7. NOTES PAYABLE AND DERIVATIVE LIABILITY

Background

On October 14, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) for the purchase of senior secured convertible notes (the “Note” or the “Prior Note”) with an institutional investor (the “Holder”). The principal amount for the initial note is $45.0 million (the “Initial Principal Amount”) of convertible notes to the Holder, subject to certain limitations. On October 23, 2024, the Purchase Agreement closed and the Note was issued for net proceeds of approximately $38.1 million, inclusive of all discounts, fees, and expenses related to the transaction.

On February 3, 2025, the Company entered into a Letter Agreement with the Holder related to the Note. As a result of the Letter Agreement, the Holder elected to early convert $8.8 million of outstanding principal into 781,690 shares of the Company’s common stock. Additionally, as a result of the Letter Agreement, the Holder agreed to defer $11.6 million of principal repayments to seven monthly payments of $1.7 million beginning on September 1, 2025 and concluding on March 1, 2026. The Letter Agreement represented a modification requiring extinguishment accounting in accordance with ASC 470, Debt. As a result of the modification, a realized loss on debt modification of $4.7 million and interest expense of $2.1 million were recorded on the condensed consolidated statement of operations during the three months ended March 31, 2025.

On February 23, 2026, the Company entered into a Securities Purchase and Exchange Agreement (the “2026 Purchase Agreement”) with the Holder, pursuant to which the Company issued two senior secured convertible notes – one for approximately $20.6 million in exchange for the Prior Note due March 2026 and the other for approximately $22.4 million (combined, the “2026 Convertible Notes”). Net cash proceeds from the issuance, after allowing for the exchange of the Prior Note, were approximately $20.6 million, inclusive of initial discounts, fees, and expenses related to the transaction.

The exchange of the Prior Note qualifies for extinguishment accounting in accordance with ASC 470. As a result of the exchange, a realized loss on debt extinguishment of $3.1 million was recorded on the condensed consolidated statement of operations during the three months ended March 31, 2026.

The 2026 Convertible Notes will rank senior to all outstanding and future indebtedness of the Company. Immediately upon closing and monthly beginning on April 1, 2026, the Holder may elect to require the Company to partially redeem the Notes. The Company has the right to optionally convert any partial redemption of the Notes to shares of the Company’s common stock, subject to certain conditions. If conversion is elected by the Company, the partial repayment amount is the greater of $3.0 million monthly, plus a 10% premium, or 110% of 7% of the aggregate daily volume of common stock for all volume-weighted average price (“VWAP”) trading days over a specified period. If cash settlement is elected by the Company, the partial repayment amount is $3.0 million monthly, plus a 10% premium. The end of term maturity balance is the outstanding principal balance of the Notes multiplied by 110% and matures on March 1, 2028. The Notes bear zero coupon.

During the three months ended March 31, 2026, pursuant to terms of the Notes, the Holder elected to convert $7.2 million of outstanding principal, inclusive of the 10% repayment premium, into 955,128 shares of the Company’s common stock.

During the three months ended June 30, 2026, pursuant to terms of the Notes, the Holder elected to convert $13.1 million of outstanding principal, inclusive of the 10% repayment premium, into 1,664,411 shares of the Company’s common stock.

As of June 30, 2026, there was $27.0 million outstanding principal, inclusive of the 10% repayment premium, on the Notes.

Subsequent to the dates of these financial statements, on July 1, 2026, the Holder elected to convert $1.1 million of outstanding principal, inclusive of the 10% repayment premium, into 264,455 shares of the Company’s common stock. On July 7, 2026, the Holder elected to convert $0.3 million of outstanding principal, inclusive of the 10% repayment premium, into 78,348 shares of the Company’s common stock. On July 7, 2026, immediately after this conversion, outstanding principal on the Notes was $25.6 million, inclusive of the 10% repayment premium.

Components

The Notes are convertible debt instruments with multiple redemption, conversion, and put features. Certain features qualify as embedded derivatives requiring bifurcation. Therefore, the bifurcated features are accounted for separately as compound embedded derivatives in accordance with ASC 815, Derivatives and Hedging, and are included in derivative liability on the condensed consolidated balance sheets. The host contracts, which represent the Notes excluding the derivative liability, are accounted for as non-convertible debt under ASC 470 and are included in notes payable, current on the condensed consolidated balance sheets.

Notes Payable

The host contracts are recorded at the total aggregate amount repayable at maturity of $27.0 million as of June 30, 2026, less any unamortized debt discount and debt issuance costs. The debt discount is equal to the amount repayable at maturity, net of the initial fair value of the bifurcated derivative liability. Debt issuance costs are comprised of qualifying expenses resulting directly from the transaction.

Supplemental balance sheet information is as follows:

 SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION 

Interest expense related to the amortization of the debt discount and issuance costs was $5.5 million and $2.2 million for the three months ended June 30, 2026 and 2025, respectively, and $8.2 million and $5.7 million for the six months ended June 30, 2026 and 2025, respectively. Total interest expense for the three and six months ended June 30, 2026 and 2025 is comprised of the following components:

 SCHEDULE OF COMPONENTS INTEREST EXPENSE 

The monthly effective interest rate implicit in the Note as of June 30, 2026 under the interest method was 4.5%.

Maturities of partial repayments, if elected by the Holder, are as follows as of June 30, 2026:

 SCHEDULE OF MATURITIES LONG TERM DEBT

Derivative Liability

The derivative liability was initially recorded at its fair value of $6.3 million as of the issuance date of February 23, 2026. The derivative liability is subsequently remeasured and reported at fair value each reporting period, with the changes in fair value recorded as an unrealized gain or loss and recognized in earnings.

The fair value of derivatives not designated as hedging instruments as of June 30, 2026 and December 31, 2025 are as follows:

 SCHEDULE OF FAIR VALUE OF DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS 

Unrealized gains and losses associated with derivatives not designated as hedging instruments for the three and six months ended June 30, 2026 and 2025 are as follows:

 SCHEDULE OF UNREALIZED GAIN AND LOSS INSTRUMENTS 

Fair Value Measurements

The fair value of the derivative liability is determined utilizing a “with and without” method, in which the fair value is calculated as the difference in the fair value of the entire hybrid instrument and the fair value of the instrument excluding the bifurcated derivative features.

The valuation inputs hierarchy classification for liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2026 and December 31, 2025 (in thousands). See Note 6. Investment Securities, Available-For-Sale and Fair Value Measurements, for discussion of the fair value level hierarchy.

SCHEDULE OF LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS 

Activity related to the derivative liability during the three and six months ended June 30, 2026 and 2025 is as follows:

SCHEDULE OF ACTIVITY RELATED TO DERIVATIVE LIABILITIES

The table below lists the inputs and assumptions for the Company’s valuations of the 2026 Convertible Notes as of June 30, 2026 and February 23, 2026 and of the Prior Note as of December 31, 2025:

 SCHEDULE OF REVALUATION DERIVATIVE LIABILITY