Convertible Notes Payable and Other Notes Payable

3 Months Ended

Mar. 31, 2024

Debt Disclosure [Abstract]

Convertible Notes Payable and Other Notes Payable

5. Convertible Notes Payable and Other Notes Payable

As of March 31, 2024 and December 31, 2023, the respective notes payable were as follows:

	March 31, 2024		December 31, 2023
Other notes payable, related party – current	$	312,000	$	42,000
Other notes payable, related party - noncurrent		-		270,000
March 2025 Convertible Notes, related party – noncurrent (ASE Note)		-		2,000,000
March 2025 Convertible Notes, related party –current (ASE Note)		2,000,000		-
March 2025 Convertible Notes – noncurrent (Lee Note)		-		1,000,000
March 2025 Convertible Notes –current (Lee Note)		1,000,000		-
Senior secured convertible notes payable (Lind Note) - fair value		2,369,694		2,651,556
	$	5,681,694	$	5,963,556

The other notes payable were issued to Ainos KY, the controlling shareholder of the Company, in exchange for $800,000 in cash to support working capital of the Company in March 2022 (the “KY Note”). The Company paid off $530,000 of the KY Note during the year ended December 31, 2023. The Company did not repay the KY Note during the three months ended March 31, 2024. Another note payable was issued to i2China Management Group, LLC (“i2China”) in exchange for consulting services in 2020 (the “i2China Note”) which remains outstanding for the amount of $42,000 as of March 31, 2024. Both the KY Note and the i2China Note bear an interest rate of 1.85% per annum. On August 17, 2023, the Company entered into extension agreements with Ainos KY and i2China to extend the maturity of the KY Note and i2China Note to March 31, 2025 and September 1, 2024, respectively.

All of the aforementioned convertible promissory notes and other notes payable are unsecured and due upon maturity. Holders of convertible notes have the option to convert some or the entire unpaid principal and accrued interest to common stock of the Company.

March 2025 Convertible Notes

On March 13, 2023, the Company entered into two convertible promissory note purchase agreements pursuant to Regulation S of the Securities Act of 1933, as amended, in the total principal amount of $3,000,000 with the following investors (the “March 2025 Convertible Notes” or “Notes”).

Convertible Note Issued to ASE Test, Inc. (the “ASE Note”)

Pursuant to the one of the aforementioned agreements, ASE Test, Inc., a shareholder of Ainos KY, committed to pay a total aggregate amount of $2,000,000 to the Company in exchange for convertible promissory note(s) in three tranches in the amounts of $1,000,000 (the “First Tranche”), $500,000 (the “Second Tranche”), and $500,000 (the “Third Tranche”) conditioned, among other things, on the Company achieving certain business milestones. As of March 31, 2024, the Company received the full amount of the payment.

Convertible Note Issued to Li-Kuo Lee (the “Lee Note”)

The Company issued a convertible note in the principal amount of $1,000,000 to an unrelated party, Li-Kuo Lee, in exchange of $1,000,000 in cash. As of March 31, 2024, the Company received the full amount of the payment.

The March 2025 Convertible Notes will mature in two years from the issuance dates, bearing interest at the rate of 6% compounded interest per annum. At any time after the issuance and before the maturity date, the Notes are convertible into the common stock of the Company at the conversion price of $7.50 per share, subject to anti-dilutive adjustment as set forth in the Notes. Unless previously converted, the Company shall repay the outstanding principal amount plus all accrued and unpaid interest on the maturity date. The Notes shall be an unsecured general obligation of the Company.

The total interest expense of convertible notes payable, other notes payable and March 2025 Convertible Notes for the three months ended March 31, 2024 was $46,386 compared with the same period in year 2023 was $6,933. As of March 31, 2024 and December 31, 2023, the unpaid accrued interest expense was $185,325 and $138,939, respectively.

Senior Secured Convertible Notes Payable

On September 25, 2023, the Company entered into a securities purchase agreement (the “SPA”) with Lind Global Fund II LP (the “Lind”). The SPA provides for loans in an aggregate principal amount of up to $10,000,000 under various tranches to fund clinical trials, commercial product launch and working capital of the Company. The Lind Note does not bear any interest and matures on March 28, 2025.

In 2023, the Company issued and sold to Lind, in a private placement, (a) a senior secured convertible promissory note in the aggregate principal amount of $3,540,000 (the “Lind Note”) and (b) warrants to purchase 691,244 shares of common stock at an exercise price of $4.50 per share of common stock (the “Lind Warrant”) for a cash amount of $3,000,000. As of March 31, 2024, the Company received the full amount of the funding.

Subject to the satisfaction of certain conditions, the Company has the right to request additional tranches of funding from Lind in the aggregate amount not to exceed $7.0 million (the “Increased Funding Amount”). Lind will receive additional warrants to purchase a number of shares of common stock based on a formula set forth in the Securities Purchase Agreement. Such warrants will expire after five years from the date of issuance and may be exercised on a cashless basis.

On January 23, 2024, the Company received an Increased Funding Amount of up to $1.75 million, with $875,000 funded at closing and $875,000 to be funded subject to an effective registration statement and other conditions specified in the Securities Purchase Agreement, and amended the Initial Note to, among other amendments, increase the principal amount to $4,235,000 (the Initial Note as so amended, the “Note”). In connection with additional funding, the Company issued Lind a warrant to purchase 1,021,400 shares at an exercise price of $2.16 per share (the “Second Lind Warrants and together with the First Lind Warrants, the “Lind Warrants”).

Following the earlier to occur of (i) 90 days from the date of the SPA or (ii) the date the resale Registration Statement is declared effective by the SEC, the Lind Note is convertible into shares of the Company’s common stock at the option of Lind at any time with the conversion price at lower of $7.50 per share, subject to adjustment, or 90% of the average of the three lowest daily VWAP of the common stock during the 20 trading days prior to conversion, subject to certain adjustments.

As of March 31, 2024, the converted principal amount from the SPA was $1,752,170 and the aggregate principal amount was $2,785,330.

From an accounting perspective, the Lind Note is considered a debt host instrument embedded with an issuer’s call and investor’s contingent puts, and is issued at substantial discount. The Company elects the fair value option (the “FVO”) to account for the Lind Note at fair value and mark to market each quarter. As of March 31, 2024, the fair value of the Lind Note was $2,369,694. For the three months ended March 31, 2024, the change in the fair value of the Lind Note was recorded in the Statements of Operations in the amount of $31,568. No portion of the change in fair value was related to changes in credit risk of the Company which would be charged to other comprehensive loss if any. The Company has granted to Lind a senior security interest in all of the Company’s right, title, and interest in, to and under all of the Company’s property, subject to certain exceptions as set forth in the SPA. The issuance cost related to the first amendment of $875,000 of the Lind Note, including a commitment fee charged by Lind, placement agent fee and warrants, and legal fees is $138,992, which is expensed off due to FVO election. $169,344 of the remaining insurance cost related to the future funding of $6,125,000 offered by the SPA is deferred as other assets on the balance sheet and will be expensed upon each closing or when the Company does not expect to complete the remaining funding.