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Convertible Notes
6 Months Ended
Jun. 30, 2023
Convertible Notes [Abstract]  
Convertible Notes

Note G — Convertible Notes

 

On September 20, 2021, the Company entered into a convertible debt agreement (the “2021 Convertible Note”) with a shareholder for aggregate principal of $2,000,000 due October 1, 2025, as amended on November 29, 2022, with the following conversion terms. The outstanding principal balance together with the unpaid and accrued interest of the note would be automatically converted upon the earlier of (i) an IPO in excess of $7,000,000 gross proceeds, (ii) a sale event of all or substantially all of the company’s assets or a majority of its equity securities, (iii) Non-IPO financing by selling preferred stock in an equity offering other than an IPO or (iv) maturity date of October 1, 2025. If an IPO, sale event or Non-IPO financing occurred between September 20, 2021 through September 19, 2022 a conversion price discount of 25% would be assessed, if between September 20, 2022 through March 19, 2023 a conversion price discount of 30% would be assessed, if between March 20, 2023 through October 1, 2025 a conversion price discount of 35% would be assessed. Otherwise at the maturity date a conversion price of $11.50 per share would be assessed. The 2021 Convertible Note accrues interest at 3% per annum, convertible to shares as previously described herein. On November 29, 2022 this agreement was amended so that the interest rate changes to 6% per annum after October 1, 2023. The occurrence of any of the following would constitute an event of default: a) failure to pay when due any principal payment; b) voluntary bankruptcy or insolvency proceedings; c) involuntary bankruptcy or insolvency proceedings; d) judgements in excess of $500,000; or e) defaults under other indebtedness. Under these occurrences, the holder may declare all outstanding principal and interest payable to be immediately due and payable.

 

On November 21, 2022, the Company entered into two convertible debt agreements (the “November 21, 2022 Convertible Notes”) with shareholders for $250,000 and $500,000. The outstanding principal balance together with the unpaid and accrued interest of the note would be automatically converted upon the earlier of (i) an IPO of no less than $7,000,000 gross proceeds, as amended (ii) a sale event of all or substantially all of the company’s assets or a majority of its equity securities, (iii) Non-IPO financing by selling preferred stock in an equity offering other than an IPO or (iv) maturity date of November 21, 2024. If an IPO, sale event or Non-IPO financing occurred prior to November 21, 2024 a conversion price discount of 30% would be assessed. Otherwise at the maturity date a conversion price of $11.50 per share would be assessed. The November 21, 2022 Convertible Notes accrue interest at 10% per annum, convertible to shares as previously described herein. The occurrence of any of the following would constitute an event of default: a) failure to pay when due any principal payment; b) voluntary bankruptcy or insolvency proceedings; c) involuntary bankruptcy or insolvency proceedings; d) judgements in excess of $500,000; or e) defaults under other indebtedness. Under these occurrences, the holders may declare all outstanding principal and interest payable to be immediately due and payable.

 

On November 29, 2022, the Company entered into a convertible debt agreement (the “November 29, 2022 Convertible Note”) for $1,500,000 with a holder. The outstanding principal balance together with the unpaid and accrued interest of the note would be automatically converted upon the earlier of (i) an IPO of no less than $7,000,000 gross proceeds, as amended (ii) a sale event of all or substantially all of the company’s assets or a majority of its equity securities, (iii) Non- IPO financing by selling preferred stock in an equity offering other than an IPO or (iv) maturity date of October 1, 2025. If an IPO, sale event or Non-IPO financing occurred prior to October 1, 2025 a conversion price discount of 30% would be assessed. Otherwise at the maturity date a conversion price of $11.50 per share would be assessed. The November 29, 2022 Convertible Note accrues interest at 10% per annum, convertible to shares as previously described herein. The occurrence of any of the following would constitute an event of default: a) failure to pay when due any principal payment; b) voluntary bankruptcy or insolvency proceedings; c) involuntary bankruptcy or insolvency proceedings; d) judgements in excess of $500,000; or e) defaults under other indebtedness. Under these occurrences, the holder may declare all outstanding principal and interest payable to be immediately due and payable.

