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NOTES PAYABLE
 6 Months Ended
Jun. 30, 2024
Debt Disclosure [Abstract]  
NOTES PAYABLE

NOTE 7—NOTES PAYABLE

 

10% OID Promissory Notes

 

On January 24, 2024, the Company entered into a securities purchase agreement in a private placement transaction with a certain accredited investor, pursuant to which the Company issued and sold to the investor a 10% original issue discount (“OID”) promissory note in the principal amount of $55,556 for total cash proceeds of $45,000. The note bears interest at a rate of 10% per annum and matures on January 24, 2025. Should the Company undertake an IPO before the maturity date, the note holder is to receive (i) equity shares equal to the principal amount at the IPO share price, and (ii) repayment of the principal and accrued interest in cash. The note contains customary covenants and events of default for a loan of this type.

 

The Company evaluated whether this promissory note contains embedded features that qualify as derivatives pursuant to ASC 815. The Company determined that the notes embedded features, specifically should the Company undertake an IPO before the maturity date, the note holder will receive (i) equity shares equal to the principal amount at the IPO share price, and (ii) repayment of the principal and accrued interest in cash. These embedded features constitute deemed redemption features as a result of the substantial premium received by the note holder. The Company concluded that these redemption features require bifurcation from the note and subsequent accounting in the same manner as a freestanding derivative.

 

The fair value of the embedded redemption derivative liability within this promissory note was calculated using a Probability Weighted Expected Return valuation methodology, considering the likelihood of occurrence. The model used a discount rate of 15% and assumptions of an 80% probability related to likelihood of the Company undergoing an IPO. Subsequent changes in the fair value of the redemption features are measured at each reporting period and recognized in the statement of operations. The OID and issuance costs for the promissory note, along with the fair value of the embedded redemption derivative liability, were collectively recorded as a debt discount. This discount will be amortized to interest expense over the respective term of the convertible notes using the effective interest method.

 

As further disclosed in Note 8, the IPO was completed on June 3, 2024. In accordance with the terms of the 10% OID promissory note agreements, the Company repaid the outstanding notes totaling $463,534 (including both principal and accrued interest) and issued each note holder common stock equal to the principal amount of the notes at the IPO price of $5.50, totaling 80,808 shares of restricted common stock, with a fair value of $214,949 or $2.66 per share. Consequently, the corresponding derivative liability was extinguished and we recognized a loss on extinguishment of debt of $38,889.

 

Derivative Liabilities

 

The following table provides a roll-forward of the derivative liability for the six months ended June 30, 2024:

 

   Amount 
Balance at December 31, 2023  $238,000 
Initial fair value of derivative liability upon issuance   38,000 
Gain on change in fair value of derivative liability   (61,051)
Extinguishment of derivative liability upon settlement of notes payable   (214,949)
Balance at June 30, 2024  $- 

 

Estimated maturities of principal payments for notes payable at June 30, 2024, were as follows:

 

Year Ending December 31,  Amount 
2024 (remaining)  $60,924 
2025   193,777 
Total payments   254,701 
Less debt discount   (26,640)
Total notes payable, net  $228,061