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Convertible Notes Payable
3 Months Ended
Mar. 31, 2025
Convertible Notes Payable  
Convertible Notes Payable

4. Convertible Notes Payable

 

Convertible Promissory Notes Payable

 

During March 2023, the Company issued a convertible promissory note payable (the “Convertible Promissory Notes Payable”) with an aggregate principal amount of $0.8 million to a non-related third party. The Convertible Promissory Note Payable had a maturity date of 18 months from the date of issuance. The note carries interest at a rate of 20% annually, which is payable every six (6) months from the date of the note until the maturity date.

 

On March 6, 2025, the Company reached a Settlement Agreement (the “Settlement Agreement”) with the loan holder to pay $0.7 million in order to settle the March 2023 Convertible Note in full. The Company repaid the loan holder the settlement amount of $0.7 million on March 13, 2025. The Settlement Agreement and subsequent repayment was treated as a debt extinguishment under ASC 470-50. During the three months ended March 31, 2025, the Company recorded a gain on debt extinguishment of $0.1 million, calculated as the difference between (i) the $0.8 million carrying value of the Convertible Promissory Note Payable immediately prior to the amendment (ii) the $0.7 million repayment of the March 2023 Convertible Note. The $0.1 million gain on debt extinguishment was recorded within other income (expense) in the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2025.

 

In connection with the Settlement Agreement, the Company entered into a consulting agreement with a third party to negotiate the settlement of the convertible note with the loan holder on behalf of the Company. In exchange for negotiating the Settlement Agreement, the Company agreed to pay $0.1 million through the issuance of shares of Common Stock or cash. On March 31, 2025, the Company issued 73,074 shares of Common Stock. The number of shares issued was determined based on the agreement amount of $0.1 million, divided by the closing share price on March 28, 2025 (prior trading date) of $0.89. The $0.1 million was recorded as interest expense in the condensed consolidated statement of operations and comprehensive income loss for the three months ended March 31, 2025.

 

For the three months ended March 31, 2025, and March 31, 2024, the Company incurred interest expense on the Convertible Promissory Note Payable of $0 and $40,000, respectively.

 

August 2024 Nirland Note

 

On August 6, 2024, the Company entered into August 2024 Nirland Note with Nirland, a related party of the Company, pursuant to which the Company issued and sold to Nirland the August 2024 Note in the original principal amount of $2.7 million, inclusive of a $0.5 million original issuance discount. See Note 11 for further reference to the relationship between the Company and Nirland. Of the total amount of the August 2024 Nirland Note, $1.7 million was issued upon execution of the August 2024 Nirland Note. The balance of $0.5 million was provided to the Company when the shares were registered for resale in September 2024. In the event the Company completes any public or private equity or debt financing, the Company shall be required to mandatorily prepay (“Mandatory Prepayment Right”), any amounts that may be then outstanding under the August 2024 Nirland Note, within two business days following the closing of such financing, in an amount of no less than 75% of the net proceeds received. Per the terms of the August 2024 Nirland Note, the Company was prohibited from entering into a variable rate transaction without prior written consent from Nirland. The August 2024 Nirland Note bore interest at a rate of 12% per annum, accruing daily on a 365-day basis, payable monthly in arrears as cash, or accrued at Nirland’s discretion. The August 2024 Nirland Note was scheduled to mature 12 months from August 6, 2024.

 

 

On October 31, 2024, the Company and Nirland amended the August 2024 Nirland Note (the “First Amendment”), whereby the August 2024 Nirland Note was amended to (i) provide for the conversion of the August 2024 Nirland Note into shares of Common Stock, at Nirland’s discretion, in a multiple of any unpaid amounts, if not otherwise previously paid, pursuant to the conversion rate contained therein, (ii) remove Nirland’s Mandatory Prepayment Right, and (iii) remove Nirland’s right of first refusal to participate in any future equity or debt offerings of the Company. The number of shares of Common Stock issuable upon conversion of any Conversion Amount would be determined by dividing (x) such conversion amount by (y) the conversion price. Conversion amount means two and one quarter times the sum of (x) portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest with respect to such portion of the principal amount, if any. Conversion price means, as of any conversion date or other date of determination, $10.00, subject to adjustment as provided within the amended agreement.

