10. Convertible and Other Promissory Notes

Convertible notes measured at fair value

The following table reflects the Company's convertible notes measured at fair value under the ASC 825 fair value option ("FVO") election as of  June 30, 2026 and December 31, 2025

2024 Convertible Promissory Notes. The Company previously issued senior convertible promissory notes in April 2024 and October 2024 (collectively, the "2024 Convertible Notes"). The terms of the 2024 Convertible Notes, together with significant conversion features, are described in Note 12 to the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2025.

The aggregate principal amount due at maturity under the 2024 Convertible Notes as of June 30, 2026 and December 31, 2025 is approximately $0.8 million and $0.8 million, respectively. The notes continue to bear interest at 12% in accordance with their contractual terms.

There were no conversions of the 2024 Convertible Notes during the three or six month periods ended June 30, 2026. 

The Company has accounted for the 2024 Convertible Notes at fair value pursuant to the fair value option election since original issuance. During the three and six month periods ended June 30, 2026, the Company recognized a ($0.07) million and ($0.14) million loss, respectively, and during the three and six month periods ended June 30, 2025, the Company recognized a ($0.89) million loss and ($1.7) million loss, respectively, from changes in the fair value of the notes, which is included in other income (expense), net.

OID Convertible Notes. Between December 2024 and November 2025, the Company issued a series of convertible promissory notes at an original issue discount ("OID") of 20% (the "OID Convertible Notes") and with various maturity dates, many of which have been subsequently extended through amendments that contractually increased the OID an additional 5% for each month that repayment extended beyond the stated maturity. The aggregate principal amount (as contractually defined) outstanding on the OID Convertible Notes as of June 30, 2026 and December 31, 2025 was approximately $0.1 million and $5.6 million, respectively.

On March 31, 2026 the Company settled with one of the OID noteholders pursuant to which the Company issued 7,583 shares of Series D Convertible Preferred Stock, having a fair value of $5.8 million, as total repayment for, and the replacement and cancellation of, all of the noteholder's outstanding promissory notes valued at the aggregate amount of $10.8 million resulting in a gain on the settlement of $5.1 million.

            On March 31, 2026, the Company issued 684 shares of Series E Convertible Preferred Stock, having a fair value of $0.5 million, as total repayment for, and the replacement and cancellation of, two outstanding promissory notes in the aggregate fair value or carrying amount of $0.7 million resulting in a gain on settlement of $0.2 million.

Original Terms

The OID Convertible Notes were originally issued with a stated maturity and included and original issue discount (“OID”) of 20% which was accreted to interest expense using the effective interest method through the quarterly period ended June 30, 2025.

Modification and Extension Feature

During the third quarter of 2025, the terms were modified to provide the Company with an option to extend the maturity date on a month-to-month basis for a cost of an additional 5% increase to the OID for each month that repayment goes beyond the stated maturity and this extension option continues for an undefined number of additional months. The Company evaluated this modification under ASC 470-50, Debt Modifications and Extinguishments.   

The Company’s evaluation revealed that the change in the present value of the cash flows associated with the modified instrument, as compared to the remaining cash flows under the original terms, was substantial. Accordingly, the amendment was accounted for as a debt extinguishment as of July 1, 2025.

Embedded Derivative Evaluation

In connection with the modification, the Company also determined that change in the potential economics associated with the extension feature combined with the holder’s conversion right needed to be reassessed to determine if the embedded features were derivatives requiring bifurcation and separate accounting under ASC 815-15, Derivatives and Hedging—Embedded Derivatives. Upon reassessment, it was determined that the newly introduced extension feature combined with the holder’s conversion right has the potential to create economic returns for the holder that are not clearly and closely related to the host debt instrument was determined to be a derivative requiring bifurcation and separate accounting as a liability at fair value, with subsequent changes in fair value recognized in earnings.

Fair Value Option Election

Because the modification resulted in the introduction of an embedded derivative that would otherwise require bifurcation, the Company elected, pursuant to ASC 825-10, to apply the FVO to each of the OID Convertible Notes impacted by the incorporation of the Company option to extend maturity.

