NOTES PAYABLE

9 Months Ended

Sep. 30, 2023

Notes Payable

NOTES PAYABLE

NOTE 7 – NOTES PAYABLE

As of September 30, 2023, the Company had the following notes payable outstanding:

	September 30,			December 31,
	2023			2022
Loan Agreement	$	157,500		$	157,500
Streeterville Note #1		2,405,000			2,807,500
Streeterville Note #2		2,575,754			—
Directors and Officers Liability Insurance Agreement		206,239			166,262
Pinnacle Note		4,810,922			—
Total		10,155,415			3,131,262
Less: Unamortized debt discount		(207,883	)		267,433
Total notes payable		9,947,532			2,863,829
Notes payable, current		(5,136,610	)		(2,098,685	)
Notes payable, non current	$	4,810,922		$	765,144

Minimum obligations under these loan agreement are as follows:

2023 (three months)	$	2,123,971
2024	$	8,031,444
Total	$	10,155,415

Loan Agreement

The Company entered into a loan agreement in April of 2019 where the company was required to pay $157,500 in five payments in the amount of $30,000 per year, with an additional $7,500, representing interest, in year two to a loan holder. As of December 31, 2022, the company has an outstanding balance of $157,500, and no payments have been made as of September 30, 2023.

Streeterville Note #1

On October 7, 2022, the Company entered into a Security Purchase Agreement with Streeterville Capital, LLC whereby the Company issued an 8% unsecured redeemable note in the principal amount of $2,807,500. The Company received net proceeds of $2,462,500, after the deduction of debt issuance costs of $345,000. These fees were recorded as debt discounts, net of the carrying value of the debt, and are being amortized over the life of the loan using the effective interest rate method. The note has a maturity date of April 7, 2024. At any time following the occurrence of any event of default, interest shall accrue on the outstanding balance beginning on the date the applicable event of default occurred at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law.

On May 1, 2023, the Company paid an amendment fee of $65,000 which was added to principal and recorded as a debt discount. The amendment was to extend the required principal payments to September of 2023. In May of 2023, the noteholders converted $217,500 of principal in exchange for 110,131 common shares. In August of 2023, the noteholders converted an additional $250,000 of principal in exchange for 413,975 common shares.

The lender has the right at any time 6 months after the effective date, at its election, to redeem all or part of the maximum redemption amount as set forth in the promissory note. Payments of each redemption amount may be made (a) in cash, or (b) in common stock per the following formula: the portion of the applicable Redemption amount being paid in common stock divided by the common stock redemption price, or (c) by any combination of the foregoing. Whereas common stock redemption price means 87.5% multiplied by the Nasdaq minimum price. Whereas Nasdaq minimum price means the lower of: (i) the closing price on the trading day immediately preceding the date the common stock redemption price is measured; or (ii) the average closing price of the common stock for the five trading days immediately preceding the date the common stock redemption price is measured.

The principal amount of the Note may be prepaid in full, or any portion of the outstanding balance earlier than it is due; provided that in the event borrower elects to prepay all or any portion of the outstanding balance it shall pay to lender 120% of the portion of the outstanding balance borrower elects to prepay. The prepayment premium will not apply if borrower repays the Note in full on the anniversary date, which is one year from the purchase price date.

If prior to the anniversary date all redemption amounts are paid as common stock redemptions, then each time after the anniversary date that borrower makes a common stock redemption, $8,333 of the monitoring fee will be deducted from the outstanding balance, not to exceed $50,000. No interest will accrue on the monitoring fee.

Debt discount related to the note amounts to $345,000 and is being amortized using the effective interest method over the term of the note. The effective interest rate of the note is 21.84%. The Company recorded $98,632 and $263,259 due to debt discount amortization to interest expense in the accompanying Statement of Operations for the three and nine months ended September 30, 2023. As a result, at September 30, 2023, the remaining unamortized balance was $57,632. The Company paid an amendment fee in May of 2023 of $65,000 which was added to debt discount.

Interest expense recorded in the accompanying Statements of Operations by the Company was $61,945 and $172,792 for the three and nine months ended September 30, 2023, respectively.

Streeterville Note #2

The features and conditions relating to this note is similar with the Streeterville note issued on October 7, 2022.

