Note 6 - Convertible Promissory Note

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Debt Disclosure [Text Block]

6. Convertible Promissory Note

July 2019 Note

On July 23, 2019, the Company entered into a private placement with Orbrex (USA) Co. Limited (“Orbrex”), pursuant to which the Company issued and sold to Orbrex an unsecured convertible promissory note, as amended, in the original principal amount of $1,000,000 (the “July 2019 Note”). The July 2019 Note bears interest at a rate of twenty-four percent (24%) per annum and is payable in arrears on January 31 of each year. In the nine months ended September 30, 2023, the Company has amended the July 2019 Note two times:

● On January 31, 2023, the Company entered into Amendment No. 3 to the July 2019 Note, which extended the maturity date from January 31, 2023 to July 31, 2023 and changed the fixed conversion price to $2.87 per share. The Company performed a debt extinguishment vs. modification analysis on this amendment to the July 2019 Note and determined that the extension would be considered an extinguishment, due to an increase of more than 10% to the value of the embedded conversion option. The Company determined that the fair value of the July 2019 Note after the amendment was $1,239,000 representing a $239,000 increase in its fair value. The increase will be recorded as a premium to the July 2019 Note and was amortized over the remaining term.

● On July 31, 2023, the Company entered into an Amendment No. 4 to the July 2019 Note, which extended the maturity date of the July 2019 Note from July 31, 2023 to January 31, 2024 and changed the fixed conversion price to $1.07 per share. The Company performed a debt extinguishment vs. modification analysis on this amendment to the July 2019 Note and determined that the extension would be considered an extinguishment, due to an increase of more than 10% to the value of the embedded conversion option. The Company determined that the fair value of the July 2019 Note after the amendment was $538,000 representing a $87,000 increase in its fair value. The increase will be recorded as a premium to the July 2019 Note and amortized over the remaining term.

The following summarizes the July 2019 Note:

	Maturity Date	Stated Interest Rate		Conversion Price		Face Value		Debt Discount/ Premium			Carrying Value
September 30, 2023	1/31/2024		24%	$	1.07	$	397,000	$	59,000		$	456,000
December 31, 2022	7/31/2023		24%	$	6.30	$	1,000,000	$	(38,000	)	$	962,000

The July 2019 Note includes a down-round anti-dilution provision that lowers its conversion price if the Company sells shares of common stock or issues convertible debt at a lower price per share. In 2023, the anti-dilution provision was triggered, as noted below:

In March 2023, the Company sold shares of common stock at $2.65 per share, resulting in a down round triggering event lowering the conversion price of the Note to that value. The triggering event created an incremental value of $43,000 which was treated as a discount to the carrying amount of the July 2019 Note and was be amortized over its remaining term.

A Black-Scholes pricing model was utilized to determine the change in the before and after incremental value of the conversion option at each triggering event, with the following inputs:

	March 2023
Conversion price before	$	2.87
Conversion price after	$	2.65
Term (years)		0.36
Volatility		182	%
Dividend rate		0	%
Risk free rate		4.20	%

The Company recorded amortization expense for the July 2019 Note of ($35,000) and ($186,000) for the three and nine months ended September 30, 2023, respectively. In addition to the amortization, the Company also recorded interest expense related to the July 2019 Note of $24,000 and $90,000 for the three and nine months ended September 30, 2023, compared to $60,000 and $180,000 for the three and nine months ended September 30, 2022, respectively.