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 an initial conversion price of $506.25 per share of common stock (53,677 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 40,260 shares of the Company’s common stock at an initial exercise price of $641.25 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. Interest expense recorded for the Convertible Notes for the years ended December 31, 2023 and 2022 were $2,913,632 and $2,231,403, respectively.

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 $571.50 per share of common stock, which was subject to adjustment to $168.75 upon stockholder approval (29,244 total shares if fully converted at $168.75 per share, stockholder approval was received on August 3, 2023). The conversion price is also subject to further adjustment if the Company completes an equity or convertible note offering with a price below $168.75, or completes a stock split, reverse stock split or recapitalization where the lowest day’s volume weighted average price (“VWAP”) of the Company’s stock price is below $168.75 in the five days following the stock split, with a floor price of $0.22 (subject to stockholder approval, which was obtained on August 3, 2023). The conversion price is also subject to further adjustment if the Company completes an equity or convertible note offering with a price below $168.75. The New Notes were issued with an original issue discount of 8.8% 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 24,155 shares of the Company’s common stock at an initial exercise price of $245.25 per share.

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 an initial conversion price of $168.75 per share (21,870 total shares if fully converted). The aggregate principal amount of the Series B Notes is $23,483,491 and were initially convertible into the Company’s common stock at an initial conversion price of $245.25 per share (95,754 total shares if fully converted) but were subject to adjustment to $168.75 upon stockholder approval (139,162 total shares if fully converted at $168.75 per share), which approval was received on August 3, 2023.

The Company also exchanged the 40,258 Note Warrants with an exercise price of $641.25 per share issued with the Convertible Notes in August 2022 for 75,814 warrants which had an initial exercise price of $245.25 per share (the “Exchange Warrants”), and which exercise price was adjusted to $168.75 per share upon stockholder approval, which approval was received on August 3, 2023. The Exchange Warrants expire August 24, 2027.

In September 2023, the Company completed a public offering and sold 6,223 shares of common stock at $112.50 per share. The holders of the May 2023 Notes waived their right to reduce the conversion price to the equity issuance price and agreed to reduce the conversion price to $123.75 per share. The exercise price of the May 2023 Warrants were reduced to $112.50 per share as a result of the public offering.

In September 2023, the holders of the May 2023 Notes agreed to modify the due date of these notes to January 31, 2025. See discussion of further modifications below. The Company also executed a security interest to the holders for substantially all of the assets of the Company.

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 $263.25 or $380.25, 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 December 31, 2023, the Company was in compliance with the above covenants.

The May 2023 Notes originally required the Company to have unrestricted and unencumbered cash on deposit of $10 million if the outstanding principal (and interest, if any) of the May 2023 Notes is $15 million 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 million on December 31, 2023. In September 2023, the note holders modified this requirement to change the date from December 31, 2023 to June 30, 2024 and reduced the cash on deposit requirement to $5 million. All other provisions for this cash on deposit requirement remain unchanged.

As discussed in Note 9, the Company completed a 1 for 5 reverse stock split on October 13, 2023 and the lowest day’s VWAP in the five days following the reverse split was $61.605 per share and the conversion price of New Notes and Exchange Notes, and the exercise price of the New Warrants and Exchange Warrants were reduced to $61.605 per share effective October 20, 2023.

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 the exercise price in effect at the time of issuance, or completes a stock split, reverse stock split or recapitalization where the lowest day’s VWAP of the Company’s stock price is below $61.605 in the five days following the stock split with a floor of $0.22 per share. See Note 14 for discussion of the impact of the 1 for 45 reverse split on February 2, 2024. Also in September 2023, the Company and the holders of the Exchange Warrants entered into a warrant inducement agreement whereby the Exchange Warrant holders agreed to exercise 6,824 Exchange Warrants at a reduced exercise price of $78.75 per share. The Company issued the holders 6,824 warrants (“Reload Warrants”) with an exercise price of $112.50 per share. The Reload Warrants are immediately exercisable for unregistered shares of the Company’s common stock and have the same terms as the May 2023 Warrants and expire August 24, 2027. The Company recognized equity issuance costs of $216,855 for the issuance of the Reload Warrants.

Holders of the May 2023 Notes, the May 2023 Warrants and Reload 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 and Reload 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 and Reload 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 determined that the Convertible Notes were extinguished based on the conclusion that the terms of the New Notes and Exchange Notes are substantially different from the Convertible Notes in accordance with ASC 470, Debt. In addition, the Company 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 iv) Exchange Warrants. The resulting loss on extinguishment was $22,296,988, which included 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 was 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 $1,739,123 in the year ended December 31, 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 is amortizing these issuance costs as additional interest expense over the remaining term of the New Notes. The Company recognized interest expense of $302,955 for the amortization of these issuance costs for the year ended December 31, 2023.

As of December 31, 2023, there were no conversions of the May 2023 Notes. As discussed in Note 14, on March 4, 2024, the Company exchanged the May 2023 Notes for Series A preferred stock. As a result, there are no remaining covenants related to the May 2023 Notes that the Company must comply with and the security interest on the assets of the Company has been released by the noteholders.