
|
