v3.26.1
CONVERTIBLE NOTES PAYABLE
 3 Months Ended
Mar. 31, 2026
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES PAYABLE

9. CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable were comprised of the following:

                            
   Conversion
price per
share		   Interest
rate		   Effective
rate(1)		   Due
date		  March  
31, 2026		   December
31, 2025		 
SJC convertible promissory note   Greater of '80% of 10-day VWAP or $0.035    12%   21%  October 29,2026  $440,000   $440,000 
SJC convertible promissory notes  $0.035    12%   21%  January 9, 2027, through March 27, 2027   880,000    - 
Fair value of embedded conversion options                     82,000    150,000 
Less: unamortized debt discounts                     (95,000)   (33,333)
Total convertible notes payable, net of financing cost, long-term                    $1,307,000   $556,667 
Less: current portion                     1,307,000    556,667 
Convertible notes payable, net of financing cost – long-term portion                    $-   $- 

(1)Includes OID costs that are amortized to interest expense over the life of the notes.

 

SJC Convertible Promissory Note

 

On October 29, 2025, the Company entered into a Securities Purchase Agreement (“Agreement”) with SJC Lending LLC ("SJC"), pursuant to which the Company agreed to sell to SJC convertible promissory notes in the aggregate principal amount of up to $ 1,650,000 (the "Convertible Notes") for a total purchase price of up to $ 1.5 million (the "Loan"). The Agreement provides that the Loan shall be conducted through seven (7) separate tranche closings, provided, that SJC has the ability, exercisable in its sole discretion, to accelerate its purchases of Convertible Notes prior to the dates of the tranche closings provided for in the Agreement.

 

Pursuant to the Agreement, the initial tranche closing, which occurred on October 29,2025, consisted of the issuance of a Convertible Note to SJC in the principal face amount of $440,000 for a purchase price of $400,000. The Convertible Note accrues interest at 12% per annum and will mature October 28, 2026. The note was issued with an original issue discount of 10%.

 

Pursuant to the Agreement, the second tranche closed on January 9, 2026, the third tranche closed on January 30,2026, and the fourth and fifth tranches on March 27, 2026. These closings consisted of the issuance of Convertible Notes to SJC in the total principal face amount of $880,000, for a total purchase price of $800,000. The convertible notes accrue interest at 12% per annum and will mature one year from issuance of the notes. The convertible notes are convertible into shares of the Company’s common stock at any time at a conversion price of $0.035 per share, which shall not be adjusted for stock dividends, stock splits, stock combinations and other similar transactions.

 

SJC entered into various collateral agreements in support of the convertible notes including (i) an intellectual property security agreement pursuant to which the Company and its subsidiaries granted SJC a continuing security interest in certain trademarks, copyrights, patents and mask works (ii) a security agreement pursuant to which the Company and its subsidiaries granted SJC a security interest in substantially all of their respective assets as collateral for repayment of the convertible notes and (iii) a pledge agreement pursuant to which the Company pledged the capital stock of the Company’s subsidiaries as additional collateral.

 

Embedded Derivative

 

The Company identified embedded derivative features within certain convertible promissory notes issued on October 29, 2025, that required bifurcation and separate accounting as derivative liabilities under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging Activities. Specifically, the embedded conversion options associated with the SJC convertible promissory note was determined to meet the criteria for derivative classification.

 

The fair value of the embedded derivative liabilities was estimated at March 31, 2026, using a binomial lattice model with a jump to default model. The model incorporates key assumptions including the Company’s stock price, risk-free interest rate, expected volatility, default intensity, and the specific terms of each conversion feature. Due to the significant use of unobservable inputs, these derivative liabilities are classified within Level 3 of the fair value hierarchy.

 

The fair value of the embedded derivative liabilities was estimated at December 31, 2025, and inception using a Monte Carlo simulation model. The model incorporates key assumptions including the Company’s stock price, risk-free interest rate, expected volatility, credit-risk adjusted discount rate, and the specific terms of each conversion feature (including floor price, cap, and VWAP-based pricing). Due to the significant use of unobservable inputs, these derivative liabilities are classified within Level 3 of the fair value hierarchy.

 

The following tables summarize the key inputs used in the valuation of the embedded derivatives at March 31, 2026, and on December 31, 2025:

     
Assumption  March 31, 2026 
Valuation technique  Binomial
(lattice model)		 
Risk-free interest rate (cont. comp.)   3.597%
Expected volatility   95%
Default intensity   71.40%
Stock price at valuation date  $0.03 
Dividend yield   0.00%

 

 

Assumption  December 31, 2025 
Valuation technique  Monte Carlo Simulation 
Risk-free interest rate (cont. comp.)   3%
Expected volatility   105%
Credit-risk adjusted rate   26%
Time to maturity (years)   0.83 
Stock price at valuation date  $0.07 
Dividend yield   0.00%