 

The Company evaluated the conversion feature of this note offering for embedded derivatives in accordance with ASC 815, Derivatives and Hedging, and the substantial premium model in accordance with ASC 470, Debt. Based on our assessment, separate accounting for the conversion feature of this note offering is not required and will be accounted for under the substantial premium model. Under the substantial premium model, the excess above the fair value of the August 2024 Nirland Note will be recorded in additional paid-in-capital. The August 2024 Nirland Note was carried at amortized cost using the effective interest method. The Company accounted for the First Amendment as a debt extinguishment, as the First Amendment added a substantive conversion option.

 

On November 22, 2024, the Company and Nirland entered into a Second Amendment to the August 2024 Nirland Note (the “Second Amendment”). Pursuant to the Second Amendment, the August 2024 Nirland Note may not be converted (other than partial conversions that may be permitted pursuant to the rules and regulations of Nasdaq (or any successor entity)) prior to receipt of stockholder approval to provide for such conversion of the August 2024 Nirland Note, and subsequent issuance of the Company’s Common Stock, pursuant to the stockholder approval rules under the rules and regulations of The Nasdaq Stock Market. If the Company had not held a special meeting of the stockholders to approve the full conversion of the August 2024 Nirland Note on or before January 9, 2025, then the Company was obligated to pay Nirland a penalty of $0.1 million per day until the special meeting was held. In addition, the existing conversion rate was amended to be two and one half times the sum of (x) the portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest (including default interest) with respect to such portion of the principal amount, if any divided by $0.10, prior to the Reverse Stock Split, (or following any reverse splits that may occur in a ratio greater than 10 to 1, the lower of such reverse split price and the market price per share at the time of the Conversion Date, but in no event less than $1.00), subject to adjustment as provided therein and to take into account any future share splits or reverse splits to maintain the economic equivalence of the conversion rights as at the amendment effective date. The Company notes that the reverse split provision in the preceding sentence was tripped, effective January 25, 2025, following the 1-for-100 reverse stock split that occurred on that date.

 

As of the Second Amendment, the Company elected to account for the August 2024 Nirland Note at fair value under ASC 825. The Company determined that the amendment to the conversion features present in the Second Amendment fall under the guidance within ASC 825 that notes that if a significant modification of debt occurs an entity is able to make an accounting election on that date to account for that debt under the fair value option. At the end of each reporting period, the Company calculates the fair value of the August 2024 Nirland Note, and any changes in fair value are reported in the current period’s condensed consolidated statements of operations and comprehensive loss.

 

The Company remeasured the fair value of the August 2024 Nirland Note as of the Second Amendment date and calculated a fair value of $4.5 million using a binomial lattice model. On December 9, 2024, and prior to obtaining shareholder approval, Nirland exercised their conversion option and converted $0.1 million of principal for 23,000 shares of common stock pursuant to the rules and regulations of the Nasdaq. As of December 31, 2024, $2.6 million of principal and accrued interest remained outstanding and the August 2024 Nirland Note had a fair value of $2.8 million.

 

 

During January and February 2025, Nirland exercised their conversion option and converted $1.8 million of principal in exchange for 901,200 shares of common stock. In total the Company issued common stock with a fair value of $3.7 million based on the closing stock price on each conversion date and recorded a loss on the change in fair value of $1.9 million, calculated as the difference between the fair value of the shares issued and the portion of principal and interest settled. On February 12, 2025, the Company repaid the remaining unpaid principal and interest of $0.9 million in cash and recorded a gain on extinguishment of $0.1 million, calculated as the difference between the remaining fair value of August 2024 Nirland Note, less the amount of cash paid. As of March 31, 2025, no obligations remained under the August 2024 Nirland Note.

 

For the three months ended March 31, 2025, the Company recorded $24,000 of interest expense, presented within Interest expense, net, in the condensed consolidated statement of operations and comprehensive loss.

 

A.G.P. Convertible Note

 

On November 25, 2024, the Company issued to A.G.P. the “A.G.P. Convertible Note in the principal amount of $5.7 million to evidence A.G.P.’s currently owed deferred commission payable. Refer to Note 6 for additional information. Unless earlier converted as specified in the Convertible Note, the principal amount, plus all accrued but unpaid interest, is due on November 25, 2025 (the “Maturity Date”). The convertible promissory note accrues interest at 5.5% per annum.