 

On March 16, 2023, the Company entered into a convertible debt agreement (the “March 16, 2023 Convertible Note”) for $50,000 with a holder. On March 30, 2023 the Company entered into a convertible note debt agreement (the “March 30, 2023 Convertible Note”) for $155,000 with a holder. The outstanding principal balances together with the unpaid and accrued interest of these notes would be automatically converted upon the earlier of (i) an IPO of no less than $7,000,000 gross proceeds (ii) a sale event of all or substantially all of the company’s assets or a majority of its equity securities, (iii) Non- IPO financing by selling preferred stock in an equity offering other than an IPO or (iv) maturity date of March 16, 2026 for the March 16, 2023 Convertible Note and March 30, 2026 for the March 30, 2023 Convertible Note. If an IPO, sale event or Non-IPO financing occurred prior to March 16, 2026 for the March 16, 2023 Convertible Note or prior to March 30, 2026 for the March 30, 2023 Convertible Note, a conversion price discount of 30% would be assessed. Otherwise at the maturity date a conversion price of $11.50 per share would be assessed. These notes accrue interest at 10% per annum, convertible to shares as previously described herein. The occurrence of any of the following would constitute an event of default: a) failure to pay when due any principal payment; b) voluntary bankruptcy or insolvency proceedings; c) involuntary bankruptcy or insolvency proceedings; d) judgements in excess of $500,000; or e) defaults under other indebtedness. Under these occurrences, the holder may declare all outstanding principal and interest payable to be immediately due and payable.

 

On April 1, 2023, the Company entered into a convertible debt agreement (the “April 1, 2023 Convertible Note”) for $12,552 with our landlord in exchange for services. The outstanding principal balances together with the unpaid and accrued interest of these notes would be automatically converted upon the earlier of (i) an IPO of no less than $7,000,000 gross proceeds (ii) a sale event of all or substantially all of the company’s assets or a majority of its equity securities, (iii) Non- IPO financing by selling preferred stock in an equity offering other than an IPO or (iv) maturity date of April 1, 2026. If an IPO, sale event or Non-IPO financing occurred prior to April 1, 2026, a conversion price discount of 30% would be assessed. Otherwise at the maturity date a conversion price of $11.50 per share would be assessed. This note accrues interest at 10% per annum, convertible to shares as previously described herein. The occurrence of any of the following would constitute an event of default: a) failure to pay when due any principal payment; b) voluntary bankruptcy or insolvency proceedings; c) involuntary bankruptcy or insolvency proceedings; d) judgements in excess of $500,000; or e) defaults under other indebtedness. Under these occurrences, the holder may declare all outstanding principal and interest payable to be immediately due and payable.

 

On May 11, 2023, the Company entered into a convertible debt agreement (the “May 11, 2023 Convertible Note”) for $25,000 with a holder. The outstanding principal balances together with the unpaid and accrued interest of these notes would be automatically converted upon the earlier of (i) an IPO of no less than $7,000,000 gross proceeds (ii) a sale event of all or substantially all of the company’s assets or a majority of its equity securities, (iii) Non- IPO financing by selling preferred stock in an equity offering other than an IPO or (iv) maturity date of May 11, 2026. If an IPO, sale event or Non-IPO financing occurred prior to May 11, 2026, a conversion price discount of 30% would be assessed. Otherwise at the maturity date a conversion price of $11.50 per share would be assessed. These note accrues interest at 10% per annum, convertible to shares as previously described herein. The occurrence of any of the following would constitute an event of default: a) failure to pay when due any principal payment; b) voluntary bankruptcy or insolvency proceedings; c) involuntary bankruptcy or insolvency proceedings; d) judgements in excess of $500,000; or e) defaults under other indebtedness. Under these occurrences, the holder may declare all outstanding principal and interest payable to be immediately due and payable.

 

All of the convertible notes had a contingent beneficial conversion feature. The value of this beneficial conversion feature had not yet been determined at December 31, 2022 since an IPO price had not been determined or an equity event had not occurred. A loss of $2,261,581 was recorded on the Statement of Operations for the three months and six months ended June 30, 2023 for the discount given to the convertible debt holders.

 

The balance at December 31, 2022 consists of:

 

   Principal   Accrued
Interest
   Total 
Convertible note dated September 20, 2021  $2,000,000   $76,767   $2,076,767 
Convertible notes dated November 21, 2022   750,000    8,219    758,219 
Convertible note dated November 29, 2022   1,500,000    13,562    1,513,562 
   $4,250,000   $98,548   $4,348,548 

 

There was no balance in Convertible notes as of June 30, 2023 since all principal and accrued interest of $4,492,552 and $244,447, respectively was converted into 1,399,716 shares of common stock at the IPO.

 

At December 31, 2022 the Company classified the convertible notes as a current liability since the Company anticipated that these notes will automatically convert into common shares within one year of the balance sheet date. The unamortized discount was amortized over the life of the convertible notes. The unamortized balance at the time of the conversion into common shares of approximately $117,700 is included in interest expense in the Statement of Operations.