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SERIES A-1 CONVERTIBLE NOTES
 6 Months Ended
Jun. 30, 2025
SERIES A-1 CONVERTIBLE NOTES  
SERIES A-1 CONVERTIBLE NOTES

6. SERIES A-1 CONVERTIBLE NOTES

On June 13, 2025, the Company entered into the June Securities Purchase Agreement with certain institutional investors under which the Company agreed to issue and sell in a registered public offering directly to the investors (the “June Offering”), convertible notes for an aggregate principal amount of $5,000,000 (the “Series A-1 Convertible Notes”), which will be convertible into shares of the Company’s Common Stock.

The June Securities Purchase Agreement contains customary representations, warranties and covenants. The Series A-1 Convertible Notes contain customary affirmative and negative covenants, including certain limitations on debt, liens, restricted payments, asset transfers, changes in the business and transactions with affiliates. The Series A-1 Convertible Notes also contain standard and customary events of default.

No Series A-1 Convertible Note may be converted to the extent that such conversion would cause a holder of such Series A-1 Convertible Note to become the beneficial owner of more than 9.99% of the then outstanding Common Stock, after giving effect to such conversion (the “Beneficial Ownership Cap”).

The Series A-1 Convertible Notes shall not bear interest except that upon the occurrence and during the continuance of an event of default. Upon the occurrence and during the continuance of an event of default, the interest rate on the Series A-1 Convertible Notes will be 18% per annum. Unless earlier converted, the Series A-1 Convertible Notes will mature on the twenty-four month anniversary of their respective issuance dates.  Additionally, the Series A-1 Convertible Notes have a financial covenant of maintaining a minimum balance of available cash of $2.25 million.

At any time after the issuance date, all amounts due under the Series A-1 Convertible Notes are convertible, in whole or in part, and subject to the Beneficial Ownership Cap, at a conversion price equal to $0.63, which is subject to customary adjustments upon any stock split, stock dividend, stock combination, recapitalization, subsequent issuances, and other events.  When a conversion occurs on an Installment Amount (as defined below), the conversion price is the lower of $0.63 or 92% of the lowest VWAP of the Common Stock during the five consecutive trading days prior to the Installment Date (as defined below).  As of June 30, 2025, approximately $1.0 million of the Series A-1 Convertible Notes was due but deferred by the investors.

Starting on the closing date, the Series A-1 Convertible Notes amortize in equal installments (each, an “Installment Amount”), and we will make monthly payments on the first trading day of each monthly anniversary commencing on the closing date through the maturity date (each, an “Installment Date”), payable in cash or shares of Common Stock, at the Company’s option. Upon the satisfaction of certain conditions, we may prepay outstanding Series A-1 Convertible Notes upon not less than 20 trading days’ written notice by paying an amount equal to the portion of the Series A-1 Convertible Notes being redeemed at a 115% premium.

Pursuant to the June Securities Purchase Agreement, the Company has agreed to seek stockholder approval of the issuance of conversion shares upon the future conversion of Series A-1 Convertible Notes, if any, that would exceed 19.99% of the Company’s issued and outstanding Common Stock, in order to comply with the rules and regulations of NYSE American. In connection with the obligation to seek such stockholder approval, the Company entered into voting agreements (each, “Voting Agreement”) with certain officers and directors of the Company, pursuant to which each such officer and director agreed to vote shares of Common Stock held by such person in favor of such stockholder proposal.

The Series A-1 Convertible Notes and shares of Common Stock issuable upon conversion of the Series A-1 Convertible Notes were offered and sold pursuant to a prospectus supplement which was filed on June 13, 2025, in connection with a “takedown” from the Company’s shelf registration statement on Form S-3.

The Company elected the Fair Value Option for the Series A-1 Convertible Notes (see Note 1 Significant Accounting Policies and Note 7 Fair Value Measurements for more details).

The shares of the Company’s Common Stock to be issued to settle the above liabilities is dependent on the share price at a future date, therefore, the Company followed FASB’s Accounting Standards Codification 260, Earnings Per Share (“ASC 260”) and determined the total number of potential future convertible shares using the if-converted method.  In accordance with the terms of the Series A-1 Convertible Notes, the highest conversion price is $0.63, subject to adjustment.  Assuming conversion at this price and using the if-converted method, the Series A-1 Convertible Notes were convertible into approximately 9,126,984 shares of the Company’s Common Stock at June 30, 2025.  This total number of shares could be higher if a conversion is made when the Company’s share price is lower.  See Note 12 Earnings Per Share for more information on the earnings per share.