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Convertible Promissory Notes

6 Months Ended

Jun. 30, 2021

Convertible Promissory Notes

Convertible Promissory Notes

(7)   Convertible Promissory Notes

From May 2018 through May 2020, the Company issued 14 convertible promissory notes (“Notes”) having an aggregate principal amount of $2,240,000. The Notes bear interest at a rate of 6% per annum and were initially set to mature on February 14, 2021. In 2020, the Notes were extended and unless previously converted, principal and accrued but unpaid interest on the Notes is payable on demand any time after December 31, 2022, (“Maturity Date”). As of June 30, 2021 and 2020, total accrued interest on the Notes was $247,285 and $91,578, respectively. Principal and accrued but unpaid interest on the Notes automatically convert, at a discount, into the same equity securities as are sold by the Company in a Qualified Financing (generally an equity financing with gross proceeds of $5 million or more) or upon a change in control of the Company. Subject to a pre-money valuation limit of $15 million, the conversion discount ranges from 20% to 30%. In the event of a liquidation, dissolution or winding up of the Company, the conversion rights shall terminate.

Convertible promissory notes at June 30, 2021, comprised the following:

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​	​	​	​	​	​	​	​	​	​	​	​
​		​		Principal			Accrued Interest at			Accrued Interest at
Note Identifier	​	Issue Date	​	Amount		​	June 30, 2021		​	December 31, 2020
Note One	​	May 2, 2018	​	$	500,000	​	$	92,548	​	$	80,137
Note Two	​	June 26, 2018	​	$	50,000	​	$	8,803	​	$	7,562
Note Three	​	March 2, 2019	​	$	100,000	​	$	13,249	​	$	10,767
Note Four	​	March 5, 2019	​	$	50,000	​	$	6,625	​	$	5,466
Note Five	​	March 8, 2019	​	$	50,000	​	$	6,707	​	$	5,384
Note Six	​	March 15, 2019	​	$	50,000	​	$	6,567	​	$	5,326
Note Seven	​	March 20, 2019	​	$	50,000	​	$	6,534	​	$	5,293
Note Eight	​	November 7, 2019	​	$	100,000	​	$	9,205	​	$	6,723
Note Nine	​	November 7, 2019	​	$	100,000	​	$	8,942	​	$	6,460
Note Ten	​	February 17, 2020	​	$	1,000,000	​	$	75,806	​	$	50,984
Note Eleven	​	April 3, 2020	​	$	40,000	​	$	2,780	​	$	1,790
Note Twelve	​	May 8, 2020	​	$	50,000	​	$	3,192	​	$	1,951
Note Thirteen	​	May 8, 2020	​	$	50,000	​	$	3,192	​	$	1,951
Note Fourteen	​	May 15, 2020	​	$	50,000	​	$	3,135	​	$	1,893

​

The unamortized amounts of debt issuance costs and debt discounts at June 30, 2021, and December 31, 2020, are:

​

​	​	​	​	​	​	​
​		June 30, 2021			December 31, 2020
Principal amount of convertible promissory notes	​	$	2,240,000	​	$	2,240,000
Less unamortized debt issuance costs	​		(6,335)	​		(8,002)
Less unamortized debt discounts	​		(107,852)	​		(145,323)
Convertible promissory notes, net	​	$	2,125,813	​	$	2,086,675

​

Upon closing of a Qualified Financing, the Notes settle by providing the holder with a variable number of shares in the Qualified Financing with an aggregate fair value determined by reference to the debt principal and accrued but unpaid interest. In this scenario, the value that the holder receives at settlement does not vary with the value of the Company’s common stock, so the settlement provision was not a typical conversion option. Rather, the share settlement feature was considered a contingent redemption provision (i.e., a contingent embedded put). The Company evaluated the embedded put features in accordance with ASC 815-15-25. The embedded puts are not clearly and closely related to the debt host instrument and therefore have been separately measured at fair value, with subsequent changes in fair value recognized in the statement of operations.

Management used a scenario-based analysis to estimate the fair value of the embedded put features upon issuance of the Notes. The original values of the embedded put features were recorded as a debt discount to the Notes which discount is amortized over the life of the Notes as non-cash interest expense during the reporting periods.

At June 30, 2021, and December 31, 2020, the fair value of the derivative liability was $2,618,000 and $1,751,000, respectively. The Company recorded a decrease in fair value of the derivative liability of $3,069,000 for the three months ended June 30, 2021, and an increase of $3,936,000 in the three months ended March 31, 2021, resulting in a net decrease of $867,000 for the six months ended June 30, 2021.

During the three and six months ended June 30, 2021, the Company amortized debt issuance costs of $1,000 and $10,538, respectively, to interest expense.

The IPO constituted a Qualified Financing resulting in the conversion of the Notes into 1,068,135 shares of common stock upon the closing of the IPO. Also, at that time, the balance of the derivative liability was extinguished. See Note 14 Subsequent Events.

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- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-URI http://asc.fasb.org/topic&trid=2208564

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