Convertible Notes Payable

6 Months Ended

Jun. 30, 2024

Debt Disclosure [Abstract]

Convertible Notes Payable

Note 7. Convertible Notes Payable

Convertible notes payable at June 30, 2024 and December 31, 2023 consist of the following:

	June 30, 2024		December 31, 2023
Note 1 – Shareholder	$	100,000	$	100,000
Note 2 – Mercer Note		683,500		695,500
Note 3 – Mercer Note #2		440,000		440,000
		1,223,500		1,235,500
Debt discount and issuance costs		-		-
		1,223,500		1,235,500
Less: current portion		1,223,500		1,235,500
Non-current portion	$	-	$	-

Note 1 – Effective May 7, 2021, the Company issued a Convertible Promissory Note in the principal amount of $100,000 to a shareholder (Note 1), the terms and conditions of which may not be indicative of what a third-party investor may agree to. The Note bears interest at the rate of 10% per annum and matures on September 30, 2022 (the “Maturity Date”) at which date all outstanding principal and accrued and unpaid interest are due and payable. On October 1, 2022, the Maturity Date of Note 1 was extended to December 31, 2023 and further extended to December 31, 2024 during the quarter ended March 31, 2024. The Company may satisfy the Note upon maturity or Default, as defined, by the issuance of common shares at a conversion price equal to the greater of a 25% discount to the 15-day average market price of the Company’s common stock or $0.50. The principal and interest accrued are convertible at any time through the maturity date of December 31, 2024 at the option of the holder using the same conversion calculation. As of June 30, 2024 and December 31, 2023, this note had $31,507 and $26,521, respectively, of accrued interest, which is included within other current liabilities on the condensed consolidated balance sheets.

Note 2 – Effective August 10, 2021, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which it issued to the investor an Original Issue Discount Secured Convertible Promissory Note (the “$806,000 Note”) in the principal amount of $806,000 and warrants to purchase 930,000 shares of the Company’s common stock for aggregate consideration of $750,000. In addition, pursuant to the Purchase Agreement the Company entered into a Registration Rights Agreement with the investor.

The principal amount of the $806,000 Note and all interest accrued thereon is payable on August 10, 2022, and is secured by a lien on substantially all of the Company’s assets. The $806,000 Note provides for interest at the rate of 5% per annum, payable at maturity, and is convertible into common stock at a price of $0.65 per share. In addition to customary anti-dilution adjustments upon the occurrence of certain corporate events, the $806,000 Note provides, subject to certain limited exceptions, that if the Company issues any common stock or common stock equivalents, as defined in the $806,000 Note, at a per share price lower than the conversion price then in effect, the conversion price will be reduced to the per share price at which such stock or common stock equivalents were sold.

The $806,000 Note provides for various events of default similar to those provided for in similar transactions, including the failure to timely pay amounts due thereunder. In the event of a default, the interest rate on the outstanding principal would increase during the continuance of the default to a Default Interest Rate defined in the $806,000 Note. Additionally, all outstanding amounts would be paid at the holder’s discretion at a Mandatory Default Amount also defined in the $806,000 Note.

On November 11, 2021, Mercer Street Global Opportunity Fund, LLC (“Mercer Fund”), converted $50,000 of the principal amount of the $806,000 Note, into 76,923 shares of the Company’s common stock at a price of $0.65 per share.

The 930,000 Warrants are initially exercisable for a period of three years at a price of $1.25 per share, subject to customary anti-dilution adjustments upon the occurrence of certain corporate events as set forth in the Warrant. The shares issuable upon conversion of the $806,000 Note and exercise of the Warrants are to be registered under the Securities Act of 1933, as amended, for resale by the investor as provided in the Registration Rights Agreement. The Warrants may be exercised by means of a “cashless exercise” if at any time the shares issuable upon exercise of the Warrant are not covered by an effective registration statement.

As a result of the issuance of a $440,000 Original Issue Discount Secured Convertible Promissory Note effective July 19, 2022, (Note 3) convertible into shares of the Company’s common stock at a price of $0.20 per share, the price at which the $806,000 Note may be converted into shares of the Company’s common stock has been reduced to $0.20 per share. On July 27, 2022, Mercer Fund converted $50,000 of the principal amount of the $806,000 Note into 250,000 shares of the Company’s common stock at a price of $0.20 per share.

On October 5, 2023, at the request of Mercer Fund, the Company agreed to reduce the conversion price with respect to $10,500 of the amounts payable pursuant to the $806,000 Note to two and one-half ($0.025) cents per share. The balance of the amounts payable pursuant to the $806,000 Note remain convertible into shares of common stock of the Company at a price of twenty ($0.20) cents per share.

On March 4, 2024, at the request of Mercer Fund, the Company agreed to reduce the conversion price with respect to $12,000 of the amounts payable pursuant to the $806,000 Note to two and one-half ($0.025) cents per share. The balance of the amounts payable pursuant to the $806,000 Note remain convertible into shares of common stock of the Company at a price of twenty ($0.20) cents per share.

