NOTE 9. NOTES PAYABLE

RELATED PARTIES

Related party notes payable consist of the following:

Total interest expense for related party notes was $25,742 and $385,889 for the three-month periods ended March 31, 2023 and 2022, respectively.

Related Party Convertible Notes Payable with Warrants - 2021 Debt Offering

The Company had four and thirteen convertible notes payable to related parties with total principal balances of $450,000 and $1,000,000 at March 31, 2023 and December 31, 2022, respectively. The notes were issued in March, April, and May 2021 as part of a 2021 debt offering. Each of the notes were issued with detached free-standing warrants to purchase the Company’s common stock at $9 per share. The notes, secured by the Company’s patents and patent applications, include interest at 12%, are convertible at $9 per share of the Company’s common stock and are due 24 months after issuance. The noteholders may elect to have the interest paid in cash monthly or have the interest accrue and be payable on the maturity date. Interest elected to be accrued will be paid in cash or may be converted into shares of our common stock under the same terms as the principal amount on the maturity date.

The notes contain both voluntary and automatic conversion features. The notes may be converted at any time, by the holders, beginning on the date of issuance. However, the holders may not convert any outstanding amounts due under the note, if at the time of such conversion the amount of common stock issued for the conversion, when added to other shares of Company common stock owned by the holders or which can be acquired by holders upon exercise or conversion of any other instrument, would cause the holder to own more than 4.9% of the Company’s outstanding common stock.  Beginning on the issuance date, the outstanding principal amount of the note, and any accrued interest, will automatically convert into shares of the Company’s common stock if the Company’s common stock closes at or above $6 per share for five (5) consecutive trading days while listed on NASDAQ.

The Company evaluated the convertible notes payable for embedded derivatives and beneficial conversion features and determined that there were beneficial conversion features to record. The total beneficial conversion feature debt discount of $448,999 is amortized over the life of the convertible notes payable. The debt discount amortization expense is recorded as amortization of interest – beneficial conversion feature in the condensed consolidated statements of operations and was none and $55,356 for the three-month periods ended March 31, 2023 and 2022, respectively. The unamortized debt discount related to the beneficial conversion feature was $66,843 at December 31, 2022. This balance was eliminated upon adoption of ASU 2020-06 effective January 1, 2023 (see Note 1). 

At the time of issuance, a portion of the proceeds from the 2021 debt offering was allocated to the stock warrants issued with the notes based on their relative fair value, resulting in a debt discount of $551,001 which is amortized over the life of the notes. Amortization of the debt discount related to the stock warrants is recorded as interest expense and was $58,951 and $67,932 for the three-month periods ended March 31, 2023 and 2022, respectively. The unamortized debt discount related to the warrants was $19,754 and $78,705 at March 31, 2023 and December 31, 2022, respectively.

Related Party Non-Convertible Note Payable

The Company has one non-convertible note payable to a related party that has a principal balance of $11,810 as of March 31, 2023 and December 31, 2022. The note carries an interest rate at 0%.  The note payable had a due date of December 31, 2012 and is currently in default.

NON-RELATED PARTIES 

Non-related party notes payable consist of the following:

Total interest expense for non-related party notes was $41,126 and $129,009 for the three-month periods ended March 31, 2023 and 2022, respectively.

Convertible Notes Payable with Warrants - 2023 Debt Offering

On March 7, 2023, the Company entered into a Debt Offering (the “2023 Debt Offering”) pursuant to a Purchase Agreement (the “Agreement”) and Registration Rights Agreement with institutional investors. The 2023 Debt Offering closed on March 9, 2023. The 2023 Debt Offering includes 15% Original Issue Discount Convertible Notes (the “Notes”) and Common Stock Purchase Warrants (the “Warrants”).  Under the terms of the Agreement, the Company received $3,000,001 from the Purchasers and in exchange issued the Notes in principal amounts of $3,529,412 and Warrants to purchase up to 386,998 shares of the Company’s common stock. The Notes are convertible voluntarily by the Purchaser at any time the principal amounts are outstanding into shares of our common stock at a conversion price $2.28. The Notes are due March 10, 2025, and accrue interest quarterly at 5% per annum. The accrued interest is payable by way of inclusion in the convertible amount and is compounded quarterly. The Warrants are exercisable at any time through March 9, 2028, into shares of the Company’s common stock at an exercise price of $2.52 per share. The Company received approximately $2,500,000 of net proceeds from the 2023 Debt Offering after offering-related costs.

