CONVERTIBLE DEBT

9 Months Ended

Sep. 30, 2024

Debt Disclosure [Abstract]

CONVERTIBLE DEBT

NOTE 8 — CONVERTIBLE DEBT

2022 Convertible Debenture (Related party)

On December 22, 2022, we issued to Alpha an 8% Senior Convertible Debenture in the aggregate principal amount of $3,300,000 for a purchase price of $3,000,000 pursuant to the terms of a Securities Purchase Agreement, dated December 21, 2022 (the “2022 Securities Purchase Agreement”). The 2022 Debenture has a maturity date of December 22, 2025 and is convertible, at any time, and from time to time, until the 2022 Debenture is no longer outstanding, at Alpha’s option, into shares of our common stock (the “Conversion Shares”), at a price initially equal to $66.00 per share, subject to adjustment as described in the 2022 Debenture and other terms and conditions described in the 2022 Debenture. On July 13, 2023, we obtained stockholder approval, for purposes of complying with Nasdaq Listing Rule 5635(d), for the issuance to Alpha of more than 20% of our issued and outstanding shares of common stock pursuant to the terms and conditions of (a) the 2022 Debenture, and (b) the common stock purchase warrant dated December 22, 2022 issued by us to Alpha. Between January 9 and 12, 2023, we issued 16,832 shares of common stock upon Alpha’s partial voluntary conversion of the 2022 Debenture at a conversion price of $66.00 per share for a total of $1,111,078 principal. In October and December 2023, we issued 6,193 shares of common stock to Alpha in lieu of cash for monthly redemption payments on the 2022 Debenture at a weighted average price of $35.52 per share.

During the three and nine months ending September 30, 2024, we issued 30,378 and 103,865 shares of common stock, respectively to Alpha in lieu of cash for monthly redemption payments on and voluntary conversions of the 2022 Debenture at a weighted average conversion price of $13.00 and $13.66 per share, respectively, and a weighted average fair value of $12.97 and $15.19 per share, respectively.

During the three and nine months ending September 30, 2023, we issued 0 and 16,832 shares of common stock, respectively to Alpha in lieu of cash for monthly redemption payments on, and voluntary conversions of the 2022 Debenture at a weighted average conversion price of $0 and $66.00 per share, respectively, and a weighted average fair value of $0 and $66.09 per share, respectively.

Commencing June 1, 2023 (the “Initial Monthly Redemption Date”) and continuing on the first day of each month thereafter until the earlier of (i) December 22, 2025 and (ii) the full redemption of the 2022 Debenture (each such date, a “Monthly Redemption Date”), we must redeem $110,000 plus accrued but unpaid interest, liquidated damages and any amounts then owing under the 2022 Debenture (the “Monthly Redemption Amount”). The Monthly Redemption Amount must be paid in cash; provided that after the first two monthly redemptions, we may elect to pay all or a portion of a Monthly Redemption Amount in shares of our common stock, based on a conversion price equal to the lesser of (i) the then conversion price of the 2022 Debenture and (ii) 85% of the average of the VWAPs (as defined in the 2022 Debenture) for the five consecutive trading days ending on the trading day that is immediately before the applicable Monthly Redemption Date, subject to the Equity Conditions (as defined in the 2022 Debenture) having been satisfied or waived.

The 2022 Debenture accrued interest at the rate of 8% per annum, which did not begin accruing until December 1, 2023, and was payable on a monthly or quarterly basis. Interest may be paid in cash or shares of our common stock or a combination thereof at our option; provided that interest may only be paid in shares if the Equity Conditions have been satisfied or waived.

