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CONVERTIBLE NOTES PAYABLE | 12 Months Ended
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Dec. 31, 2022
CONVERTIBLE NOTES PAYABLE |
NOTE 8 - CONVERTIBLE NOTES PAYABLE | NOTE 8 - CONVERTIBLE NOTES PAYABLE 2020 Debentures: In May and June 2020, the Company entered into a Securities Purchase Agreement, effective May 28, 2020 (the “Purchase Agreement”) with several accredited investors (the “Purchasers”). Four of the investors had previously invested in the Company’s preferred stock. Pursuant to the Purchase Agreement, the Company sold to the Purchasers a total of (i) $2,953,125 in the aggregate principal amount of 12.5% Original Issue Discount Senior Subordinated Secured Convertible Debentures (the “Debentures”), and (ii) 738,282 common stock purchase warrants (the “Warrants”), which represents 100% warrant coverage. The Company received a total of $2,226,000 in net proceeds from the offering, after deducting the 12.5% original issue discount of $328,125, offering expenses and commissions, including the placement agent’s commission and fees of $295,000, reimbursement of the placement agent’s and lead investor’s legal fees and the Company’s legal fees in the aggregate amount of $100,000 and escrow agent fees of $4,000. The Company also agreed to issue to the placement agent, as additional compensation, 147,657 common stock purchase warrants exercisable at $5.00 per share. The number of placement agent warrants issued was reduced on July 2, 2021 to 36,364, and the exercise price was increased to $6.25 (see Note 10). On August 17, 2022 and August 30, 2022, we issued warrants with an exercise price of $2.00 (see Note 7). Consequently, the number of Warrants associated with the 2020 Debentures were increased from 739,787 to 1,300,093, and the exercise price was reduced from $5.00 to $2.00 (see Note 10) due to anti-dilution provisions in Warrants. The exercise price of the Warrants was then again reduced from $2.00 to $0.98 in connection with the issuance of stock to Parrut; however there was no further full ratchet adjustment to the quantity of warrants due to the maximum limit allowed (see Note 13). The Warrants are exercisable for three years from May 28, 2020 subject to certain adjustments. The Debentures matured on May 28, 2021, subject to a nine-month extension at the Company’s option which was taken and the Company incurred $253,767 of penalty for the extension which is included in interest expense on the consolidated statements of operations during the year ended December 31, 2021. The Debentures bear interest at 8% per annum payable quarterly, subject to an increase in case of an event of default as provided for therein. The Debentures are convertible into shares of Common Stock at any time following the date of issuance at the Purchasers’ option at a conversion price of $4.00 per share, subject to certain adjustments. The Debentures are subject to mandatory conversion in the event the Company closes an equity offering of at least $5,000,000 resulting in the listing of the Company’s common stock on a national securities exchange. The Debentures rank senior to all existing and future indebtedness of the Company and its subsidiaries, except for approximately $508,000 of outstanding senior indebtedness. The Company may prepay the Debentures at any time at a premium as provided for therein. On July 2, 2021, the 2020 Debentures were exchanged for common stock and warrants (See Note 10). The Company’s obligations under the Purchase Agreement and the Debentures are secured by a first priority lien on all of the assets of the Company and its subsidiaries pursuant to a Security Agreement, effective May 28, 2020 (the “Security Agreement”) by and among the Company, its wholly owned subsidiaries, and the Purchasers, subject to certain existing senior liens. The Company’s obligations under the Debentures are guaranteed by the Company’s subsidiaries. The Purchase Agreement contains customary representations, warranties and covenants of the Company, including, among other things and subject to certain exceptions, covenants that restrict the ability of the Company and its subsidiaries, without the prior written consent of the Debenture holders, to incur additional indebtedness, including further advances under a certain pre-existing secured loan, and repay outstanding indebtedness, create or permit liens on assets, repurchase stock, pay dividends or enter into transactions with affiliates. The Debentures contain customary events of default, including, but not limited to, failure to observe covenants under the Debentures, defaults on other specified indebtedness, loss of admission to trading on OTCQB or another applicable trading market, and occurrence of certain change of control events. Upon the occurrence of an event of default, an amount equal to 130% of the principal, accrued but unpaid interest, and other amounts owing under each Debenture will immediately come due and payable at the election of each Purchaser, and all amounts due under the Debentures will bear interest at an increased rate. Pursuant to the Purchase Agreement, the Purchasers have certain participation rights in future equity offerings by the Company or any of its subsidiaries for a period of 24 months after the closing, subject to customary exceptions. The Debentures and the Warrants also contain certain price protection provisions providing for adjustment of the number of shares of Common Stock issuable upon conversion of the Debentures and/or exercise of the Warrants and the conversion or exercise price in case of future dilutive offerings. During 2020, notes aggregating $91,600, plus related accrued interest of $4,400, were converted into 24,000 shares of common stock. Unamortized debt costs and debt discount of $13,647 and $25,956, respectively, were charged against the value of the common stock issued upon conversion. We have incurred a total of $1,299,677 of debt costs related