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Convertible Notes - Related Parties
 9 Months Ended
Sep. 30, 2022
Debt Disclosure [Abstract]  
Convertible Notes - Related Parties

Note 3 – Convertible Notes - Related Parties

 

Commencing in May 2017, the Company entered into Subordinated Convertible Promissory Note Agreements (the “Agreements”) with certain lenders (together, the “Holders” or individually, the “Holder”), pursuant to which the Company issued Subordinated Convertible Promissory Notes (individually the “Note” or together, the “Notes”) to the Holders, principally all to the Chief Executive Officer (“CEO”) and founder of the Company, a member of the Company’s board of directors and third parties that are family members of the founder and CEO. Interest on the unpaid principal balance accrued at a rate of 5% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. Unless earlier converted into shares of the Company’s common stock or preferred stock (collectively, the “Equity Securities”), the principal and accrued interest was to be due and payable by the Company on demand by the Holders at any time after the earlier of (i) the Maturity Date (as defined in each Agreement) and (ii) the closing of the Next Equity Financing. “Next Equity Financing” means the next sale, or series of related sales, by the Company of its Equity Securities pursuant to which the Company received gross proceeds of not less than $5.0 million for Notes issued in 2017 and through November 2020 and $7.5 million for Notes issued after November 2020 (including the aggregate amount of debt securities converted into Equity Securities upon conversion or cancellation of the Notes). The Company’s IPO qualified as a Next Equity Financing.

 

In general, the stated maturity date was two years from the date of issuance, except for the Notes issued in December 2020 and thereafter (in the aggregate principal amount of approximately $2.1 million) which had a stated maturity date of three years. For Notes issued in 2017 and through September 2018, the default interest rate of 20% was added to the Notes for the period after the stated maturity date.

 

The Notes were to automatically convert into the type of Equity Securities issued in the Next Equity Financing upon closing. The number of shares of such Equity Securities to be issued was equal to the quotient obtained by dividing the outstanding principal and unpaid accrued interest due on the Note on the date of conversion by the lesser of (i) 80% of the price paid per share for Equity Securities by the investors in the Next Equity Financing, or (ii) an equity valuation of $25 million ($50 million for Notes issued after December 2020). On January 14, 2022, all outstanding Notes and accrued interest were converted into an aggregate of 1,225,384 shares of the Company’s common stock as the IPO qualified as a Next Equity Financing.

 

 

Certain embedded features contained in the Notes in the aggregate were embedded derivative instruments, which were recorded as a debt discount and derivative liability at the issuance date at their estimated fair value for all Notes of approximately $2.4 million. Amortization of debt discount for the Notes recorded as interest expense was approximately $1.6 million for the nine months ended September 30, 2022, and approximately $192,000 and approximately $455,000 for the three and nine months ended September 30, 2021, respectively. The amount for the nine months ended September 30, 2022 contains amortization charged to interest expense of approximately $34,000 up to the date of the IPO and the full amount of the unamortized debt discount of approximately $1.5 million charged to interest expense on the date of the IPO.

 

Accrued interest expense associated with the Notes at December 31, 2021 was approximately $180,000. Accrued interest at the date of the IPO was approximately $187,000 and was converted into common stock as the IPO qualified as a Next Equity Financing. Total interest expense, including accrued interest and amortization of the debt discount, amounted to approximately $1.6 million for the nine months ended September 30, 2022, and $236,000 and $573,000 for the three and nine months ended September 30, 2021, respectively.

 

The carrying value of the outstanding related-party convertible notes at December 31, 2021 was as follows:

 

      
Principal amount outstanding  $3,734,446 
Less: debt discount, net of amortization   (1,569,003)
Carrying value  $2,165,443 

 

Current portion  $1,392,544 
Long-term portion   772,899 
Total carrying value  $2,165,443 

 

Roll-over Notes

 

Effective October 1, 2020, all Notes which matured, and were not repaid or converted, were rolled over, including the default interest rate of 20% as disclosed above. Approximately $805,000 of such Notes were rolled over through December 31, 2021, of which approximately $166,000 occurred prior to December 31, 2020 and approximately $639,000 occurred between January 1, 2021 and December 31, 2021. Since the terms of the new notes were not substantially different from the Notes, this was not accounted for as a debt modification or debt extinguishment.