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Mezzanine Equity and Preferred Stock Embedded Derivative Liability
 12 Months Ended
Dec. 31, 2025
Mezzanine Equity and Derivative Liability [Abstract]  
Mezzanine Equity and Preferred Stock Embedded Derivative Liability

Note 13 - Mezzanine Equity and Preferred Stock Embedded Derivative Liability

 

On March 7, 2025, the Company entered into a media-for-equity transaction with Mercurius Media Capital LP (“MMC”) pursuant to which the Company issued 250,000 shares of its Series A Convertible Preferred Stock, $0.001 par value (the “Series A Preferred Stock”), at a stated value of $20 per share, for an aggregate stated value of $5,000,000. In exchange, the Company received $5,000,000 of marketing credits, which were recorded as a prepaid media asset and are amortized to marketing expense as the credits are utilized.

 

The Series A Preferred Stock carries a 3.0% annual preferred dividend on its $20.00 stated value, accruing daily on a non-compounding basis. Dividends are payable annually and are due 60 calendar days after the close of each December 31 dividend period. At the Company’s sole discretion, dividends may be paid in cash or in additional shares of Series A Preferred Stock.

 

The Series A Preferred Stock is convertible into shares of the Company’s common stock at the holder’s option and will automatically convert after three years from the date of issuance. The governing agreements also include a shortfall settlement provision pursuant to which, upon conversion, if the value of the shares of common stock issuable upon conversion is less than the stated value (plus accrued dividends), the Company may be required to settle such shortfall in cash or by issuing additional shares of common stock.

 

Under the guidance in ASC 480, which provides guidance on the classification and measurement of redeemable equity instruments, equity instruments that are redeemable for cash or other assets upon the occurrence of events not solely within the control of the issuer are required to be classified outside of permanent equity as temporary equity (mezzanine equity).

The Company evaluated the terms of the Series A Preferred Stock and determined that while the instrument is not mandatorily redeemable at a fixed date or at the option of the holder, the governing agreements include provisions related to fundamental transactions, such as a change in control, merger, or sale of substantially all of the Company’s assets. Upon the occurrence of such events, the holders of the Series A Preferred Stock are entitled to receive the same form and amount of consideration as common shareholders upon conversion and benefit from a liquidation preference senior to common stock. Because these events are not solely within the control of the Company, the Series A Preferred Stock meets the criteria for classification as temporary equity in accordance with ASC 480. In accordance with ASC Topic 815, Derivatives and Hedging, the shortfall settlement provision was determined to be a freestanding derivative instrument and was accounted for separately as a derivative liability.

 

At issuance, the Company allocated the $5,000,000 fair value of the instrument between the derivative liability and the mezzanine equity component based on their relative fair values. The fair value of the derivative liability was determined using an option pricing model that incorporated assumptions regarding the Company’s stock price, expected volatility, risk-free interest rate, expected term, and dividend yield. The derivative liability was initially recorded at $4,102,500, and the residual amount of $897,500 was recorded as Series A Preferred Stock within mezzanine equity.

 

The derivative liability is measured at fair value at each reporting date, with changes in fair value recognized in the consolidated statement of operations and comprehensive loss. As of December 31, 2025, the fair value of the derivative liability was $4,574,980.

 

As of December 31, 2025, the carrying value of the Series A Preferred Stock classified in mezzanine equity was $1,020,377, which includes the initial allocation and accrued dividends. During the year ended December 31, 2025, the Company accrued dividends of $122,877, which increased the carrying value of the Series A Preferred Stock.

 

During the year ended December 31, 2025, the Company recognized marketing expense of $4,406,571 related to the utilization of the prepaid marketing credits.

 

As of December 31, 2025, the Company estimated the fair value of the derivative liability using the Black-Scholes option pricing model with the following key assumptions: 

 

Inputs  MMC 
Common stock price as of December 31, 2025  $0.42 
Risk-free interest rate   3.73%
Expected volatility   242%
Dividend yield   3%
Expected term (years)   2.18 

 

During the year ended December 31, 2025, the Company recognized a net increase in the fair value of the derivative liability of approximately $456,325.

 

In connection with the rescission of the GTG Financial acquisition, the stock purchase agreement was rescinded and the related Series A Preferred Stock issued in connection with that transaction was terminated in accordance with applicable accounting guidance. For additional information, see Note 5 – Business Combinations.