As a result of this election, the OID Convertible Notes were accounted for as a single hybrid instrument measured at fair value, with changes in fair value recognized in earnings each reporting period beginning with the quarterly period ended September 30, 2025. The FVO election eliminated the requirement to separately account for the embedded derivative under ASC 815.

Subsequent Fair Value Changes

Following the modification and the election of the fair value option, the OID Convertible Notes have been remeasured at fair value at each reporting date in accordance with ASC 820, Fair Value Measurement.

Additional OID Notes Issued in 2026

On April 21, 2026, the Company issued a promissory note with a 20% OID, together with 240 shares of Series C Convertible Preferred Stock, for gross proceeds of €0.2 million (approximately $0.23 million).

           Additionally, on June 30, 2026, the Company issued a convertible promissory note in the principal amount of $1,250,000 at an original issue discount of 20% (together with the April 21, 2026 promissory note, referred to as "2026 OID Notes"), together with 750 shares of Series F Convertible Preferred Stock ("Series F"), for gross proceeds of $1 million. The 2026 OID Notes contain certain embedded features that would require bifurcation and separate accounting under ASC 815, Derivatives and Hedging. Accordingly, at issuance the Company elected the fair value option under ASC 825, Financial Instruments, for the entire hybrid note instruments. As a result of this election, the 2026 OID Notes are recognized in their entirety at fair value, with subsequent changes in fair value recognized in earnings each reporting period. Direct issuance costs attributable to the 2026 OID Notes were expensed as incurred.

The Company determined that the issuance-date fair values of the 2026 OID Notes were equal to the aggregate cash proceeds received of approximately $1.23 million. In accordance with the applicable allocation guidance for transactions involving freestanding instruments issued together with a financial instrument subsequently measured at fair value, the Company first allocated the proceeds to the 2026 OID Notes at their issuance-date fair values. Because the issuance-date fair values of the 2026 OID Notes equaled the aggregate proceeds received, no proceeds remained available for allocation to the Series C or Series F.

Subsequent changes in the fair value of the 2026 OID Notes are recognized in the accompanying consolidated statements of operations as gains or losses on fair value remeasurement.

Valuation Methodology

The fair value of the OID Convertible Notes reflects the present value of expected future cash flows, incorporating the impact of the extension feature and the increasing OID structure, as well as market participant assumptions regarding discount rates, credit risk, and expected timing of repayment. The valuation requires significant judgment and is classified within Level 3 of the fair value hierarchy.

Valuation Inputs and Assumptions

The fair value of the OID Convertible Notes was determined using a probability-weighted discounted cash flow model that incorporates the economic effects of the extension feature, including the increasing OID structure.

Significant unobservable inputs include:

Sensitivity Analysis

Because the valuation of the OID Convertible Notes utilizes significant unobservable inputs, the resulting fair value is inherently subjective. Changes in these inputs could result in materially different fair value measurements.

The Company notes that these inputs are interrelated, and changes in one input may be accompanied by changes in others. Accordingly, the sensitivity analysis above is provided for illustrative purposes and may not be indicative of actual future changes in fair value.

Credit Risk Attribution

The Company determined that no material portion of the change in fair value during the three months ended June 30, 2026 was attributable to changes in instrument-specific credit risk. The change in fair value was primarily driven by changes in expected cash flows associated with the extension feature, including the increasing OID structure, and the passage of time.

