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CONVERTIBLE DEBT AND NOTES PAYABLE
 3 Months Ended
Mar. 31, 2025
Debt Disclosure [Abstract]  
CONVERTIBLE DEBT AND NOTES PAYABLE

NOTE 8 – CONVERTIBLE DEBT AND NOTES PAYABLE

 

Convertible Debenture – Arena

 

On November 22, 2024, the Company entered into a Securities Purchase Agreement with the Arena Finance Markets, LP (“Arena Finance”), Arena Special Opportunities Partners III, LP (“ASOP” and, together with Arena Finance, the “Arena Investors”). Under the Securities Purchase Agreement, the Company will issue 10% original issue discount secured convertible debentures (“Debentures”) in a principal amount of up to $12,222,222, divided into up to three separate tranches that are each subject to certain closing conditions. The conversion price per share of each Debenture is equal to 92.5% of the lowest daily VWAP (as defined in the Debentures) of the Company’s shares of common stock during the five trading day period ending on the trading day immediately prior to delivery or deemed delivery of the applicable conversion notice, subject to adjustments related to the trading price of the Company’s common stock.

 

The closing of the first tranche was consummated on November 25, 2024 (the “First Closing”) and the Company issued to the Arena Investors Debentures in an aggregate principal amount of $3,333,333 (the “First Closing Debentures”). The First Closing Debentures were sold to the Arena Investors for a purchase price of $3,000,000, representing an original issue discount of ten percent (10%). The convertible debenture will be matured eighteen months from the date first closing.

 

The First Closing Debentures contain customary events of default. If an event of default occurs, until it is cured, the holder may increase the interest rate applicable to the First Closing Debentures to two percent (2%) per annum and accelerate the full indebtedness under the First Closing Debentures, in an amount equal to 125% of the outstanding principal amount and accrued and unpaid interest. Subject to limited exceptions set forth in the First Closing Debentures, the First Closing Debentures prohibit the Company and, as applicable, its subsidiaries from incurring any new indebtedness that is not subordinated to the Arena Investors and, as applicable, any subsidiary’s obligations in respect of the First Closing Debentures until the First Closing Debentures are paid in full.

 

As consideration for the Arena Investors’ consummation of the First Closing, concurrently with the First Closing, the Company issued to each Arena Investor participating in the First Closing its pro rata portion of the 55,000 shares of common stock (the “SPA Commitment Fee Shares”) issued to the Arena Investors as a commitment fee upon the execution of the Securities Purchase Agreement. Furthermore, as consideration for the Arena Investors’ consummation of subsequent closings, the Company shall issue to the Arena Investors participating in such closing a certain number of Company common stock as agreed upon among the Company and the Arena Investors participating. The fair value of the shares of common stock issued was $420,200, which was included as a debt discount as noted below.

 

The Company agreed, pursuant to a Security Agreement, dated November 25, 2024 (the “Security Agreement”), to grant the Arena Investors a security interest in all of its assets to secure the prompt payment, performance, and discharge in full of all of the Company’s obligations under the Debentures. In addition, the Company’s wholly-owned subsidiary, Scienture, LLC, entered into a Guarantee Agreement, dated November 25, 2024 (the “Guarantee”), with the Arena Investors, pursuant to which it agreed to guarantee the prompt payment,

 

Interest shall accrue on the outstanding principal amount of this Debenture at a rate equal to 10.00% per annum paid in kind (the “PIK Interest”) unless there is an Event of Default, in which case Default Interest shall accrue and be paid instead of PIK Interest. The PIK Interest shall be added to the outstanding principal amount of this Debenture on a monthly basis as additional principal obligations hereunder and shall automatically and thereafter constitute a part of the outstanding principal amount for all purposes hereof (including the accrual of interest thereon at the rates applicable to the principal amount generally). The Company will not issue additional debentures to represent the PIK Interest. Interest shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day periods, and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made.

 

During the three months ended March 31, 2025, the Company accrued $84,167 in interest expense pertaining to the Arena debentures.

 

As a result of the debentures, the Company recognized an aggregate debt discount of $3,333,333. Through December 31, 2024, $869,692 of the debt discount was amortized to interest expense. During the three months ended March 31, 2025, $480,186 of the debt discount was amortized to interest expense. At March 31, 2025, the outstanding balance of the debentures, including the outstanding principal of $3,333,333 less the unamortized discount of $2,240,872, was $1,092,461. The following is a summary of the Arena Debentures:

 

SCHEDULE OF THE ARENA DEBENTURES 

   Arena Note 
Convertible debenture - Arena Principal  $3,333,333 
Original issuance discount   (333,333)
Other issuance costs   (360,000)
Fair value of shares issued   (420,200)
Derivative liability recognized as debt discount   (2,477,217)
Excess debt discount amortization at issuance date   257,417 
Amortization of debt discount   1,092,461 
Arena note, net of unamortized debt discount, at March 31, 2025  $1,092,461 

 

Derivative Liability

 

The Company evaluated the terms of the conversion features of the debentures as noted above in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock, and determined they are not indexed to the Company’s common stock and that the conversion feature, which is akin to a redemption feature, meet the definition of a liability. The notes contain an indeterminate number of shares to settle with conversion options outside of the Company’s control. Therefore, the Company bifurcated the conversion feature and accounted for it as a separate derivative liability. Upon issuance of the convertible debenture, the Company recognized a derivative liability at a fair value of $2,477,217, which is recorded as a debt discount and will be amortized over the life of the debentures.