to the sale of the Debentures, including commissions, costs and fees of $366,500. We have also recorded a cost related to the fair value of the placement agent warrants of $933,177 (see Note 10). The costs were being amortized over the life of the notes. We have recorded a total of $1,653,448 of debt discount related to the sale of the Debentures, including original issue discount of $328,125. We have also recorded a discount related to the fair value of the warrants issued with the debt of $1,325,323 (see Note 10). The discount was being amortized over the life of the notes. On November 23, 2020, we issued a convertible promissory note in the amount of $250,000 to a current stockholder and noteholder, and received proceeds of $250,000. The note bears interest at 5% per year and matures on March 24, 2021. If we consummate a Qualified Offering on or before March 24, 2021 then the remaining outstanding and unpaid amount of this note will automatically be converted into shares of our common stock (or units of common stock and warrants to purchase common stock, if units are offered to the public in the Qualified Offering) at the Qualified Offering Price. “Qualified Offering” shall mean an offering of common stock (and other securities potentially) for an aggregate price of at least $5,000,000 resulting in the listing for trading of the common stock on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange (or any successors to any of the foregoing). For the purposes of this note “Qualified Offering Price” shall mean the price per share (or unit, if units are offered in the Qualified Offering) at which the Qualified Offering is made. Under this note, an Event of Default would occur if: (i) a default for five (5) days in payment of principal or interest on this Note; (ii) failure by the Borrower to comply with any material provision of this Note; (iii) the Borrower, pursuant to or within the meaning of any Bankruptcy Law (as defined herein): (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian (as defined herein) of it or for all or substantially all of its property; (D) makes a general assignment for the benefit of its creditors; or (E) admits in writing that it is generally unable to pay its debts as the same become due; or (iv) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Borrower in an involuntary case; (B) appoints a Custodian of the Borrower for all or substantially all of its property; or (C) orders the liquidation of the Borrower, and the order or decree remains unstayed and in effect for sixty (60) days. “Bankruptcy Law” means Title 11, U.S. Code, or any similar Federal or state law for the relief of debtors. The term “Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. If an Event of Default occurs and is continuing under the note, the lender, may declare all of note to be due and payable immediately. The lender under the note, shall have all rights available to it at law or in equity. The lender under the note may assess reasonable attorneys’ fees, paralegals’ fees and costs and expenses incurred or anticipated by the lender in collecting or enforcing payment hereof (whether such fees, costs or expenses are incurred in negotiations, all trial and appellate levels, administrative proceedings, bankruptcy proceedings or otherwise), and together with all other sums due by the Company under the note, all without any relief whatsoever from any valuation or appraisement laws, and payment thereof may be enforced and recovered in whole or in part at any time by one or more of the remedies provided to the lender at law, in equity, or under the note. In connection with the lender’s rights under the note upon an Event of Default, the lender need not provide, and the Company waives, any presentment, demand, protest or other notice of any kind, and the lender, may immediately enforce any and all of its rights and remedies hereunder and all other remedies available to it in equity or under applicable law. As of December 31, 2021, the Debentures are no longer in effect. On July 2, 2021, the Debentures were exchanged for common stock and warrants (See Notes 9 and 10). 2021 Debentures: During January 2021, we entered into two Securities Purchase Agreements, effective January 5, 2021 and January 20, 2021 (the “2021 Purchase Agreements”), with twenty accredited investors (the “2021 Purchasers”). Pursuant to the 2021 Purchase Agreements, we agreed to sell to the 2021 Purchasers a total of (1) $2,799,000 in the aggregate principal amount of 12.5% Original Issue Discount Senior Subordinated Secured Convertible Debentures (the “2021 Debentures”), and (2) 699,750 common stock purchase warrants (the “2021 Warrants”), which represents 100% warrant coverage. On July 21, 2021, we increased the number of warrants to 701,164 from 669,750 due to anti-dilution provisions in the warrants. We received a total of $2,488,000 in gross proceeds from the offerings, after deducting the 12.5% original issue discount, before deducting offering expenses and commissions, including the placement agent’s commission of $241,270 (10% of the gross proceeds less $7,500 paid to its legal counsel) and fees related to the offering of the 2021 Debentures of $93,530. We also agreed to issue to the placement agent, as additional compensation, warrants exercisable in to 139,950 shares of our common stock, exercisable at $5.00342554 per share (the “PA Warrants”). The number of shares issuable under the PA Warrants was reduced on July 2, 2021 to 36,364, and the exercise price was increased to $6.25 (see Note 10). On August 17, 2022 and August 30, 2022, we issued warrants with an exercise price of $2.00 (see Note 7). Consequently, the number of 2021 Warrants associated with the 2021 Debentures were increased from 772,303 (which is the 701,164 discussed above plus the February 2021 warrants totaling 71,139 as discussed below) to 1,146,952, and the exercise price was reduced from $5.00 to $2.00 (see Note 10) due to anti-dilution provisions