5. CONVERTIBLE NOTES PAYABLE, UNSECURED

Exchanged Notes (July 2022)

In relation to the issuance of the 2022 Notes (see Note 4), certain noteholders of the Company’s Series 2 note payable (see Note 6) agreed to exchange their Series 2 notes payable consisting of $600,000 principal and accrued interest of $99,781 for $699,781 of Unsecured Convertible Promissory Notes (the “Exchanged Notes”) on substantially the same terms as the 2022 Notes, except that the Exchanged Notes are subordinate to the 2022 Notes and are unsecured. The notes bear interest at a rate of 10% per annum payable at maturity or upon conversion, mature January 6, 2024 (which was subsequently extended to March 15, 2024), and are convertible into shares of the Company’s common stock at a conversion price of $9.14 per share. At December 31, 2023 and September 30, 2023, there was no discount recorded for the Exchanged Notes.

Second Closing Notes (January 2023)

In January 2023, pursuant to the SPA (see Note 8), as amended, investors agreed to purchase Unsecured Convertible Promissory Notes (the “Second Closing Notes”) in the aggregate of $636,000 in exchange for cash proceeds of $530,000, net of original issue discount (OID) of $106,000. The notes are unsecured, bear interest at a rate of 10% per annum, mature January 6, 2024 (which was subsequently extended to March 15, 2024), and are convertible into shares of the Company’s common stock with a conversion price of $9.14 per share.

In connection with the issuance of the Second Closing Notes, the Company granted the Second Closing Notes noteholders (i) 127,968 warrants to purchase shares of common stock. The warrants are fully vested, exercisable at $9.94 per share and expire in 5 years. The Company determined the relative fair value of the warrants to be $256,000 using the Black Scholes option pricing model; and (ii) 9,598 shares of common stock with a relative fair value of $26,000. The Company also issued 6,565 warrants to purchase shares of the Company’s common stock to the placement agent who assisted in the Second Closing offering. The placement agent warrants are fully vested, exercisable at $10.06 per share and will expire in 5 years. The Company determined the relative fair value of the placement agent warrants to be $13,000 using the Black Scholes option pricing model. Furthermore, the Company also incurred direct legal and professional fees of $31,000 as part of this offering.

ThirdClosing Notes (March, April and May 2023)

In March, April and May 2023, pursuant to the SPA, as amended, investors agreed to purchase Unsecured Convertible Promissory Notes (the “Third Closing Notes”) in the aggregate of $703,000 in exchange for cash proceeds of $488,000, net of original issue discount (OID) of $215,000. The notes are unsecured, bear interest at a rate of 10% per annum, originally matured January 6, 2024 (which was subsequently extended to March 15, 2024), and are convertible into shares of the Company’s common stock with a conversion price of $9.14 per share.

In connection with the issuance of the Third Closing Notes, the Company granted the Third Closing Notes noteholders (i) 141,396 warrants to purchase shares of common stock. The warrants are fully vested, exercisable at $9.94 per share and expire in 5 years. The Company determined the relative fair value of the warrants to be $164,000 using the Black Scholes option pricing model; and (ii) 10,608 shares of common stock with a relative fair value of $18,000. The Company also incurred direct legal and professional fees of $5,000 as part of this offering.

The Second Closing Notes and Third Closing Notes contain events of default similar to the 2022 Notes. Subsequent to issuance, for no additional consideration, the Second Closing Notes and Third Closing Notes were amended several times in order to allow the Company to issue additional notes payable, extend the completion date of the Uplist Transaction, and amend certain provisions with regards mandatory conversion of the notes upon the Uplist Transaction.

Debt discount on unsecured convertible promissory notes

As a result of the issuance of the Second Closing and the Third Closing Notes, the Company recorded debt discount in the aggregate of $834,000 to account for the Second Closing and the Third Closing Notes OID of $321,000, the relative fair value of the warrants issued of $433,000, the relative fair value of common stock issued of $44,000, and direct legal and professional fees incurred of $36,000. The debt discount is being amortized over the term of the notes using the effective interest rate method.

As of September 30, 2023, outstanding balance of the Exchange notes, Second Closing Notes, and Third Closing Notes was $2,039,000 and unamortized debt discount of $380,000, or a net balance of $1,659,000. During the three month period ended December 31, 2023, the Company amortized debt discount of $351,636. As of September 30, 2023, outstanding balance of the Exchange notes, Second Closing Notes, and Third Closing Notes was $2,039,000 and unamortized debt discount of $28,163, or a net balance of $2,010,338.