 

At any time prior to the full payment of the convertible promissory note, provided that the A.G.P. has given at least three business days written notice to the Company, A.G.P., in its sole discretion, may elect to have all or any portion of the outstanding principal amount and all interest accrued converted into shares of the Company’s common stock, at a fixed price of $10.00 (or following any reverse splits that may occur in a ratio greater than 10 to 1, the lower of such reverse split price and the market price per share at the time of the conversion date, but in no event less than $1.00 (the “Conversion Price Floor”), subject to adjustment as provided therein and to take into account any future share splits or reverse splits. The Company notes that the reverse split provision in the preceding sentence was tripped, effective January 25, 2025, following the 1-for-100 reverse stock split that occurred on that date.

 

Per the terms of the A.G.P. Convertible Note, conversion could not occur prior to the Company having sufficiently authorized shares of common stock to permit the entire conversion of the convertible promissory note. In addition, the conversion of the convertible promissory note could also not occur prior to receipt of stockholder approval to provide for such conversion of the convertible promissory note, and subsequent issuance of the Company’s common stock, pursuant to the stockholder approval rules under the rules and regulations of The Nasdaq Stock Market. Further, A.G.P. will not be entitled to receive the Company’s common stock upon conversion, if such conversion would result in A.G.P. owning greater than 9.99% of the Company’s then currently outstanding common stock. A.G.P. is also entitled to resale registration rights as identified in the convertible promissory note. As of January 25, 2025, the Company had sufficient authorized shares of common stock to permit the entire conversion of the convertible promissory note and the Company has also received shareholder approval to allow for the entire conversion of the convertible promissory note.

 

The Company may prepay the convertible promissory note in whole or in part. In the event of certain Events of Default (as defined in the convertible promissory note), all outstanding principal and accrued interest under the Convertible Note will become, or may become at A.G.P.’s election, immediately due and payable to the A.G.P.

 

The Company elected to account for the A.G.P. Convertible Note at fair value under ASC 825. The Company determined that the substantive conversion option within the A.G.P. Convertible Note falls under the guidance within ASC 825 that notes that if a significant modification of debt occurs an entity is able to make an accounting election on that date to account for that debt under the fair value option. At the end of each reporting period, the Company calculates the fair value of the A.G.P. Convertible Note, and any changes in fair value are reported in the current period’s condensed consolidated statements of operations and comprehensive loss. The change in fair value attributable to instrument-specific credit risk, if any, will be recognize within other comprehensive income each reporting period. As an accounting policy, the Company elected to present interest expense separately from other changes in the A.G.P. Convertible Note’s fair value. Interest expense will be presented within Interest expense, net, while the other changes in the fair value with be presented within other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.

 

 

The Company determined the fair value of the A.G.P. Convertible Note to be $3.4 million as of November 25, 2024 through the use of a binomial lattice model. See Note 2 for additional information regarding the fair value measurement of the A.G.P Convertible Promissory Note. As of December 31, 2024, $6.1 million of principal and accrued interest remained outstanding and the A.G.P. Convertible Note had a fair value of $3.0 million.

 

On March 31, 2025, A.G.P. exercised their conversion option and converted $0.4 million of principal and interest in exchange for 430,000 shares of common stock. As of March 31, 2025, the Company’s common stock price was trading below the Conversion Price Floor. For the purpose of the March 31, 2025 conversion, the Company waived the Conversion Price Floor and allowed A.G.P. to convert at a price of $0.89/share (prior trading day closing stock price). Upon conversion, the Company recorded a $0.2 million loss on the change in fair value based on the difference between (i) the fair value of the common stock issued and (ii) the percentage of total principal and interest converted (6.54%), multiplied by the December 31, 2024 valuation of $3.0 million.

 

Additionally, on March 31, 2025, the Company remeasured the fair value of the A.G.P. Convertible Note through the use of a binomial lattice model and calculated a fair value of approximately $2.7 million. For the three months ended March 31, 2025, the Company recorded a $0.2 million gain in the change in fair value of the A.G.P. Convertible Note and interest expense of approximately $0.1 million. As of March 31, 2025, there was approximately $5.5 million in outstanding principal and interest remaining