On February 19, 2024, the Company received the most recent notice from the manager of Mercer Fund of its agreement to forbear from the exercise of any rights it might have as a result of any defaults under the $806,000 Note and the related documents between the Company and the Mercer Fund, provided that the Mercer Fund reserved all of its rights under such agreements.

As of June 30, 2024, all original issue discount and debt issuance costs, including the allocated relative fair value of the Warrants, have been recognized. As of June 30, 2024, and December 31, 2023, total unamortized debt issuance costs were $0 and $0, including the Warrant expense and the remaining debt discount. The remaining principal balance of $683,500, along with associated interest, is recorded with current liabilities on the Company’s condensed consolidated balance sheets. After giving effect to payments totaling $30,000 made during the quarter ended June 30, 2024, as of June 30, 2024 and December 31, 2023, the $806,000 Note had $74,490 and $87,344, respectively, of accrued interest, without giving effect to additional interest and penalties of $377,826 and $139,603, respectively, which Mercer may demand as a result of the Company’s defaults under the terms of the $806,000 Note.

Note 3 – Effective July 19, 2022, the Company entered into a Securities Purchase Agreement with Mercer Fund pursuant to which it issued an Original Issue Discount Secured Convertible Promissory Note (the “$440,000 Note”) in the principal amount of $440,000 and warrants to purchase 550,000 shares of the Company’s common stock for aggregate consideration of $400,000. In addition, pursuant to the Purchase Agreement the Company entered into a Registration Rights Agreement with Mercer Fund.

The principal amount of the $440,000 Note and all interest accrued thereon is payable on July 19, 2023, and are secured by a lien on substantially all of the Company’s assets. The $440,000 Note provides for interest at the rate of 5% per annum, payable at maturity, and is convertible into common stock at a price of $0.20 per share. In addition to customary anti-dilution adjustments upon the occurrence of certain corporate events, the $440,000 Note provides, subject to certain limited exceptions, that if the Company issues any common stock or common stock equivalents, as defined in the $440,000 Note, at a per share price lower than the conversion price then in effect, the conversion price will be reduced to the per share price at which such stock or common stock equivalents were sold.

The $440,000 Note provides for various events of default similar to those provided for in similar transactions, including the failure to timely pay amounts due thereunder. The $440,000 Note provides further that the Company will be liable to the Mercer Fund for various amounts, including the cost of a buy-in, if the Company shall default in its obligation to register the shares issuable upon conversion of the $440,000 Note for sale by the Mercer Fund under the Securities Act or otherwise fails to facilitate Buyer’s sale of the shares issuable upon conversion of the $440,000 Note as required by the terms of the $440,000 Note. In the event of a default, the interest rate on the outstanding principal would increase during the continuance of the default to a Default Interest Rate defined in the $440,000 Note. Additionally, all outstanding amounts would be paid at the holder’s discretion at a Mandatory Default Amount also defined in the $440,000 Note.

On February 19, 2024 the Company received the most recent notice from the manager of the Mercer Fund, LLC that it agreed to forbear from exercising any rights it might have as a result of any defaults under the $440,000 Note and the related documents between the Company and the Fund, provided that it reserved all of its rights.

The 550,000 Warrants are initially exercisable for a period of three years at a price of $0.50 per share, subject to customary anti-dilution adjustments upon the occurrence of certain corporate events as set forth in the Warrant. The shares issuable upon conversion of the $440,000 Note and exercise of the Warrants are to be registered under the Securities Act of 1933, as amended, for resale by the investor as provided in the Registration Rights Agreement. The Warrants may be exercised by means of a “cashless exercise” if at any time the shares issuable upon exercise of the Warrant are not covered by an effective registration statement.

The Company accounts for the allocation of its issuance costs related to its Warrants in accordance with ASC 470-20, Debt with Conversion and Other Options. Under this guidance, if debt or stock is issued with detachable warrants, the proceeds need to be allocated to the two instruments using either the fair value method, the relative fair value method, or the residual value method. The Company used the relative fair value at the time of issuance to allocate the value received between the convertible note and the warrants.

The Company estimated the fair value of the Warrants utilizing the Black-Scholes pricing model, which is dependent upon several assumptions such as the expected term of the Warrants, expected volatility of the Company’s stock price over the expected term, expected risk-free interest rate over the expected term and expected dividend yield rate over the expected term. The Company believes this valuation methodology is appropriate for estimating the fair value of warrants. The value allocated to the relative fair value of the Warrants was recorded as debt issuance costs and additional paid in capital.

The principal, net of the original issue discount and debt issuance costs, including the allocated relative fair value of the Warrants, which are being recognized over the life of the $440,000 Note, along with associated interest, is recorded with current liabilities on the Company’s condensed consolidated balance sheets. As of June 30, 2024, and December 31, 2023, without giving effect to additional interest and penalties of $167,452 and $27,988 which Mercer may demand as a result of the Company’s default under the terms of the $440,000 Note, the $440,000 Note had $42,734 and $31,764 respectively of accrued interest.