Derivative Liabilities |
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| Derivative Liabilities | Note 9 — Derivative Liabilities
The Company’s derivative liabilities consist of (i) the conversion option embedded in the AHP Note, (ii) warrants issued to AHP, (iii) warrants issued to Hudson Global Ventures in connection with the Equity Line of Credit, and (iv) the compound embedded derivative in the FirstFire Note. Each derivative liability is initially recognized at fair value and subsequently remeasured at fair value at each reporting date, with changes recognized in earnings.
AHP Convertible Note Conversion Option
The conversion option embedded in the AHP Note has been bifurcated and accounted for as a derivative liability under ASC 815. The Day-1 fair value at issuance on March 23, 2026 was $271,214, determined using a Black-Scholes option pricing model. The fair value at March 31, 2026 was $269,318, resulting in a change in fair value of $1,896 recognized in the statement of operations for the three months then ended. The combined fair value of the conversion option and the related warrant issued in March 2026 was $496,624 at June 30, 2026, and the resulting change in fair value of $124,650 was recognized in the statement of operations for the three months ended June 30, 2026. The Company has not separately determined the fair values of that conversion option and warrant as of June 30, 2026.
AHP Warrant
In connection with the AHP Note, the Company issued a warrant to purchase 186,000 shares of common stock at an exercise price of $2.50 per share, with a five-year term. The Day-1 fair value at issuance on March 23, 2026 was $352,444, determined using a Black-Scholes option pricing model. The fair value at March 31, 2026 was $351,956, resulting in a change in fair value of $488 recognized in the statement of operations for the three months then ended.
In connection with the AHP Loan funded in April 2026, the Company issued two additional warrants: a warrant to purchase 154,166 shares of common stock at an exercise price of $18.00 per share, and a pre-funded warrant to purchase 26,000 shares of common stock at an exercise price of $0.01 per share. Both warrants have five-year terms expiring on April 7, 2031. The fair values of these warrants were $96,424 and $40,801, respectively, as of June 30, 2026. Warrants to purchase an aggregate of 366,166 shares of common stock were outstanding as of June 30, 2026.
FirstFire Convertible Note Conversion Option
The conversion option embedded in the FirstFire Note, together with the contingent conversion price reset, has been bifurcated and accounted for as a single compound embedded derivative liability under ASC 815. The Day-1 fair value at issuance on June 17, 2026 was $133,476, determined using a Black-Scholes option pricing model with a stock price of $2.61, a risk-free interest rate of 3.98%, an expected term of 1.00 year, expected volatility of 100.0% and an expected dividend yield of 0.0%. The fair value at June 30, 2026 was $90,617, resulting in a gain of $42,859 recognized in change in fair value of derivative liabilities for the three months then ended. No loss on issuance was recognized, as the Day-1 fair value did not exceed the net proceeds received.
The Company evaluated the terms of the conversion features of the note as noted above in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock, and determined they are not indexed to the Company’s common stock and that the conversion feature, which is akin to a redemption feature, meets the definition of a liability. Although the conversion price is subject to a floor equal to 75% of the average of the three lowest traded prices of the Common Stock during the Trading Days preceding the Conversion Date (and is also capped at $2.50 per share), the conversion price continues to vary based on future market prices and therefore the conversion feature is not considered indexed to the Company’s common stock under ASC 815-40. The notes also contain an indeterminate number of shares to settle with conversion options outside of the Company’s control. Therefore, the Company bifurcated the conversion feature and accounted for it as a separate derivative liability. Upon issuance of the convertible note, the Company recognized a derivative liability at a fair value of $623,658 which is recorded as a debt discount and will be amortized over the life of the note.
The Company measured the derivative liability at fair value based on significant inputs not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of the derivative liability uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of the contingent consideration liability related to updated assumptions and estimates are recognized within the statements of operations.
The Company valued the derivative liability using a Black-Scholes method using following assumptions:
The following table summarizes the changes in the fair value of the Company’s Level 3 derivative liabilities:
Derivative liabilities consist of the following bifurcated conversion features and warrants. The fair values of the April 2026 tranches at June 30, 2026 were separately determined using the assumptions set out above; the amount shown for the March 2026 issuance represents the balance of the total recorded fair value of the Company’s derivative liabilities at that date:
The fair values of the derivative liabilities are classified as Level 3 within the fair value hierarchy, as the inputs to the valuation models include unobservable inputs (volatility) that are significant to the overall fair value measurement. There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 2026.
The April 2026 AHP Note is convertible into common stock, subject to a 4.99% beneficial ownership limitation and a Nasdaq exchange cap, at the lesser of (i) $36.00 per share and (ii) 80% of the average of the three lowest traded prices during the trading days preceding conversion. The note and the related warrants were issued in a private placement under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D. |
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