Convertible Notes Payable with Warrants - 2021 Debt Offering

The Company had nine and sixteen convertible notes payable to related parties with total principal balances of $455,000 and $1,005,000 at March 31, 2023 and December 31, 2022, respectively. The notes were issued in March, April, and May 2021 as part of a 2021 debt offering. Each of the notes were issued with detached free-standing warrants to purchase the Company’s common stock at $9 per share. The notes, secured by the Company’s patents and patent applications, include interest at 12%, are convertible at $9 per share of the Company’s common stock and are due 24 months after issuance. The noteholders may elect to have the interest paid in cash monthly or have the interest accrue and be payable on the maturity date. Interest elected to be accrued will be paid in cash or may be converted into shares of our common stock under the same terms as the principal amount on the maturity date. 

The notes contain both voluntary and automatic conversion features. The notes will be convertible at any time, by the holders, beginning on the date of issuance. However, the holders may not convert any outstanding amounts due under the note if at the time of such conversion the amount of common stock issued for the conversion, when added to other shares of Company common stock owned by the holders or which can be acquired by holders upon exercise or conversion of any other instrument, would cause the holder to own more than 4.9% of the Company’s outstanding common stock.  Beginning on the issuance date, the outstanding principal amount of the note, and any accrued interest, will automatically convert into shares of the Company’s common stock if the Company’s common stock closes at or above $6 per share for five (5) consecutive trading days while listed on NASDAQ.

The Company evaluated the convertible notes payable for embedded derivatives and beneficial conversion features and determined that there were beneficial conversion features to record. The total beneficial conversion feature debt discount of $460,215 is amortized over the life of the convertible notes payable. The debt discount amortization expense is recorded as amortization of interest – beneficial conversion feature in the condensed consolidated statements of operations and was none and $59,230 for the three-month periods ended March 31, 2023 and 2022, respectively. The unamortized debt discount related to the beneficial conversion feature was $65,803 at December 31, 2022. This balance was eliminated upon adoption of ASU 2020-06 effective January 1, 2023 (see Note 1). 

At the time of issuance, a portion of the proceeds from the 2021 debt offering was allocated to the stock warrants issued with the notes based on their relative fair value, resulting in a debt discount of $541,707 which is amortized over the life of the notes. Amortization of the debt discount related to the stock warrants is recorded as interest expense and was $64,924 and $69,780 for the three-month periods ended March 31, 2023 and 2022, respectively. The unamortized debt discount related to the warrants was $14,151 and $79,074 at March 31, 2023 and December 31, 2022, respectively.

Convertible Notes Payable

The Company has two convertible notes payable to a non-related entity with principal balances totaling $9,183 as of March 31, 2023 and December 31, 2022.  The notes bear interest at 12% and are convertible into shares of the Company’s common stock at $32.29 per share. The notes were due in February and March 2013 and are currently in default. 

Non-Convertible Notes Payable

The Company has two non-convertible notes payable to non-related parties with principal balances totaling $17,500 as of March 31, 2023, and December 31, 2022. These notes carry interest rates ranging from 9% - 10% and have due dates ranging from December 2013 to November 2015. The notes are currently in default. 

Premium Financing Note Payable

On May 25, 2022, the Company entered into a financing agreement for payment of annual Directors & Officers insurance premiums for coverage from May 2022 through May 2023 totaling $349,455. The financing agreement required an initial down payment of $74,866 with the remaining amount of $274,559 financed for a nine-month period at an annual interest rate of 4.37% with monthly payments of $31,068 beginning in June 2022. The financing liability balance at December 31, 2022 was $61,792. The note was paid in full in February 2023.