Term Loans, net of debt issuance costs

      The following table reflects the Company's convertible and non-convertible promissory notes, net of related discounts as of  June 30, 2026 and December 31, 2025:

From the Company inception through June 30, 2026, the Company issued a series of term loans, promissory notes and bridge notes having stated interest rates between 9% and 25%. The Company has defaulted on the original maturity dates for most of these obligations and has received waivers to repeatedly extend the maturity dates such that balances continue to remain outstanding as of June 30, 2026. The aggregate principal amount on these combined debt obligations was $7.3 million and $6.2 million as of June 30, 2026 and December 31, 2025, respectively. Accrued interest related to these debt obligations was $1.4 million and $1.1 million as of June 30, 2026 and December 31, 2025, respectively, and interest expense attributable to the obligations, including amortization of the discount recorded relating to the debt issuance and restructuring (described below), together with interest expense recorded at the stated interest rates associated with these debt obligations, was $0.5 million and $0.7 million for the three and six month periods ended June 30, 2026. 

On March 3, 2026, the Company restructured $1.0 million of outstanding principal together with $0.1 million of related accrued interest for several holders of various term loans, each having a stated interest rate of 10%. In order to incent or induce the holders of these term loans to 1) further extend the maturity date related to these pre-existing term loans and 2) invest in a new private placement of 20% OID secured promissory notes (see Subscription Agreements, below) the Company was required to agree to issue 2,625 shares of Series C Convertible Preferred Stock ("Series C"), having a fair value of $1.8 million to these pre-existing holders.

In connection with the modification or restructuring of the pre-existing term loans, the Company considered the troubled debt restructuring ("TDR") guidance in ASC 470-60 and the guidance related to Modifications and Extinguishments of debt included in ASC 470-50. Because the effective borrowing rate to the Company increased as a result of the Subscription Agreements (see below), the Company determined that the modifications did not represent a TDR. However, as a result of the substantial change in the terms of the pre-existing loans, including the fair value required to be paid by the Company in the form of Series C shares, the Subscription Agreements together with the change in maturity dates associated with these loans were required to be treated as a debt extinguishment (hereinafter referred to as "debt restructuring") under ASC 470-50, resulting in a loss on debt extinguishment of $1.7 million, calculated as follows (in thousands):

The new restructured 20% OID secured promissory notes together with the pre-existing notes have a total combined principal amount of $1.96 million (the new "Notes") originally measured and recorded on the March 3, 2026 closing date at fair value of $1.61 million, net of discount of $0.36 million representing future interest expense to be amortized and recognized through the amended maturity date of September 3, 2026.

Amortization expense during the three and six months ended June 30, 2026, was $177,105 and $226,796 respectively.

Subscription Agreements

On March 3, 2026, the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “Purchasers”) pursuant to which the Company’s wholly owned subsidiary, Alt Alliance LLC (“AltA”), sold in a private placement (the “Offering”), the Notes. The Subscription Agreements also provide for the issuance of an aggregate of 2,625 shares of the Company’s Series C Convertible Preferred Stock with a face value of $1,000 each and convertible into the Company’s common stock, at $0.10 per common share, subject to certain standard anti-dilution and price protection provisions (the “Shares”) to the Purchasers. The transaction closed on March 3, 2026.

The aggregate gross proceeds to the Company were $1,000,000; $600,000 of such proceeds were transferred on the closing date with the remaining amount transferred to the Company in the second fiscal quarter of 2026. The Company intends to use the net proceeds from the Offering for working capital and other general corporate purposes.

Original Issue Discount Secured Promissory Notes

The Notes were issued with an original issue discount of 20%. No interest shall accrue on the Notes. The Notes mature upon the earlier of i) six months from the Issue Date, or ii) the date on which proceeds from a capital raise equals or exceeds $5 million.

The Notes are secured by a first-priority pledge of 100% of the membership interests of AltA held by the Company, pro rata among the holders of the Notes, pursuant to the Pledge Agreement.

The Notes contain certain Events of Default, including but not limited to (i) the Company’s failure to pay any amount of principal or other amounts due under the Notes, (ii) commencement of bankruptcy proceedings by Alta if they remain undismissed for 60 days, (iii) the dissolution of the Company or Alta, and (iv) any breach or failure to comply with any provision of the Note if it remains uncured for 60 days. Upon the occurrence of any Event of Default and at any time thereafter, the Purchasers shall have the right to exercise all of the remedies under the Notes.