Debt discount recognized during 2023 related to the note amounts to $344,500 and is being amortized using the effective interest method over the term of the note. The effective interest rate of the note is 22.63%. The Company recorded $100,416 and $240,119 due to debt discount amortization to interest expense in the accompanying Statement of Operations for the three and nine months ended September 30, 2023. As a result, at September 30, 2023, the remaining unamortized balance was $135,240. The Company paid an amendment fee in May of 2023 of $35,000 which was added to debt discount. In August of 2023, the noteholders converted $266,746 of principal and $33,254 of accrued interest in exchange for 479,923 common shares.

Interest expense recorded in the accompanying Statements of Operations by the Company was $32,510 and $130,311 for the three and nine months ended September 30, 2023, respectively.

Directors and Officers Liability Insurance Agreement

On August 28, 2022, the Company entered into a one-year Directors and Officers Liability Insurance agreement for $318,833. Under the terms of the agreement, the Company made a down payment of $41,730, with the remaining balance financed over the remaining term at an annual percentage rate of 5.05%. Beginning in September 2022, the Company is making 10 monthly payments of $27,710, with the last payment made in June 2023. At September 30, 2023, the outstanding balance on the note payable was $0.

On August 28, 2023, the Company entered into a one-year Directors and Officers Liability Insurance agreement for $279,347. Under the terms of the agreement, the Company made a down payment of $42,115 and an additional payment of $30,933 prior to September 30, 2023, with the remaining balance financed over the remaining term at an annual percentage rate of 6.28%. Beginning in September 2023, the Company is making 10 monthly payments of $24,411, with the last payment made in June 2024. At September 30, 2023, the outstanding balance on the note payable was $206,239 and interest expense for the three months and nine months ended September 30, 2023 were immaterial to the consolidated financial statements.

Pinnacle Note

In December 2022, the Company entered into a Loan and Security Agreement, or (the “Loan Agreement”), with Pinnacle Bank, which provides for a $5,000,000 secured revolving credit facility (the “Loan Facility”). The facility was later amended and increased to $6,000,000 on May 23, 2023. The loan is subject to a maximum advance amount of up to 85% of net face amount of eligible accounts, plus the lessor a) of the sum of 20% of the aggregate eligible inventory value of raw materials and 35% of the aggregate eligible inventory value of finished goods, b) $1 million, c) 80% of the net orderly liquidation value of raw materials and finished goods, or d) 100% of the aggregate outstanding principal amount of advances. In no event shall the aggregate amount of the outstanding advances under the Loan Facility be greater than $6 million. The loan matures on December 9, 2024. The principal amount of outstanding revolving loan, together with accrued and unpaid interest, is due on the maturity date.

The loan accrues interest at a 1.50% margin above the greater of the prime rate or 4.00%. The interest margin is increased to 2.00% in respect to the advances against eligible inventory. If the Company fails to meet any covenant, term or provision of the Loan Agreement, then interest shall accrue at the rate of 6.0% above the interest rate. If after the occurrence of an event of default and the loan is not paid in full by the maturity date, the loan shall bear interest at the rate of 18.0% above the interest rate.

Obligations under the Loan Agreement are secured by all of the Company's assets. On the effective date the Company paid a loan fee of 2% of the amount of the Loan Facility and will be required to pay a loan fee of 1.5% of the amount of the Loan Facility annually thereafter.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and the Subsidiaries, including, without limitation, restrictions on liens, indebtedness, fundamental changes, capital expenditures, consignments of inventory and distributions.

The Loan Agreement contains customary events of default, including, without limitation, payment defaults, covenant defaults, breaches of certain representations and warranties, certain events of bankruptcy and insolvency, certain events under ERISA and judgments. If an event of default occurs and is not cured within any applicable grace period or is not waived, the Lender is entitled to take various actions, including, without limitation, the acceleration of amounts due thereunder and termination of commitments under the Loan Facility.

There was a $4,810,922 outstanding balance under the Loan Facility as of September 30, 2023 which has all been classified as long term.

Chase Credit Facility

In connection with the acquisition of LED Supply Co, LLC, the Company assumed $1,728,474 in principal and $71,724 in accrued interest relating to a credit facility issued by JP Morgan Chase Bank. On March 15, 2023, the Company paid the principle in full and accrued interest of $71,724, for an aggregate payment of $1,800,198, by drawing down on the Company’s credit facility with Pinnacle Bank.