Note 7 - Convertible Notes with Warrants (Related Party) |
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| Debt Disclosure [Text Block] |
Note 7 – Convertible Notes with Warrants (related party)
On December 16, 2022, the Company entered into a Securities Purchase Agreement with K.A.H.R. Foundation, a beneficial owner of more than 5% of the Company’s common stock as of the agreement date (see Note 12), for the issuance of unsecured, unquoted convertible promissory notes, to be issued in two tranches, to raise a maximum aggregate amount of $5,000,000.
The first tranche was issued on December 23, 2022. The Company received $2,325,000 in gross proceeds from the issuance of the convertible note. The convertible note bears interest of 10% per annum, compounded annually. The interest accrued during the three months ended June 30, 2026 and 2025 was $77,152 and $70,139, respectively. The interest accrued during the six months ended June 30, 2026 and 2025 was $153,457 and $139,506, respectively. As of June 30, 2026 and December 31, 2025, cumulative accrued interest on the first tranche totaled $929,815 and $776,358, respectively, and the entire principal balance of $2,325,000 remained outstanding at both dates. All or a portion of the principal is convertible into CHESS Depositary Interests (“CDIs”, as described further in Note 9) at a price of $0.2691 per share at the election of the holder following the 36 month anniversary of the closing date. All or a portion of accrued and unpaid interest is convertible into CDIs at a price of $0.2563 per share at the election of the holder during the same time frame. Accrued interest on the convertible notes is included in the fair value of the convertible notes (related party) on the unaudited condensed consolidated balance sheets. The maximum number of CDIs to be issued upon conversion of the principal amount and interest is no more than 12,849,949 CDIs. As of June 30, 2026, 12,267,749 CDIs would be issued if the principal and accrued interest were converted.
The second tranche was issued on March 28, 2023. The Company received $2,675,000 of gross proceeds from the issuance of the convertible note. The second tranche is subject to the same terms as the first tranche. The interest accrued during the three months ended June 30, 2026 and 2025 was $88,767 and $80,697, respectively. The interest accrued during the six months ended June 30, 2026 and 2025 was $168,843 and $153,494, respectively. As of June 30, 2026 and December 31, 2025, cumulative accrued interest on the second tranche totaled $977,118 and $808,275, respectively, and the entire principal balance of $2,675,000 remained outstanding at both dates. The maximum number of CDIs to be issued upon conversion of the principal and interest is no more than 14,784,350 CDIs. As of June 30, 2026, 13,752,944 CDIs would be issued if the principal and accrued interest were converted. The maturity date on the notes is the earliest occurrence of (i) a change-in-control event, at which time the Company would be required to pay the holder the greater of 125% of the then outstanding balance plus accrued and unpaid interest or the amount the holder would receive if the principal and accrued and unpaid interest had been converted to CDIs at a conversion price equal to the variable weighted average price (“VWAP”) of the CDIs for the 10 day period ending on the change-in-control event date; or (ii) the four year anniversary of the closing date of each tranche.
On March 28, 2023 and December 23, 2022, pursuant to the Securities Purchase Agreement, the Company issued warrants exercisable for 1,043,699 and 907,141 CDIs, respectively, with an exercise price of $0.2563 per share. The warrants expire years after the dates of issuance.
The Company accounts for its convertible promissory notes under ASC 815, Derivatives and Hedging ("ASC 815"). Under 815-15-25, the election can be made at the inception of a financial instrument to account for the instrument under the fair value option under ASC 825. The Company has made such election for its convertible promissory notes because the notes contain conversion and settlement features and management believes that measuring the entire instrument at fair value provides more relevant information about the current value of the obligation and changes in that value over time. Using the fair value option, the convertible promissory notes are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the notes are recognized as a non-cash item in the change in fair value of convertible notes (related party) on the unaudited condensed consolidated statements of operations.
The convertible notes (related party) were recorded as a liability on the unaudited condensed consolidated balance sheets at the dates of issuance. The following tables provide a summary of change in fair value of the two tranches of the convertible notes (related party) for the six months ended June 30:
As of June 30, 2026, the Company had total convertible notes (related party) of $33,186,900, all of which was classified as current liabilities on the unaudited condensed consolidated balance sheets. As of December 31, 2025, the Company had total convertible notes (related party) of $25,014,200 of which $13,268,500 was classified as long-term liabilities on the unaudited condensed consolidated balance sheets. The fair value of the convertible notes is measured in accordance with ASC 820 using the “Monte Carlo Method” modeling incorporating the following inputs:
Significant assumptions used to determine the fair value of the convertible note include the estimated probability of a change in control event, which is based on management’s expectation of future transactions; the volatility of the stock price, which is estimated based on the Company’s own historical volatility; and the credit spread, which is based on the Company's estimate of its credit rating derived from the Company's financial condition and market yields for similar instruments issued by companies with comparable credit ratings. The Company evaluated the warrants under ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815. The warrants do not meet the characteristics for liability classification under either provision and as such are classified as equity under ASC 815. Given that the convertible notes were subject to fair value remeasurement, the fair value of the convertible notes was carved out from gross proceeds and the remainder of the gross proceeds of the first and second tranches of $127,900 and $541,200, respectively, was allocated to warrants. The warrants were recorded as Additional paid-in capital on the unaudited condensed consolidated balance sheets at the dates of issuance. No subsequent remeasurement of the warrants is required.
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