In December 2022, pursuant to the terms of the 2022 Securities Purchase Agreement, we entered into a registration rights agreement with Alpha (the “Registration Rights Agreement”), pursuant to which we agreed to file one or more registration statements, as necessary, and to the extent permissible, to register under the Securities Act the resale of the remaining shares (underlying the 2022 Debenture and the 2022 Warrant) not otherwise registered under the Company’s registration statement on Form S-3 (File No. 333-266430). The Registration Rights Agreement requires that the Company file, within 30 days after signing, a resale registration statement and use commercially reasonable efforts to cause the resale registration statement to be declared effective by the SEC on or before the 60^th calendar day following the date of signing of the Registration Rights Agreement (or 120 days if such registration statement is subject to full review by the SEC). We filed a resale registration statement on Form S-3 pursuant to the requirements of the Registration Rights Agreement on December 2022 (File Number 333-269088), which registration statement was declared effective by the SEC on January 5, 2023. On September 1, 2023, we filed a Post-Effective Amendment No. 1 to Form S-3 on Form S-1 (File No. 333-269088), which Post-Effective Amendment was declared effective by the SEC on September 7, 2023. On May 1, 2024, we filed a Post-Effective Amendment No. 2 to Form S-1 on Form S-3 (File No. 333-269088), which Post-Effective Amendment was declared effective by the SEC on May 2, 2024.

The Company evaluated the 2022 Debenture and the 2022 Warrant and determined that the 2022 Warrant is a freestanding financial instrument. Initially, the 2022 Warrant is not considered indexed to the Company’s own stock, because the settlement amount would not equal the difference between the fair value of a fixed number of the Company’s equity shares and a fixed strike price and all of the adjustment features in Section 3(b) of the Alpha Warrant are not down round provisions, as defined in ASU 2017-11. Accordingly, the 2022 Warrant was classified as a liability and recognized at fair value, with subsequent changes in fair value recognized in earnings.

The proceeds from the 2022 Debenture were allocated to the initial fair value of the 2022 Warrant, with the residual balance allocated to the initial carrying value of the 2022 Debenture. The Company has not elected the fair value option for the 2022 Debenture. The 2022 Debenture was recognized as proceeds received after allocating the proceeds to the 2022 Warrant, and then allocating remaining proceeds to a suite of bifurcated embedded derivative features (conversion option, contingent acceleration upon an Event of Default, and contingent interest upon an Event of Default), with the resulting difference, if any, allocated to the loan host instrument. The suite of derivative features was measured and determined to have no fair value.

The original issue discount of $0.3 million, the initial fair value of the 2022 Warrant of $2.8 million, the initial fair value of the suite of bifurcated embedded derivative features of $0, and the fees and costs paid to Alpha and other third parties of $0.1 million comprised the debt discount upon issuance. The debt discount is amortized to interest expense over the expected term of the 2022 Debenture using the effective interest method, in accordance with ASC 835-30. The debt host instrument of the 2022 Debenture will subsequently be measured at amortized cost using the effective interest method to accrete interest over its term to bring the 2022 Debenture’s initial carrying value to the principal balance at maturity.

On December 5, 2023, the Company and Alpha executed Amendment No. 1 with regard to Securities Purchase Agreement (the “SPA Amendment”), pursuant to which the Company and Alpha agreed to, among other things, reduce the Conversion Price of the 2022 Debenture from $66.00 per share to $36.50 per share and reduce the exercise price of the 2022 Warrant from $82.50 per share to $36.50 per share, in each case subject to certain adjustments. In addition, the SPA Amendment revised certain provisions of the 2022 Warrant to (i) limit the circumstances which would trigger a potential adjustment to the exercise price of the 2022 Warrant and (ii) clarify the treatment of the 2022 Warrant upon a Fundamental Transaction. The purpose of these revisions was to remove the terms that caused the 2022 Warrant to be liability-classified under U.S. GAAP. The Company performed an assessment and concluded that all remaining adjustment features in the revised language meet the FASB’s definition of a down-round feature. In addition, the 2022 Warrant was determined to meet all of the additional requirements for equity classification. Accordingly, as of December 5, 2023, the Company remeasured the 2022 Warrant to its fair value immediately prior to the modification and recognized the change in fair value in earnings. The incremental fair value impact from the 2022 Warrant modification of $0.09 million was included in the Company’s evaluation of the 2022 Debenture modification under ASC 470, discussed further below. The Company then reclassified the 2022 Warrant liability to equity at its post-modification fair value of $1.6 million.