 

The Company measured the derivative liability at fair value based on significant inputs not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of the derivative liability uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of the contingent consideration liability related to updated assumptions and estimates are recognized within the statements of operations.

 

The Company valued the derivative liability using a Black-Scholes method using following assumptions:

 

SCHEDULE OF DERIVATIVE LIABILITY 

   March 31,   December 31, 
   2025   2024 
Risk-free interest rate   4.030%   4.290%
Expected term (in years)   1.15    1.40 
Expected volatility+A13   143.88%   171.46%
Expected dividend yield   0.00%   0.00%

 

 

The following is a summary of the derivative liability:

 

SCHEDULE OF THE DERIVATIVE LIABILITY LIABILITY 

   Derivative 
   Liability 
Outstanding as of December 31, 2024  $2,296,834 
Change in fair value   (603,322)
Outstanding as of March 31, 2025  $1,693,512 

 

Scienture Convertible Debt

 

In September 2023, Scienture entered into a Loan and Security Agreement (the “NVK Loan Agreement”) with NVK Finance, LLC, a Nebraska Limited Liability Company (“NVK”) for $2,000,000. The debt accrues interest at a per annum rate equal to the Prime Rate (as defined in the NVK Loan Agreement) plus 7 percent and the prime rates are adjusted quarterly. As of both March 31, 2025 and December 31, 2024, the interest rate was 15.50%. The debt is collateralized by all of Scienture’s receivables, cash and cash equivalents and its right, title and interest in, to and under its Intellectual Property (as defined in the NVK Loan Agreement) and all proceeds thereof. The principal is entirely repayable on the maturity date in September 2025 and interest shall be paid monthly following a Qualified Financing (as defined in the NVK Loan Agreement). The NVK debt is convertible into common stock of Scienture at a fully-diluted Scienture valuation of $60,000,000. The balance of the NVK debt upon the Scienture Merger and at March 31, 2025 was $2,000,000. Interest expense on the NVK debt was $77,500 for the three months ended March 31, 2025.

 

August 2024 Note

 

In August 2024, the Company issued a convertible note of $360,000, for which the Company received $314,000 in net proceeds. On the six-month anniversary of the issuance, the Company will be required to make a payment of $360,000 to the noteholder and each month thereafter the Company will be required to make a payment of $7,200 to the noteholder towards repayment of the note (each, an “Amortization Payment”). The note bears interest at 12% per annum and shall be deemed earned in full and guaranteed as of the note issuance date. If the Company fails to pay any Amortization Payment, the noteholder will have the right to convert the outstanding principal and accrued interest at a conversion price equal to the Conversion Price (as defined below and subject to a floor price of $1.50). The Conversion Price is the lesser of i) $8.36 or (ii) 85% of the lowest volume-weighted average prices of the preceding five trading days. The note matures on August 20, 2025.

 

In connection with the note, the Company issued 76,923 warrants to purchase common stock. The warrants have an exercise price of $9.36 per share, are immediately exercisable and have a term of 5 years. The fair value of the warrant was $71,332, which was recognized as a debt discount and will be amortized to interest expense over the life of the note.

 

Total debt discount recognized in connection with the note was $117,332, with $42,755 amortized through December 31, 2024, and an additional $28,931 amortized during the three months ended March 31, 2025. The net carrying value of the note payable, after deducting the remaining unamortized discount of $45,646, was $314,354. On March 31, 2025, the Company converted the outstanding note into equity by issuing 274,000 shares of common stock at a fair value of $411,000. As a result, it recognized a $96,646 loss on conversion, reported as a non-operating expense in the unaudited condensed consolidated statements of operations.

 

Debt Summary

 

The following is a summary of the Company’s debt as of March 31, 2025 and December 31, 2024:

 

SCHEDULE OF DEBT 

                
   As of March 31, 2025 
  

Principal

outstanding

  

Unamortized debt

discount

  

Debt, net of unamortized

debt discount

 
Convertible debenture - Arena  $3,333,333   $(2,240,872)  $1,092,461 
Scienture convertible debt   2,000,000    -    2,000,000 
Total debt   5,333,333    (2,240,872)   3,092,462 
Current maturity of debt   2,000,000    -    2,000,000 
Total long-term debt  $3,333,333   $(2,240,872)  $1,092,461 

 

                
   As of December 31, 2024 
  

Principal

outstanding

  

Unamortized debt

discount

  

Debt, net of unamortized

debt discount

 
Convertible debenture - Arena  $3,333,333   $(2,721,058)  $612,275 
August 2024 note   360,000    (74,577)   285,423 
Scienture convertible debt   2,000,000    -    2,000,000 
Total debt   5,693,333    (2,795,635)   2,897,698 
Current maturity of debt   2,360,000    (74,577)   2,285,423 
Total long-term debt  $3,333,333   $(2,721,058)  $612,275