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CONVERTIBLE DEBT
 9 Months Ended
Sep. 30, 2025
Debt Disclosure [Abstract]  
CONVERTIBLE DEBT

NOTE 9 — CONVERTIBLE DEBT

 

2022 Convertible Debenture (Related party)

 

On December 22, 2022, the Company issued to Alpha an 8% Senior Convertible Debenture in the aggregate principal amount of $3,300,000 for a purchase price of $3,000,000 pursuant to the terms of a Securities Purchase Agreement, dated December 21, 2022 (the “2022 Securities Purchase Agreement”). The 2022 Debenture carried a maturity date of December 22, 2025 and was convertible, at any time, at Alpha’s option, into shares of the Company’s common stock (the “Conversion Shares”), at a price initially equal to $66.00 per share, subject to adjustment as described in the 2022 Debenture and other terms and conditions described in the 2022 Debenture. On July 13, 2023, the Company obtained stockholder approval, for purposes of complying with Nasdaq Listing Rule 5635(d), for the issuance to Alpha of more than 20% of our issued and outstanding shares of common stock pursuant to the terms and conditions of the 2022 Debenture, and the common stock purchase warrant dated December 22, 2022 issued by us to Alpha.

 

Commencing June 1, 2023 the Company was required to redeem $110,000 monthly, plus accrued and unpaid interest in cash, or, subject to the Equity Conditions (as defined in the 2022 Debenture) having been satisfied or waived, in shares of our common stock, based on a conversion price equal to the lesser of (i) the then-effective conversion price of the 2022 Debenture and (ii) 85% of the average of the VWAPs (as defined in the 2022 Debenture) for the five consecutive trading days ending on the trading day immediately before the applicable monthly redemption date. The 2022 Debenture accrued interest at the rate of 8% per annum beginning on December 1, 2023, and was payable on a monthly or quarterly basis in cash or, subject to the Equity Conditions having been satisfied or waived, shares or a combination thereof at our option.

 

In December 2022, pursuant to the terms of the 2022 Securities Purchase Agreement, the Company entered into a registration rights agreement with Alpha (the “Registration Rights Agreement”), pursuant to which the Company agreed to file one or more registration statements, as necessary, and to the extent permissible, to register under the Securities Act the resale of the remaining shares (underlying the 2022 Debenture and the 2022 Warrant) not otherwise registered under the Company’s registration statement on Form S-3 (File No. 333-266430). The Company filed a resale registration statement on Form S-3 pursuant to the requirements of the Registration Rights Agreement on December 2022 (File Number 333-269088), which registration statement was declared effective by the SEC on January 5, 2023. On September 1, 2023, the Company filed a Post-Effective Amendment No. 1 to Form S-3 on Form S-1 (File No. 333-269088), which Post-Effective Amendment was declared effective by the SEC on September 7, 2023. On May 1, 2024, the Company filed a Post-Effective Amendment No. 2 to Form S-1 on Form S-3 (File No. 333-269088), which Post-Effective Amendment was declared effective by the SEC on May 2, 2024.

 

 

The Company evaluated the 2022 Debenture and the 2022 Warrant and determined that the 2022 Warrant is a freestanding financial instrument. Initially, the 2022 Warrant is not considered indexed to the Company’s own stock, because the settlement amount would not equal the difference between the fair value of a fixed number of the Company’s equity shares and a fixed strike price and all of the adjustment features in Section 3(b) of the Alpha Warrant are not down round provisions, as defined in ASU 2017-11. Accordingly, the 2022 Warrant was classified as a liability and recognized at fair value, with subsequent changes in fair value recognized in earnings.

 

In accordance with ASC 470-50, the Company determined that the modified terms of the 2022 Debenture were substantially different when compared to the original terms that existed prior to the SPA Amendment, and thus the event was required to be accounted for as a debt extinguishment. Accordingly, the Company derecognized the net carrying value of the original Debenture, and recorded the new debt instrument at its fair value of $1.4 million, and recorded a $0.6 million loss on debt extinguishment. The difference between the remaining 2022 Debenture principal and its fair value on December 5, 2023 was recorded as a debt discount, which was amortized to interest expense over the expected term of the Debenture using the effective interest method, in accordance with ASC 835-30.

 

On February 27, 2024, in connection with the issuance of an additional warrant to Alpha with an exercise price of $13.00 per share, and pursuant to certain antidilution provisions in the 2022 Debenture, the Conversion Price of the 2022 Debenture was reduced from $36.50 per share to $13.00 per share.

 

2024 Alpha Debenture (Related party)

 

On February 27, 2024, pursuant to a Securities Purchase Agreement executed with Alpha on February 27, 2024 the “2024 Securities Purchase Agreement”, the Company issued to Alpha an 8% Convertible Debenture (the “2024 Alpha Debenture”) with a principal amount of $550,000, for a gross purchase price of $500,000 less expenses. The 2024 Alpha Debenture carries a maturity date of December 31, 2024 and was convertible, at any time, and from time to time, at Alpha’s option, into shares of common stock of the Company, at $30.56 per share, subject to adjustment as described in the 2024 Alpha Debenture. Upon the closing of the public offering on September 6, 2024 per the terms of the antidilution provision, the conversion price of the 2024 Alpha Debenture was reduced from $30.56 to $6.50 per share. The 2024 Alpha Debenture accrued interest on its outstanding principal balance at the rate of 8% per annum, payable at maturity. In connection with this issuance, the Company also issued to Alpha a noncompensatory equity classified 5-year common stock purchase warrant (the “2024 Alpha Warrant”) to purchase 18,001 shares of our common stock at an exercise price initially equal to $13.00 per share (see Note 14 - Stockholders Equity (Deficit)).

