Note 14 - Convertible Note Payable and Warrant Liability |
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| Debt Disclosure [Text Block] |
NOTE 14 – Convertible Note Payable and Warrant Liability
The Financing
On July 21, 2026, the Company entered into a Securities Purchase Agreement with Lind Global Fund III LP (the “Investor”) and issued to the Investor a Senior Secured Convertible Promissory Note in the principal amount of $4,600,000 (the “Note”) and a Common Stock Purchase Warrant to purchase 1,030,928 shares of common stock at an exercise price of $3.88 per share (the “Warrant”). The funding amount was $4,000,000, and the $600,000 difference between the principal amount and the funding amount represents an original issue discount.
The funding amount was reduced at closing by a commitment fee of $120,000, $49,700 of the Investor’s legal fees, and a $337,556 payoff of an existing loan owed to ODK Capital, LLC, resulting in net cash proceeds to the Company of $3,492,744. A portion of the net proceeds was used to redeem the Predecessor Series B Preferred as described in Note 18.
Terms of the Note
The Note does not bear interest other than upon an event of default. Principal is repayable in consecutive monthly installments of $328,571 commencing on the date that is 120 days after the July 21, 2026 issuance date, with each installment payable at any time during the applicable calendar month. Any principal amount then outstanding is due on the January 21, 2028 maturity date.
Each monthly installment may be settled, at the Company’s option, in cash in an amount equal to 104% of the installment, in shares of common stock, or in a combination of the two. Shares issued in settlement of an installment are valued at 90% of the average of the five lowest daily volume weighted average prices during the twenty trading days preceding the payment date. Settlement in shares is permitted only if the shares may be immediately resold under Rule 144 without restriction or are covered by an effective resale registration statement. As of the date of this report, there is an effective resale registration statement.
Between payment dates, the Investor may increase the amount of up to two monthly installments to as much as $750,000 each by delivering written notice, with the increased amount payable within one day of the Company’s receipt of that notice. Amounts paid in excess of the scheduled installment reduce subsequent installments in reverse chronological order. The maximum incremental amount that the Investor may require the Company to pay ahead of schedule is $842,858.
The Note is convertible at the Investor’s option, in whole or in part, into common stock at a conversion price of $3.88 per share, subject to customary adjustments and to a full-ratchet adjustment upon the issuance of additional shares of common stock at an effective price below the conversion price, subject to a carve-out for certain defined issuances. Amounts converted reduce subsequent monthly installments in reverse chronological order. The Company may prepay the Note in full at par following the earlier of effectiveness of the resale registration statement or the date the underlying shares may be resold under Rule 144 without restriction, in which case the Investor may elect to convert up to one-third of the outstanding principal amount.
The Note is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by the Company’s subsidiaries. Events of default include, among others, failure to pay amounts when due, failure to deliver shares when required, a change of control, the common stock ceasing to be listed on a trading market, and the Company’s market capitalization remaining below $12.5 million for ten consecutive trading days. Upon an event of default, the Investor may declare due an amount equal to 120% of the outstanding principal amount and may convert principal at a discount to the market price of the common stock.
The Company may not issue shares under the Note and the Warrant in excess of 2,982,493 shares, representing 19.99% of the shares of common stock outstanding immediately prior to execution of the Securities Purchase Agreement, unless shareholder approval is obtained. In addition, the Investor may not convert the Note or exercise the Warrant to the extent that it would beneficially own more than 4.99% of the outstanding common stock.
Terms of the Warrant
The Warrant entitles the Investor to purchase 1,030,928 shares of common stock at $3.88 per share and expires on July 21, 2031. The Warrant provides for cashless exercise in specified circumstances and contains a full-ratchet exercise price adjustment upon a dilutive issuance. In the event of a tender offer or exchange offer or other fundamental transaction, the Investor may require the Company to purchase the unexercised portion of the Warrant for its Black-Scholes value in cash.
Classification and Allocation
The Note and the Warrant were issued together for a single funding amount. The Warrant is a freestanding instrument and does not meet the conditions for equity classification in ASC 815-40 because the fundamental transaction provision may require the Company to settle the Warrant in cash in circumstances outside its control. The Warrant also meets the definition of a derivative in ASC 815-10 and does not qualify for the scope exception for contracts indexed to, and classified in, an entity’s own equity. The Warrant is therefore recognized as a liability, measured at fair value at issuance and at each reporting date, with changes in fair value recognized in earnings.
The proceeds were allocated first to the Warrant at its issuance-date fair value of $925,980, with the residual allocated to the Note. Issuance costs of $169,700 were allocated between the two instruments on the same basis; $130,415 allocated to the Note was recorded as a debt discount and $39,285 allocated to the Warrant was expensed as incurred and is presented within other income (expense).
The Company evaluated the redemption and conversion features embedded in the Note and determined that certain features would otherwise require bifurcation. Because the events that would trigger those features are not considered probable and the features had no significant value at issuance or at August 31, 2026, no amounts have been allocated to them. The Company will reassess this conclusion at each reporting date.
Carrying Amount of the Note
The carrying amount of the Note is as follows:
Installments contractually due within twelve months of the balance sheet date are classified as current and the remainder as non-current, with the unamortized discount allocated between the two on a pro rata basis. Ten installments are due on or before August 31, 2027 and four are due thereafter. Classification is based on the scheduled installment amounts; the Investor’s right to increase up to two installments, described above, has not been reflected in the classification because it had not been exercised at August 31, 2026 and its exercise is not considered probable. Exercise of that right in full would increase the current portion by $842,858 of principal.
The discount is accreted to interest expense over the term of the Note using the effective interest method. Accretion of $198,410 was recognized during each of the three and six months ended August 31, 2026. No installment payments had become due, and no principal had been converted, as of August 31, 2026.
Future principal payments on the Note are as follows:
Warrant Liability
The Warrant liability is measured at fair value on a recurring basis using the Black Scholes pricing model and is classified within Level 3 of the fair value hierarchy because the expected volatility used in the measurement is a significant unobservable input. The following inputs were used:
Changes in the Warrant liability were as follows:
The $296,242 decrease in fair value is presented as a gain on revaluation of warrant liability within other income (expense) for each of the three and six months ended August 31, 2026. The Warrant liability is classified as non-current because the Warrant is exercisable through July 21, 2031 and settlement is not expected to require the use of current assets within twelve months.
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