NOTE 11. INVESTMENT IN OTHER ENTITY-RELATED PARTY

The Company accounts for its investments in other entities under the equity method of accounting if the Company has the ability to exercise significant influence, but not control, over the entity. Equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable.

On December 31, 2025, the Company entered into a Stock Purchase and Satisfaction of Debt Agreement with its former parent HCMC. Pursuant to this agreement, the Company settled an intercompany receivable due from HCMC with a carrying value of approximately $4.0 million by accepting 43,889,786,222 shares of HCMC common stock in full satisfaction of the receivable.

Initial Measurement

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Accordingly, the Company measured the investment at the carrying amount of the receivable surrendered. This treatment is consistent with the principle that when fair value cannot be determined within reasonable limits in a related party context, defaulting to the recorded amount of the asset relinquished is appropriate. The substance of this transaction is a conversion of intercompany funding to equity, not an income-generating event; therefore, no gain was recognized.

Ownership Changes During the Period

As of December 31, 2025, HCMC had approximately 525.2 billion shares of common stock outstanding. The Company held 43,889,786,222 shares, representing approximately 8.4% of HCMC’s outstanding common stock.

On February 1, 2026, HCMC entered into a Stock Purchase and Satisfaction of Debt Agreement with a vendor, issuing 2,000,000,000 shares of common stock to settle $200,000 of outstanding accounts payable. As a result of this issuance, HCMC’s total outstanding common stock increased to approximately 527.2 billion shares. The Company’s ownership percentage was diluted to approximately 8.3% as of February 1, 2026, and remained at that level as of March 31, 2026, assuming no other changes to HCMC’s share count.

Equity Method Assessment

Although the Company’s ownership interest in HCMC remains below the 20% presumptive threshold for significant influence, a member of the Company’s senior management serves as Chairman of the Board of HCMC. As of March 31, 2026, HCMC’s board consists of three members, and the Company continues to hold disproportionate board representation relative to its ownership percentage. This representation provides the Company with the ability to exercise significant influence over HCMC’s operating and financial policies. As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2025, the Company and HCMC have committed to separate their boards and management teams. As of March 31, 2026, this separation had not yet been completed. Accordingly, the investment continues to be accounted for using the equity method during the three months ended March 31, 2026.

Equity Method Loss Recognition

HCMC has historically incurred net losses and continues to do so. For the three months ended March 31, 2026, HCMC reported a net loss of approximately $0.8 million. The Company recognized its proportionate share of this loss based on its weighted-average ownership percentage during the period, which resulted in equity method loss of approximately $66,000 for the three months ended March 31, 2026. This loss is recorded within other income (expense) in the accompanying condensed consolidated statement of operations.

Summarized Financial Information of Equity Method Investee (HCMC)

As of March 31, 2026, the Company’s equity method investment in HCMC represented approximately 12.4% of the Company’s consolidated total assets. Applying the significance tests under Regulation S-X, Rule 1-02(w), the investment test 12.4% and the asset test 4.6% did not exceed the 20% threshold; however, the income test resulted in 38.3%, which exceeds the 20% significance threshold. Accordingly, the investment is considered significant, and the following tables present summarized financial information for HCMC as of March 31, 2026 and for the three months then ended, as derived from HCMC’s publicly filed Form 10-Q for the same period.

SUMMARIZED FINANCIAL INFORMATION FOR HCMC

Impairment Assessment

The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To assess recoverability as of March 31, 2026, the Company performed an internal valuation of the investment. The internal valuation was based on the third-party valuation obtained as of December 31, 2025, adjusted for subsequent changes in the investee’s financial position, share issuances, and observable market prices as of March 31, 2026.

During the three months ended March 31, 2026, the Company recorded an impairment loss of $1,623,922 on its equity method investment due to an adverse PTAB IPR ruling that materially reduced the fair value of the investee. The fair value was estimated using a multi-method approach under ASC 820, incorporating observable transaction prices and a probability-weighted litigation model. The impairment loss is included in other income (expense) in the condensed consolidated statement of operations.

Related Party Considerations

HCMC is a related party as the Company’s former parent prior to the Spin-Off completed on September 13, 2024. Prior to the Spin-Off, the Company and HCMC were under common control and had significant intercompany relationships. Following the Spin-Off, the Company and HCMC continue to have common board representation and management overlap as described above. The terms of the settlement were negotiated and approved by the Company’s Board of Directors, which has a majority of independent directors.

Variable Interest Entities (Unconsolidated)

The Company has evaluated its investment in its former parent, HCMC, under ASC 810, Consolidation, and has determined that HCMC meets the definition of a VIE. HCMC is considered a VIE primarily due to its negative equity position, which indicates that the equity at risk is insufficient to permit the entity to finance its activities without additional subordinated financial support.

The Company holds a variable interest in HCMC through its ownership of approximately 8.3% of HCMC’s outstanding common stock as of March 31, 2026. The Company is not the primary beneficiary of HCMC because it does not have the power to direct the activities that most significantly impact HCMC’s economic performance. Such power resides with HCMC’s Board of Directors, of which the Company holds one of three seats, with independent directors holding the majority vote. Accordingly, the Company does not consolidate HCMC. We will continue to absorb portions of HCMC’s expected losses or gains commensurate with our 8.3% equity interest in HCMC, until we conclude we no longer hold a significant influence over HCMC, at which point we will consider whether the investment should be accounted for at fair value.

The Company’s maximum exposure to loss as a result of its involvement with this unconsolidated VIE is limited to its equity investment.

The carrying value of the investment as of March 31, 2026, reflects (i) the initial carrying value of $3.95 million, (ii) the equity method loss of approximately $66,000, (iii) an impairment loss of $1,623,922 on its equity method investment, resulting in a carrying value of approximately $2.3 million as of March 31, 2026. The Company does not have any future funding commitments, guarantees, or other arrangements that could require it to provide additional financial support to HCMC. Any losses or gains attributable to the Company’s interest in HCMC will be recognized commensurate with its equity ownership percentage in accordance with the equity method of accounting.