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SHORT TERM NOTES, CONVERTIBLE DEBT, AND DERIVATIVE LIABILITIES
 12 Months Ended
Dec. 31, 2024
Debt Disclosure [Abstract]  
SHORT TERM NOTES, CONVERTIBLE DEBT, AND DERIVATIVE LIABILITIES

NOTE 10. SHORT TERM NOTES, CONVERTIBLE DEBT, AND DERIVATIVE LIABILITIES

 

Convertible Notes

 

There was no convertible note activity in the years ended December 31, 2024 and 2023.

 

Senior Notes Payable

 

In May 2023, the Company issued $1,437,500 unsecured senior notes that mature on 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 accrued 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 accrued interest at an annual rate of 8.0%.

 

In November 2023, the Company issued $294,118 unsecured senior notes that mature on 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 accrued 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 (9 and 5 shares, respectively, after giving effect to the 2025 Stock Splits) 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 ($90,624 and $41,462 post-2025 Stock Splits), 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 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 (2 and 1 shares after giving effect to the 2025 Stock Splits) 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.

 

Between January 22 and January 29, 2024, the Company entered into a series of exchange agreements to exchange principal and accrued interest on the Senior Notes Payable for shares of common stock. Pursuant to the Exchange Agreements, the Company issued an aggregate of 644,142 shares (71 after giving effect to the 2025 Stock Splits) 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.

 

On March 6, 2024, the company retired the Series C Notes Payable with a cash payoff of the principal and accrued interest of $300,974.

 

On August 14, 2024, the Company entered into an exchange agreement with the Series B Notes Payable holders to exchange $930,052 of principal and accrued interest on the notes for 930 shares of newly issued Series B convertible preferred stock (“Series B Preferred Stock”) at a purchase price of $1,000 per share of Series B Preferred Stock. The Series B Preferred Stock is convertible into Common Stock at an initial conversion price (“Conversion Price”) of $0.234 ($2,116.53 post-2025 Stock Splits) per share of Common Stock. (See Note 12).

 

Following the retirement of the Senior Notes Payable, the Series B Notes Payable, and Series C Notes Payable, all described above, the remaining outstanding balance of principal and interest on the notes was $0 for the year ended December 31, 2024.

 

For the years ended December 31, 2024 and 2023, the Company recognized $64,084 and $110,525, respectively, in stated interest expense.

 

For the years ended December 31, 2024 and 2023, the Company recognized $471,387 and $497,763, respectively, in amortization of debt discounts and deferred financing costs which is recorded in interest expense.

 

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.

          
  

December 31,

2024

  

December 31,

2023

 
Note Payable  $–   $2,594,118 
Less: Unamortized Discounts and Deferred Financing Costs          
Warrants   (–)   (557,582)
Derivative   (–)   (235,628)
Deferred financing costs   (–)   (675,184)
    (–)   (1,468,394)
   $–   $1,125,724 

 

Secured Promissory Notes Payable

 

In June 2021, the Company issued $2.0 million of promissory notes that matured at the earlier of the consummation of a Qualified Financing or May 31, 2022. The promissory notes incorporated the following major attributes: secured by a lien and security interest on substantially all of the Company’s assets; interest accrues at 33%; holder option to convert the accrued interest into the Company securities being offered in a Qualified Financing at 30% (i.e. 70% discount) of the price being paid by other investors in the Qualified Financing; and automatic conversion in the case of a Qualifying IPO of the accrued interest into the Company securities being offered in the Qualifying IPO at 30% (70% discount) of the price being paid by other investors in the Qualifying IPO.

 

On April 21, 2022, the registration statement for our IPO was declared effective. In connection with the effectiveness of the IPO registration statement, all accrued interest on the Company's outstanding secured promissory notes were converted into (i) 26,673 (3 after giving effect to the 2025 Stock Splits) common shares and (ii) warrants to purchase 26,673 shares of common stock (3 common shares after giving effect to the 2025 Stock Splits) with a $1,299,507 beneficial conversion rate charged to interest expense.

 

On April 27, 2022, the Company used $2 million of the IPO proceeds to retire all outstanding secured promissory notes.