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Note 4 - Convertible Notes Payable

3 Months Ended

Mar. 31, 2024

Note 4: Convertible Notes Payable

On March 8, 2024, the Company issued senior secured convertible promissory notes (the “Convertible Notes”) with an aggregate principal amount of $6.0 million, of which, $2.0 million were sold to related parties, including immediate family members and family trusts related to Mark Emalfarb, our President and Chief Executive Officer and a member of our Board of Directors.

The Convertible Notes are senior, secured obligations of the Company and its affiliates, and interest is payable quarterly in cash on the principal amount equal to 8% per annum, and guaranteed by its subsidiary, Dyadic International (USA), Inc. under a subsidiary guarantee for the benefit of the holders of the Convertible Notes (each such holder, a “Holder”).

The Convertible Notes mature on March 8, 2027, unless earlier converted or redeemed in accordance with the terms of the Convertible Notes. The Convertible Notes are secured by a first priority lien on substantially all assets of the Company and Dyadic International (USA), Inc.

The Holders may require the Company to redeem all or any part of the Convertible Notes on a redemption date falling on any of the 18, 21, 24, 27, 30, and 33-month anniversaries of the original issue date of the Convertible Notes (any such date, a "Redemption Date”) upon not less than 60 calendar days written notice prior to the applicable Redemption Date. The Company may also elect to redeem all or any part of the Convertible Notes on a Redemption Date upon not less than 60 calendar days written notice prior to the applicable Redemption Date.

The Convertible Notes are convertible into shares of the Company’s common stock, in whole or in part, at the option of the Holders at any time, based on an initial conversion price of $1.79 per share of common stock.

The Convertible Notes are accounted for in accordance with ASC 470-20, Debt with Conversion and Other Options and ASC 815-15, Derivatives and Hedging. Under ASC 815, contracts that are both indexed to its own stock and classified in stockholders’ equity in its statement of financial position are not considered to be derivative instruments. Based on the Company’s analysis, it is determined that the Convertible Notes contain embedded features that are indexed to the Company’s own stock and are classified in stockholders’ equity in the Company’s statement of financial position, but do not meet the requirements for bifurcation and recognition as derivatives, and therefore, do not need to be accounted for separately. Accordingly, the proceeds received from the issuance of the Convertible Notes were recorded as a single liability in accordance with ASC 470 on the Company’s consolidated balance sheets.

The Company incurred $176,000 of debt issuance costs associated with the Convertible Notes, which were recorded as a reduction of the Convertible Notes on the consolidated balance sheets. The debt issuance costs are being amortized and recognized as additional interest expense over the expected life of the Convertible Notes using the effective interest method. We determined the expected life of the debt is equal to the three-year term of the Convertible Notes.

As of March 31, 2024, no portion of the Convertible Notes were converted. Accrued interest on the Convertible Notes to related parties and other third parties were $10,000 and $20,000, respectively, and was recognized as interest expenses in the consolidated statements of operations.

For the three months ended March 31, 2024, there were no payments of interest made and debt issuance costs of $4,000 were amortized and recorded in interest expenses on the consolidated statements of operations. As of March 31, 2024, accumulated amortized debt issuance costs are $4,000.

As of March 31, 2024, convertible notes payable was consisted of the following:

Holder	*Issuance Date*	*Due Date*	*Interest Rate*		*Convertible Note Principal*		*Principal Repayments*		*Principal Outstanding*
Francisco Trust dated 2/28/1996 ⁽¹⁾	03/08/24	03/08/27		8 %	$	1,000,000	$	—	$	1,000,000
Bradley Emalfarb ⁽²⁾	03/08/24	03/08/27		8 %		500,000	$	—		500,000
Bradley Scott Emalfarb Irrevocable Trust ⁽²⁾	03/08/24	03/08/27		8 %		410,000	$	—		410,000
Emalfarb Descendent Trust ⁽³⁾	03/08/24	03/08/27		8 %		90,000	$	—		90,000
Convertible Notes - Related Party					$	2,000,000	$	—		2,000,000
Unamortized Debt Issuance Costs - Related Party										(57,516)
Net Carrying Amount									$	1,942,484

Convertible Notes - Third Party	03/08/24	03/08/27			$	4,000,000	$	—		4,000,000
Unamortized Debt Issuance Costs - Third Party										(115,033)
Net Carrying Amount									$	3,884,967

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Notes:

(1) Mr. Thomas Emalfarb, nephew of Mr. Mark A. Emalfarb, our President and Chief Executive Officer, is the Trustee of the Francisco Trust. Mr. Thomas Emalfarb may be deemed to have voting, dispositive and investment power with respect to the shares of common stock held by the Francisco Trust and disclaims any such beneficial ownership other than to the extent of any pecuniary interest he may have therein, directly or indirectly. The amount of accrued interest as of March 31, 2024, is $5,000.

(2) Mark A. Emalfarb, our President and Chief Executive Officer, is the Trustee of the Irrevocable Trust and the brother of Mr. Bradley S. Emalfarb, who is the sole beneficiary of the Irrevocable Trust. Mr. Bradley S. Emalfarb, as sole beneficiary of the Irrevocable Trust, therefore, may be deemed to have voting, dispositive and investment power with respect to the shares of common stock held by the Irrevocable Trust and disclaims any such beneficial ownership other than to the extent of any pecuniary interest he may have therein, directly or indirectly. The amount of accrued interest for Bradley Emalfarb as of March 31, 2024, is $2,000. The amount of accrued interest for Bradley Scott Emalfarb Irrevocable Trust as of March 31, 2024, is $2,000.

(3) Messrs. Thomas Emalfarb, Scott Emalfarb and Michael Emalfarb, nephews of Mr. Mark A. Emalfarb, our President and Chief Executive Officer, are co-trustees of the Descendant Trust and may therefore be deemed to have shared voting, dispositive and investment power over the shares of common stock held by the Descendant Trust. The amount of accrued interest as of March 31, 2024, is $400.