in the 2021 Warrants. The exercise price of the 2021 Warrants was then again reduced from $2.00 to $0.98 in connection with the issuance of stock to Parrut; however there was no further adjustment to the quantity of warrants due to the maximum limit allowed (see Note 13). The 2021 Warrants are exercisable for three years from the dates of the 2021 Purchase Agreements. subject to certain adjustments. The 2021 Debentures were scheduled to mature in January 2022 on the one-year anniversary, subject to a nine-month extension at our option. The 2021 Debentures bear interest at 8% per annum payable quarterly, subject to an increase in case of an event of default as provided for therein. The 2021 Debentures were convertible into shares of our common stock at any time following the date of issuance at the 2021 Purchasers’ option at a conversion price of $4.00 per share, subject to certain adjustments. The 2021 Debentures were subject to mandatory conversion in the event we closed an equity offering of at least $5,000,000 resulting in the listing of our common stock on a national securities exchange. The 2021 Debentures ranked senior to all of our existing and future indebtedness and that of our subsidiaries, except for approximately $95,000 of outstanding senior indebtedness. In addition, the 2021 Debentures ranked pari-passu with, and amounts owing thereunder would be paid concurrently with, payments owing pursuant to and in connection with the Debentures. We were entitled to prepay the 2021 Debentures at any time at a premium as provided for therein. On July 2, 2021, the 2021 Debentures were exchanged for common stock and warrants (See Notes 9 and 10, respectively) and the 2021 Debentures are no longer in effect. Our obligations under the 2021 Purchase Agreements and the 2021 Debentures were secured by a first priority lien on all of our assets and that of our subsidiaries pursuant to Security Agreements, dated January 5, 2021 and January 20, 2021 (the “2021 Security Agreements”) by and among us, our wholly owned subsidiaries, and the Purchasers, subject to certain existing senior liens. Our obligations under the 2021 Debentures were guaranteed by our subsidiaries. The 2021 Purchase Agreements contained customary representations, warranties and covenants, including, among other things and subject to certain exceptions, covenants that restricted our ability and that of our subsidiaries, without the prior written consent of the 2021 Debenture holders, to incur additional indebtedness, including further advances under a certain preexisting secured loan, and repay outstanding indebtedness, create or permit liens on assets, repurchase stock, pay dividends or enter into transactions with affiliates. The 2021 Debentures contained customary events of default, including, but not limited to, failure to observe covenants under the 2021 Debentures, defaults on other specified indebtedness, loss of admission to trading on OTCQB or another applicable trading market, and occurrence of certain change of control events. Upon the occurrence of an event of default, an amount equal to 130% of the principal, accrued but unpaid interest, and other amounts owing under each 2021 Debenture would have immediately come due and payable at the election of each Purchaser, and all amounts due under the 2021 Debentures would bear interest at an increased rate. Pursuant to the 2021 Purchase Agreements, the 2021 Purchasers have certain participation rights in our future equity offerings or those of our subsidiaries after the closing, subject to customary exceptions. The 2021 Debentures and the 2021 Warrants also contain certain price protection provisions providing for adjustment of the number of shares of our common stock issuable upon conversion of the 2021 Debentures and/or exercise of the 2021 Warrants and the conversion or exercise price in case of future dilutive offerings (subject to a maximum quantity of warrants upon adjustment). In February 2021, the holder of a $250,000 November 2020 promissory note elected to convert the $250,000 note, plus accrued interest of $2,430, into $283,984 principal amount of 2021 Debentures (including 12.5% Original Issue Discount of $31,554) based on the same terms as those issued in January 2021 (described above), plus a 2021 Warrant exercisable into 70,996 shares of our common stock. On July 21, 2021, we increased the number of warrants to 71,139 from 70,996 due to anti-dilution provisions in the warrants. We have incurred a total of $1,254,779 of debt costs related to the issuance of the 2021 Debentures, including commissions, costs and fees of $334,800. We have also recorded a cost related to the fair value of the placement agent warrants of $919,979 (see Note 10). The costs which have been recorded as debt discounts are being amortized over the life of the notes. Amortization expense was $0 and $575,503 for the years ended December 31, 2022 and 2021, respectively. Unamortized debt costs of $679,276 were charged off against paid in capital upon the exchange of the notes for common stock in July 2021 (see Note 8) and were $0 both at December 31, 2022 and 2021. We have recorded a total of $1,796,651 of debt discount related to the sale of the 2021 Debentures and February 2021 note exchange, including original issue discount of $342,554 and a warrant discount of $1,454,097 at fair value for the warrants issued with the debt (see Note 10). The discount is being amortized over the life of the notes. Amortization expense was $808,985 and $0 for the years ended December 31, 2022 and 2021, respectively. Unamortized debt discount of $987,666 was charged off against paid in capital upon the exchange of the notes for common stock in July 2021 (see Note 9) and was $0 both at December 31, 2022 and 2021. On July 2, 2021, the 2021 Debentures were exchanged for common stock and warrants (See Notes 9 and 10) and the 2021 Debentures are no longer in effect.

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