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SHORT TERM NOTES AND CONVERTIBLE DEBT
 6 Months Ended
Jun. 30, 2024
Debt Disclosure [Abstract]  
SHORT TERM NOTES AND CONVERTIBLE DEBT

NOTE  9. SHORT TERM NOTES AND CONVERTIBLE DEBT

  

Convertible Notes:

 

As of December 31, 2023, there were no Convertible Notes payable and outstanding. There was no convertible note activity in the three months ended June 30, 2024.

 

Senior Notes Payable

 

In May 2023, the Company issued $1,437,500 unsecured senior notes with a maturity date of May 16, 2024 (“the Senior Notes Payable”), for cash proceeds of $1,250,000. The Senior Notes Payable contained an original issue discount of 15.0% and accrue interest at an annual rate of 8.0%.

 

In September 2023, as agreed to during the issuance of the Senior Notes Payable, the Company exercised their right to an additional financing, issuing $862,500 unsecured senior notes that mature on September 1, 2024 ("the Series B Notes Payable) for cash proceeds of $750,000. The Series B Notes Payable contained an original issue discount of 15.0% and accrue interest at an annual rate of 8.0%.

 

In November 2023, the Company issued $294,118 unsecured senior notes with a maturity date of April 19, 2024 (“the Series C Notes Payable”), for cash proceeds of $250,000. The Senior Notes Payable contained an original issue discount of 15.0% and accrue interest at an annual rate of 8.0%.

 

The Company incurred issuance costs, recorded as deferred financing costs, of $296,313 relating to due diligence and legal costs associated with the issuance of the notes.

 

The Company evaluated the embedded redemption and contingent interest features in the notes to determine if such features were required to be bifurcated as an embedded derivative liability. In accordance with ASC 815-40, Derivatives and Hedging Activities, the embedded redemption features and contingent interest feature were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value at each reporting date. The Company fair valued such derivative liabilities and recorded a debt discount at issuance of the notes of $320,561.

 

The Company issued warrants to purchase 77,010 and 46,556 shares of common stock (1,232,156 and 744,890 shares before giving effect to the 2024 Stock Split) to the holders of the Senior Notes Payable and Series C Notes Payable (collectively the “Senior Notes Warrants”) with an exercise price of $10.02 and $4.58 per share ($0.6262 and $0.2856 pre-2024 split), respectively. The Company accounted for the warrants in accordance with the guidance contained in ASC 815 “Derivatives and Hedging” whereby under that provision these warrants did not meet the criteria for equity treatment and were recorded as a liability. As such, these warrants are recorded at fair value as of each reporting date with the change in fair value reported within other income in the accompanying consolidated statements of operations as “Change in fair value of warrant liability” until the warrants are exercised, expired or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity. The fair value of the Senior Notes Warrants at issuance was $736,249 and was recorded as a debt discount. The Company incurred issuance costs of $72,862 relating to the Senior Notes Warrants which was recorded as a day 1 expense due to the liability classification of such warrants.

 

In connection with the issuance of the Senior Notes Payable and Series C Notes Payable, the Company paid a commitment fee in the form of 21,210 and 9,311 shares (339,360 and 148,978 shares before giving effect to the 2024 Stock Split) of unregistered common stock to the holders, respectively. The aggregate commitment fees had a fair value at issuance of $208,916 and are recorded as a deferred financing cost.

 

The resulting debt discounts from the derivative liabilities, warrant liabilities and deferred financing costs were presented as a direct deduction from the carrying amount of that debt liability and amortized to interest expense using the effective interest rate method. For the three months ended June 30, 2024, the Company recognized $106,937 in amortization of debt discounts and deferred financing costs which is recorded in interest expense.

 

Between January 22 and January 29, 2024, the Company entered into a series of exchange agreements (the “Exchange Agreements”) with the accredited investors to exchange principal and accrued interest on these notes for shares of common stock. Pursuant to the Exchange Agreements, the Company issued an aggregate of 644,142 post-split shares of common stock in exchange for $1,519,779 principal and accrued interest on the notes. Following these exchanges, the remaining outstanding balance of principal and interest on the notes was $1,145,037. This transaction accelerated the recognition of the related note discounts and resulted in a $1,066,732 charge.

 

On March 6, 2024, the Company paid $300,974 of principal and accrued interest on certain unsecured non-convertible notes. Following this payment, the remaining outstanding balance of principal and interest on the notes was $898,380. This transaction accelerated the recognition of the related note discounts and resulted in a $111,928 charge.

 

The following table reconciles the aggregate amount for the Senior Notes Payable, Series B Notes Payable, and Series C Notes Payable as well as the unamortized deferred financing costs and debt discounts relating to the derivative liabilities and warrant liabilities.

        
  

June 30,

2024

  

December 31,

2023

 
Note Payable  $862,500   $2,594,118 
Less: Unamortized Discounts and Deferred Financing Costs          
Warrants   –    (557,582)
Derivative   (34,475)   (235,628)
Deferred financing costs   (50,938)   (675,184)
    (85,413)   (1,468,394)
   $777,087   $1,125,724