NOTE 6 - CONVERTIBLE NOTES

On August 24, 2022, the Company issued senior convertible notes with an aggregate principal amount of $27,173,913 due February 24, 2024. The Convertible Notes had a conversion price of $2.25 per share of common stock (12,077,295 total shares if fully converted) and were issued with an original issue discount of 8.0% and did not bear interest unless an event of default occurred, upon which interest would have accrued at 10% per annum. The holders of the Convertible Notes could have converted any portion of the principal at any time during the term of the notes. The holders of the Convertible Notes also received fully vested warrants (the “Note Warrants”) to purchase 9,057,971 shares of the Company’s common stock at an exercise price of $2.85 per share. The conversion and warrant exercise prices were subject to adjustment if the Company declared a stock dividend, stock split or recapitalization. The Company received net cash proceeds, after issuance costs (excluding the value of the warrants issued to the placement agent as discussed below) of $22,300,321.

Company allocated the net proceeds received from the issuance of the Convertible Notes and Note Warrants based on the relative fair values of each resulting in net proceeds of $15,122,345 being allocated to the Convertible Notes recorded as a current liability in the balance sheet and net proceeds of $6,561,247 being allocated to the Note Warrants which was recorded in equity. The Company recorded non-cash interest expense through May 24, 2023 (see below for discussion of issuance of additional convertible notes) to accrete the allocated value of the Convertible Notes using the effective interest method and an interest rate of 39.6%. The Company incurred debt issuance costs of $3,316,409 upon issuance of the Convertible Notes, which includes $616,730 for the fair value of the warrants issued to the placement agent of the Convertible Notes as further described in Note 9. These debt issuance costs were amortized as additional interest expense through May 24, 2023. Total interest expense for the Convertible Notes for the three and six months ended June 30, 2023 was $1,136,997 and $2,913,632, respectively, prior to the recognition of the unamortized discount and issuance costs upon issuance of the addition senior convertible notes noted below.

On May 24, 2023, the Company issued additional senior convertible notes (“New Notes'') with an aggregate principal amount of $4,934,783 due February 24, 2024 to the same investors of the Convertible Notes. The New Notes had an initial conversion price of $2.54 per share of common stock, which was subject to adjustment to $0.75 upon stockholder approval (6,579,710 total shares if fully converted at $0.75 per share, stockholder approval was received on August 3, 2023, see Note 13). The conversion price is also subject to further adjustment if the Company completes an equity or convertible note offering with a price below $0.75, or completes a stock split, reverse stocks split or recapitalization where the five-day VWAP of the Company’s stock price is below $0.75, with a floor price of $0.22 (subject to stockholder approval, see Note 13). The New Notes were issued with an original issue discount of 9.7% and do not bear interest unless an event of default has occurred, upon which interest accrues at 10% per annum. The holders of the New Notes also received fully vested warrants (the “New Warrants”) to purchase 5,434,783 shares of the Company’s common stock at an initial exercise price of $1.09 per share, which was also subject to adjustment to $0.75 upon stockholder approval which approval was received on August 3, 2023 (see Note 13). The New Warrants expire on August 24, 2027.

Concurrent with the issuance of the New Notes, the Company exchanged the Convertible Notes into two new notes, Series A Notes and Series B Notes both due February 24, 2024 (collectively the “Exchange Notes” and collectively with the New Notes the “May 2023 Notes”). The aggregate principal amount of Series A Notes is $3,690,422 and these are convertible into the Company’s common stock at $0.75 per share (4,920,562 total shares if fully converted). The aggregate principal amount of the Series B Notes is $23,483,491 were initially convertible into the Company’s common stock at $1.09 per share (21,544,487 total shares if fully converted) but were subject to adjustment to $0.75 upon stockholder approval (31,311,322 total shares if fully converted at $0.75 per share), which approval was received on August 3, 2023, (see Note 13).

