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Notes Payable
9 Months Ended
Sep. 30, 2023
Debt Disclosure [Abstract]  
Notes Payable

Note 5 – Notes Payable

 

As of September 30, 2023 and through the date of this filing, notes and convertible notes payable with principal amounts totaling $5,246,129 and $1,726,093, respectively, were past due and are classified as current liabilities on the condensed consolidated balance sheet as of September 30, 2023. Such notes continue to accrue interest and all relevant penalties have been accrued as of September 30, 2023. Of such past due notes payable, a holder of a note with principal amount of $250,000 issued a notice of default. See Note 8, Commitments and Contingencies – Litigation for additional details. The Company is in negotiations with certain holders of notes payable to extend the maturity dates of such notes or to convert the principal and accrued interest into equity. As of September 30, 2023, the Company had an accrued interest balance of $599,427 related to notes past due.

 

During the three months ended September 30, 2023 and 2022, the Company recorded interest expense of $262,091 and $179,954, respectively, and amortization of debt discount of $80,667 and $56,309, respectively. During the nine months ended September 30, 2023 and 2022, the Company recorded interest expense of $635,143 and $540,081, respectively, and amortization of debt discount of $361,692 and $187,802, respectively. As of September 30, 2023 and December 31, 2022, the Company had $2,405,635 and $1,796,736, respectively, of accrued interest (including interest in the form of warrants (see Note 4, Fair Value) and penalties related to notes payable, which is included with accrued interest and accrued interest – related parties on the condensed consolidated balance sheets.

 

Notes Payable

 

On June 12, 2023, the Company issued 176,000 shares of common stock to the holder of a promissory note issued by the Company in the principal amount of $100,000 that matured in May 2018 in exchange for the cancellation of the note. The exchange was accounted for as debt extinguishment and the Company recorded a gain on extinguishment of $41,920 which is included in other income on the condensed consolidated statements of operations. See Note 6, Stockholders’ Deficiency – Common Stock for additional details.

 

Convertible Notes Payable

 

During the nine months ended September 30, 2023, the Company issued convertible notes payable in the aggregate principal amount of $494,960 with maturity dates ranging from July 3, 2023 to February 17, 2024. The notes accrue interest at 8% per annum and are convertible at any time at the option of the holder into the Company’s Series C Convertible Preferred Stock at a conversion price of $7.50 per share. The notes automatically convert into Series C Convertible Preferred Stock on the maturity date. In connection with the issuances, the Company issued five-year immediately vested warrants to purchase 396,000 shares of common stock at an exercise price of $1.25 per share. The warrants had an issuance date relative fair value of $48,164 and was recorded as a discount to the face value of the notes, which will be amortized over the term of the notes.

 

During the nine months ended September 30, 2023, the Company issued convertible notes payable in the aggregate principal amount of $425,000 with maturity dates ranging from November 8, 2023 to July 28, 2024. The notes accrue 8% interest per annum and are convertible at any time at the option of the holder into the Company’s common stock at a conversion price of $0.75 per share. In connection with the issuances, the Company issued five-year immediately vested warrants to purchase an aggregate of 212,500 shares of common stock at an exercise price of $1.25 per share. The warrants had an issuance date relative fair value of $26,700 and was recorded as a discount to the face value of the notes, which will be amortized over the term of the notes. These notes are guaranteed by a director of the Company.

 

During the nine months ended September 30, 2023, $519,960 of principal outstanding under convertible notes automatically converted into 69,334 shares of Series C Convertible Preferred Stock and the Company elected to convert $26,234 of interest accrued under such notes into an aggregate of 34,979 shares of common stock. The note principal had a conversion price of $7.50 per share and the common stock was valued at $0.75 per share for purposes of the interest payment.

 

Convertible Notes Payable - Related Parties

 

The Company and George Verstraete, a director of the Company, entered into a promissory note agreement dated March 10, 2022 (the “Verstraete Note”), whereby Mr. Verstraete, at his discretion, can loan up to $6,000,000 to the Company. Mr. Verstraete has agreed to loan an aggregate of $2,500,000 to the Company under the note. The note bears interest at a rate of 10% per annum and, prior to its amendment in November 2023, provided that it would mature twelve months from the date of issuance. Mr. Verstraete has the right, at his option, to convert the note into shares of the Company’s Series B Convertible Preferred Stock at a conversion price of $7.50 per share at any time after the Company first issues any shares of the Series B Convertible Preferred Stock. Interest accruing under the note will be payable upon the maturity of the note and may be paid at the Company’s option in either cash or shares of the Company’s common stock (calculated based upon $0.75 per share for purposes of calculating the number of shares of common stock to be issued). For each $500,000 advanced under the Verstraete Note, Mr. Verstraete will be issued a warrant to purchase 400,000 shares of the Company’s common stock at an exercise price of $1.25 per share. Each warrant will have a five-year term.

 

In February 2023, $413,018 of payments made by Mr. Verstraete to third parties on behalf of the Company in June 2022 were characterized as convertible notes payable – related parties under the Verstraete Note. The Company received additional advances of $250,000, $100,000, $150,000, $72,018 and $105,000 in April 2023, May 2023, July 2023, August 2023 and September 2023, respectively, and, as a result, increased the outstanding principal balance of the Verstraete Note to $3,590,036 as of September 30, 2023. In connection with the advances, the Company issued five-year immediately vested warrants to purchase an aggregate of 872,029 shares of common stock at an exercise price of $1.25 per share. The warrants had an issuance date relative fair value of $106,973 which was recorded as a discount to the face value of the note and has been amortized over the term of the note.

 

Mr. Verstraete has assigned the Verstraete Note to a trust for which Darlene Soave, a director of the Company, serves as trustee. On March 10, 2023, the Company and the trust agreed to extend the maturity date of the Verstraete Note to September 10, 2023. See Note 9, Subsequent Events - Convertible Notes Payable - Related Parties for details of an additional extension of the maturity date of the Verstraete Note.

 

On April 28, 2023, the Company and Ms. Soave agreed to extend the maturity date of the convertible promissory note dated October 28, 2019 issued to Ms. Soave (“Soave Note”) from April 28, 2023 to October 28, 2023. Under the terms of the Soave Note, Ms. Soave, at her discretion, can loan up to $6,000,000 to the Company. As of September 30, 2023, $3,500,000 was outstanding under the Soave Note. See Note 9, Subsequent Events - Convertible Notes Payable - Related Parties for details of an additional extension of the maturity date of the Soave Note.

 

 

CELL SOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)