 

Pursuant to the 2024 Securities Purchase Agreement, the Company also granted to Alpha an option, exercisable until July 1, 2024, to purchase from us an additional 8% Convertible Debentures, of like tenor, with face amounts of up to an aggregate of $1.1 million (and with a proportional number of accompanying common stock warrants of like tenor, up to a total of 36,001 additional warrants) for a purchase price of $1.0 million.

 

The Company evaluated the terms of the 2024 Securities Purchase Agreement and determined that the 2024 Alpha Warrant and the Option issued to Alpha are each considered freestanding financial instruments. The 2024 Alpha Warrant was further determined to initially (i) be indexed to the Company’s own stock, and (ii) meet all of the additional criteria for permanent equity classification. As the Option required the Company to issue convertible debt with multiple cash settlement alternatives, the Option was classified as a liability and recognized at fair value, with subsequent changes in fair value recognized in earnings.

 

The net proceeds from the issuance of the 2024 Alpha Debenture were allocated first to the liability-classified Option and the bifurcated embedded features in the 2024 Alpha Debenture (conversion option, contingent acceleration upon an Event of Default, and contingent interest upon an Event of Default), with the resulting difference, if any, allocated to the loan host instrument and the equity-classified warrant on a relative fair value basis. The fair value of the Option was estimated to be $0.8 million at issuance, and the suite of bifurcated embedded derivative features was $0.08 million. As the fair value of the liability-classified instruments and features exceeded the net proceeds received, the Company recognized a loss on issuance of convertible debt of $0.4 million, presented in other expenses in the consolidated statements of operations. As a result, the Company recorded a debt discount at the maximum amount equal to the principal of $550,000, which was amortized as additional interest expense over the expected term of the 2024 Alpha Debenture.

 

 

During the three and nine months ending September 30, 2024 in connection with the 2024 Alpha Debenture, the Company recorded initial derivative liabilities with a fair value of $858,279, and recorded interest expense of $165,000 and $403,000, respectively, (of which approximately $154,000 and $376,000 was attributable to discount accretion, respectively) in other expenses in the condensed consolidated statements of operations related to the 2024 Alpha Debenture. The Securities Purchase Agreement related to the issuance of 2024 Alpha Debenture resulted in down-round provisions of various warrants being triggered which resulted in reductions of the exercise price of these warrants from $0.73 per share to $0.26 per share.

 

As of September 30, 2024, the fair value of derivative liabilities related to the 2024 Alpha Debenture was $536,977.

 

On November 20, 2024, in connection with the closing of the Company’s private placement transaction and issuance of Series A-2 Preferred Stock, the Company repaid the outstanding principal and accrued interest on the Alpha Debenture, in full settlement of the obligation. As of December 31, 2024, there were no amounts outstanding under the 2024 Alpha Debenture.

 

2024 Convertible Debenture

 

In April 2024, Alpha assigned the Option to Yi Hua Chen (“Chen”) and Chen exercised the option in full, in exchange for $1,000,000, less expenses, the Company issued to Chen an 8% Convertible Debenture (the “2024 Chen Debenture”) with a principal amount of $1,100,000. In connection with this issuance, the Company also issued to Chen a 5-year liability classified common stock purchase warrant to purchase 36,001 shares of our common stock with a current exercise price of $6.50 per share (see Note 8 - Warrant Liabilities).

 

In November 2024, in connection with the closing of the Company’s private placement transaction and issuance of Series A-2 Preferred Stock, the Company and Chen executed an Exchange Agreement (the “Exchange Agreement”), agreeing to convert all outstanding principal and accrued interest on the 2024 Chen Debenture totaling approximately $1,154,000, in exchange for 1,154 shares of newly designated Series A-2 Preferred Stock, in full settlement of the Company’s obligations with respect to the Chen Debenture. As of September 30, 2025 and December 31, 2024, there were no amounts outstanding under the 2024 Chen Debenture.

 

2025 Convertible Note

 

On April 28, 2025, the Company entered into a Secured Convertible Note (the “2025 Convertible Note”) with Alpha Capital Anstalt (“Alpha”, or “Holder”), pursuant to which the Company issued to Alpha a non-interest-bearing note with a principal of $264,000, and an original issue discount (“OID”) of 20%, or $44,000, in exchange for $220,000 cash, less $20,000 in expenses. The Note is convertible at any time at Alpha’s option, into shares of the Company’s common stock at a price equal to $3.80 per share (the “Conversion Price”), subject to certain adjustments. The Convertible Note bears no interest, and the principal will be due on January 28, 2026 (the “Maturity Date”).

 

The Company determined the 2025 Convertible Note does not contain a substantial premium and therefore the Company elected to account for the Convertible Note under the fair value option in accordance with ASC 825-10-15-4. The Company determined the fair value of the Convertible Note was $311,943 at issuance. The difference between the $220,000 proceeds received and fair value was recorded as a loss upon issuance in the amount of $91,943. Issuance costs incurred in connection with the transaction were expensed immediately.

 

On June 4, 2025 the Company paid down $132,000 in principal at the request of Alpha. As of September 30, 2025 the Company reassessed the fair value of the 2025 Convertible Note at $213,367, with a gain on the change in fair value of $71,298 and $33,424 recorded in the three and nine months ended September 30, 2025, respectively.