In accordance with ASC 470-50, the Company determined that the modified terms of the 2022 Debenture were substantially different when compared to the original terms that existed prior to the SPA Amendment, and thus the event was required to be accounted for as a debt extinguishment. Accordingly, the Company derecognized the net carrying value of the original Debenture, and recorded the new debt instrument at its fair value of $1.4 million, and recorded a $0.6 million loss on debt extinguishment. The difference between the remaining 2022 Debenture principal and its fair value on December 5, 2023 was recorded as a debt discount and will be amortized to interest expense over the expected term of the Debenture using the effective interest method, in accordance with ASC 835-30.

During the three and nine months ended September 30, 2024, the Company recognized a gain of approximately $1,000, and a loss of approximately $124,000 respectively, upon debenture share redemptions, and recorded interest expense of approximately $28,000 and $162,000 (of which approximately $28,000 and $120,000 was attributable to discount accretion, respectively) for the three and nine months ended September 30, 2024 respectively, in other expenses in the condensed consolidated statements of operations related to the 2022 Debenture. As of September 30, 2024 and December 31, 2023, the fair value of the suite of bifurcated embedded derivative features related to the 2022 Debenture was $0.

During the three and nine months ended September 30, 2023, the Company recorded interest of approximately $368,000 and$1.3 million, respectively (of which approximately $350,000 and $1.2 million was attributable to discount amortization, respectively) in other expenses in the condensed consolidated statements of operations. As of September 30, 2023, the fair value of the Alpha Warrant was approximately $2.2 million, and the fair value of the suite of bifurcated embedded derivative features was $0.

On July 3, 2024 and July 5, 2024 Alpha voluntarily converted the remainder of the 2022 Debenture.

2024 Convertible Debenture (Related party)

On February 27, 2024, upon our receipt of a cash purchase price payment of $500,000 less expenses, we issued to Alpha an 8% Convertible Debenture (the “2024 Alpha Debenture”) in the principal amount of $550,000. The 2024 Alpha Debenture matures no later than December 31, 2024 and was convertible, at any time, and from time to time, at Alpha’s option, into shares of common stock of the Company, at $30.56 per share, subject to adjustment as described in the 2024 Alpha Debenture. Except in respect of an Exempt Issuance, the 2024 Alpha Debenture contains a “ratchet” antidilution provision, with a $5.82 per share floor. Upon the closing of the public offering on September 6, 2024 per the terms of the antidilution provision, the conversion price of the 2024 Alpha Debenture was reduced from $30.56 to $6.50 per share. The 2024 Alpha Debenture accrues interest on its outstanding principal balance at the rate of 8% per annum, payable at maturity. In connection with this issuance, we also issued to Alpha a noncompensatory equity classified 5-year common stock purchase warrant to purchase (at $13.00 per share) 18,001 shares of our common stock (see Note 12 - Stockholders Equity (Deficit)).

We also granted to Alpha an option, exercisable until July 1, 2024, to purchase from us additional 8% Convertible Debentures, of like tenor, with face amounts of up to an aggregate of $1,100,000 (and with a proportional number of accompanying common stock warrants of like tenor, up to a total of 36,001 additional warrants).

On September 9, 2024 we issued 7,842 shares of common stock upon Alpha’s partial voluntary conversion of the 2024 Alpha Debenture at a conversion price of $6.50 per share for a total of $50,979 principal.

During the three and nine months ending September 30, 2024 in connection with the 2024 Alpha Debenture, the Company recorded initial derivative liabilities with a fair value of $858,279, and interest expense of approximately $165,000 and $403,000, respectively (of which approximately $154,000 and $376,000, respectively was attributable to discount accretion), and loss (gain) on change in derivative liabilities of approximately $151,000 and ($14,000), respectively in other expenses in the condensed consolidated statements of operations. As of September 30, 2024, the fair value of the suite of bifurcated embedded derivative features related to the 2024 Alpha Debenture was approximately $169,000.