The May 2023 Notes contain certain conversion limitations, providing that no conversion may be made if, after giving effect to the conversion, the holder, together with any of its affiliates, would own in excess of 9.99% of the Company’s outstanding shares of common stock after giving effect to such conversion. The Company can force conversion of the Series A and Series B Notes at any time if the weighted average price of the Company’s common stock for ten consecutive trading days equals or exceeds $1.17 or $1.69, respectively, subject to the share limitations described above. In addition to default interest of 10% accruing on the May 2023 Notes, the holders may require the Company to redeem a portion or all of the outstanding May 2023 Notes. 

Events of default for the May 2023 Notes are defined in the note agreements and include the following:

As of June 30, 2023, the Company is in compliance with all covenants. The May 2023 Notes require the Company to have unrestricted and unencumbered cash on deposit of $10,000,000 or greater if the outstanding principal (and interest, if any) of the May 2023 Notes is $15,000,000 or greater as of December 31, 2023. The cash on deposit requirement is reduced dollar for dollar to the extent that the outstanding principal (and interest, if any) of the May 2023 Notes is less than $15,000,000 on December 31,2023.

The Company also exchanged the 9,057,951 Note Warrants with an exercise price of $2.85 per share issued with the Convertible Notes in August 2022 for 17,057,091 warrants which had an initial exercise price of $1.09 per share (the “Exchange Warrants”), and which exercise price was adjusted to $0.75 per share upon stockholder approval, which approval was received on August 3, 2023 (see Note 13). The Exchange Warrants expire August 24, 2027.

The conversion prices of the Exchange Notes, and the exercise prices of the New Warrants and Exchange Warrants (collectively the “May 2023 Warrants”) are subject to further adjustment in the event that the Company issues additional common stock, stock options, warrants or convertible notes with prices below $0.75 per share, or completes a stock split or reverse stock split where the Company’s five day volume weighted average stock price is below $0.75 per share with a floor of $0.22 per share see Note 13).

Holders of the May 2023 Notes and the Exchange Warrants (collectively the “Holders”) do not have voting rights to the extent they have not converted their notes or exercised their warrants.  

The May 2023 Warrants contain certain conversion limitations, providing that a holder thereof may not exercise such warrants to the extent that, if after giving effect to such conversion, the holder or any of its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock immediately after giving effect to such exercise. The May 2023 Warrants provide the holders the right to exercise these warrants on a non-cash basis if the Company does not have an effective registration statement for the underlying shares of common stock.

The Company has evaluated the issuance of the New Notes and Exchange Notes and related warrants and has determined that the Convertible Notes have been extinguished based on the conclusion that the terms of the New Notes and Exchange Notes are substantially different than the Convertible Notes in accordance with ASC 470, Debt. In addition, the Company has recognized a loss on the extinguishment of the Convertible Notes based on the carrying value of the Convertible Notes at the transaction date, plus gross proceeds received from the issuance of New Notes and New Warrants, less the fair value of the i) New Notes and conversion option, ii) New Warrants, iii) Exchange Notes and conversion options, and i) Exchange Warrants. The resulting loss on extinguishment was $22,296,988, which includes the unamortized issuance costs of $1,330,296 of the Convertible Notes as of the date of the issuance of the New Notes. The fair value of the May 2023 Notes were estimated based on the future cash flows discounted at an interest rate of 14.9%. The May 2023 Notes were recorded at their initial fair values as follows: 

The Company recognized interest expense of $406,353 in the three and six months ended June 30, 2023 for the accretion of the discount on the May 2023 Notes during the periods.

The Company estimated the fair value of the conversion features of the New Notes, Exchange Notes, New Warrants and Exchange Warrants as of May 24, 2023 as discussed in Note 7 below.

The Company incurred debt issuance costs of $586,968 upon issuance of the New Notes and New Warrants. The Company will amortize these issuance costs as additional interest expense over the remaining term of the New Notes. The Company recognized interest expense of $65,219 for the amortization of these issuance costs for the three and six months ended June 30, 2023.

As of June 30, 2023, no conversions of the May 2023 Notes or exercise of the May 2023 Warrants or warrants issued to the placement agent for the Convertible Notes offering have occurred.