The Securities Purchase Agreement related to the issuance of 2024 Alpha Debenture resulted in down-round provisions of various warrants being triggered which resulted in reductions of the exercise price of these warrants from $36.50 per share to $6.50 per share (see Note 7 - Warrant Liabilities and Note 12 - Stockholders Equity (Deficit).

2024 Convertible Debenture

In April 2024, Alpha assigned its option to Chen and Chen exercised the option in full, in exchange for $1,000,000, less expenses, we issued to Chen an 8% Convertible Debenture (the “2024 Chen Debenture”) with a principal amount of $1,100,000. The 2024 Chen Debenture matures no later than December 31, 2024 and was convertible, at any time, and from time to time, at Chen’s option, into shares of common stock of the Company, at $30.56 per share, subject to adjustment as described in the 2024 Chen Debenture. Except in respect of an Exempt Issuance, the 2024 Chen Debenture contains a “ratchet” antidilution provision, with a $5.82 per share floor. Upon the closing of the public offering on September 6, 2024 per the terms of the antidilution provision, the conversion price of the 2024 Chen Debenture was reduced from $30.56 to $6.50 per share. The 2024 Chen Debenture accrues interest on its outstanding principal balance at the rate of 8% per annum, payable at maturity. In connection with this issuance, we also issued to Chen a 5-year liability classified common stock purchase warrant to purchase 36,001 shares of our common stock at $6.50 per share with an initial fair value of $565,582 (see Note 7 - Warrant Liabilities).

During the three and nine months ending September 30, 2024 in connection with the 2024 Chen Debenture, the Company recorded initial derivative liabilities with a fair value of $33,243, and recorded interest expense of approximately $32,000 and $60,000, respectively (of which approximately $10,000 and $18,000, respectively was attributable to discount accretion), and loss on change in derivative liabilities of approximately $345,000 and $335,000, respectively in other expenses in other expenses in the condensed consolidated statements of operations. As of September 30, 2024, the fair value of the suite of bifurcated embedded derivative features related to the 2024 Alpha Debenture was approximately $368,000. The fair value of the warrant issued in connection with the 2024 Chen Debenture was approximately $257,000 at September 30, 2024, and during the three and nine months ended September 30, 2024, the Company recorded a gain on change in fair value of warrant liabilities of approximately $2,784 and $308,090 for this warrant.

Convertible debt is comprised of the following as of September 30, 2024 and December 31, 2023:

	September 30, 2024			December 31, 2023
Convertible debt	$	1,100,000		$	—
Discount on convertible debt		(9,998	)		—
Total convertible debt	$	1,090,002		$	—

	September 30, 2024			December 31, 2023
Convertible debt - related party		499,021			1,418,922
Discount on convertible debt - related party		(154,792	)		(119,706	)
Total convertible debt - related party	$	344,229		$	1,299,216

As of September 30, 2024, there were no events of default or violation of any covenants under our financing obligations.

The following table presents the Company’s fair value hierarchy for its derivative liabilities arising from the issuance of convertible debt measured at fair value on a recurring basis as of September 30, 2024:

Derivative Liabilities Arising From Issuance of Convertible Debt		Quoted Market Prices for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Balance as of December 31, 2023	$	—	$	—	$	—	$	—
Granted		—		—		215,897		215,897
Loss on change in fair value of derivative liabilities		—		—		321,080		321,080
Balance as of September 30, 2024	$	—	$	—	$	536,977	$	536,977

The following are the weighted average and the range of assumptions used in estimating the fair value of derivative liabilities arising from the issuance of convertible debt as of September 30, 2024:

	September 30, 2024
	Actual			Weighted Average
Risk-free interest rate		4.79% — 4.79	%		4.79	%
Expected volatility (peer group)		139.5% — 139.5	%		139.5	%
Remaining term (years)		0.25 — 0.25			0.25
Expected dividend yield		0.00	%		0.00	%