Note 6. Debt

Debt consists of the following (in thousands):

 Schedule of Long-Term Debt

Loans Payable

Fusemachines Inc. and Subsidiaries Notes to the Condensed Consolidated Interim Financial Statements

Convertible notes payable, current

Issuance and terms: On August 2, 2026, the Company entered into securities purchase agreements (collectively, the “SPAs”) with certain institutional investors (the “Purchasers”) and issued original issue discount senior unsecured convertible promissory notes (the “Notes”) with an aggregate stated principal of $2,500 thousand for aggregate cash proceeds of $2,050 thousand, reflecting an original issue discount of $450 thousand. The Notes are due on February 12, 2027 and are zero-coupon: no interest accrues unless an event of default occurs, in which case simple interest accrues at 18% per annum until repaid. The Notes are senior unsecured obligations of the Company. They are convertible at the holder’s option at any time into shares of common stock at a fixed conversion price of $4.20 per share. The price is not subject to reset or ratchet and is adjusted only for stock splits, stock dividends, recapitalizations and similar events. Conversion is subject to a 9.99% beneficial ownership limitation and to Nasdaq share-issuance limits. The Company may prepay the Notes at any time at 100% of principal without premium. In addition, 33% of the proceeds received under the Forward Purchase Agreement, and 33% of the net proceeds of any financing transaction, must be applied to repay the Notes at 100% of face value (the “mandatory prepayment”).

Classification and measurement: The Notes are not measured at fair value and are carried at amortized cost. The Notes are classified as liabilities under ASC 470, Debt. The Company evaluated the embedded features of the Notes under ASC 815-15-25-1. The holder’s conversion option is not clearly and closely related to the debt host and would otherwise meet the definition of a derivative. However, it qualifies for the scope exception in ASC 815-10-15-74(a) it is (i) indexed to the Company’s own stock, with a fixed conversion price of $4.20 per share that is not subject to reset or ratchet adjustment other than standard anti-dilution provisions, and (ii) classified in stockholders’ equity, as the Notes convert in their entirety into a fixed number of shares and are settled only by physical delivery of shares (ASC 815-40-25-39). Accordingly, the conversion option was not bifurcated, and no portion of the proceeds was attributed to it (ASC 470-20-25-12). The optional and mandatory prepayment and the acceleration and default interest provisions only accelerate repayment of principal at par and are clearly and closely related to the debt host; they were therefore not bifurcated.

Financing Warrants: Concurrently, the Company issued 2,050,000 detachable common stock purchase warrants (the “Financing Warrants”) exercisable at $4.20 per share for five years. The Financing Warrants are freestanding instruments separate from the Notes. The Company evaluated them under ASC 480 and ASC 815-40 and concluded that they are not within the scope of ASC 480, are indexed to the Company’s own common stock, and satisfy all equity classification conditions under ASC 815-40-25-10. Accordingly, they are equity-classified, recorded in additional paid-in capital at their allocated fair value, and are not subsequently remeasured.

Allocation of proceeds and transaction costs: In accordance with ASC 470-20, the $2,050 thousand of proceeds was allocated between the Notes and the Financing Warrants on a relative fair value basis. This gave $1,714.14 thousand (83.6%) to the Notes and $335.86 thousand (16.4%) to the Financing Warrants. The amount allocated to the Financing Warrants was recorded in additional paid-in capital, with a corresponding debt discount against the Notes. The fair values were determined with the assistance of an independent valuation specialist as of August 2, 2026, the issuance date. The Financing Warrants were valued using the Black-Scholes option pricing model, based on the $4.20 exercise price, the five-year term, a stock price of $0.78, volatility of 65% and a risk-free rate of 4.4%. The Notes, which are the hybrid instrument including the conversion option (not bifurcated) and the prepayment features, were valued using a Monte Carlo simulation of the Company’s stock price. At each simulated node, the model tests whether the holder would convert at $4.20 per share or the Notes would be repaid at the $2,500 thousand principal amount at maturity, and the resulting cash flows were discounted at a credit yield of 410.3%, calibrated so that the fair value of the Notes plus the fair value of the Financing Warrants equals the $2,050 thousand proceeds. The fair value of the Notes of $1,714.14 thousand, which includes the embedded conversion option, and the fair value of the Financing Warrants of $335.86 thousand were the basis for the relative fair value allocation. These valuations use significant unobservable inputs (Level 3). The Company incurred transaction costs of $150 thousand directly attributable to the issuance, which were initially deferred. They were allocated between the Notes and the Financing Warrants on the same relative fair value basis: $125.42 thousand to the Notes and $24.58 thousand to the Financing Warrants. The portion allocated to the Notes is presented as a direct deduction from the carrying amount of the Notes (ASC 835-30) and amortized to interest expense over the term using the effective interest method. The portion allocated to the Financing Warrants is recorded as a reduction of additional paid-in capital.

Amendment of Shortfall Warrants: As a condition precedent to the closing of the Note financing, the Company amended the exercise price of pre-existing shortfall warrants held by one of the purchasers (refer to Note 16 Shortfall warrant). This amendment formed part of a single arrangement with the Notes; accordingly, the incremental fair value of the modified shortfall warrants of $494.05 thousand was recognized as a cost of the financing in accordance with ASC 815-40-35-17(b). Consistent with the allocation of proceeds and transaction costs above, this cost was allocated between the Notes and the Financing Warrants on the same relative fair value basis: $413.11 thousand (83.6%) to the Notes, which is recorded as a debt discount against the carrying amount of the Notes (ASC 835-30) and amortized to interest expense over the term using the effective interest method, and $80.94 thousand (16.4%) to the Financing Warrants, which is recorded as a reduction of additional paid-in capital. Accordingly, the amendment resulted in a net increase of $413.11 thousand in additional paid-in capital, comprising a credit of $494.05 thousand presented as “Shortfall warrant amendment” and a reduction of $80.94 thousand presented within “Warrants issued in connection with new Convertible Notes” in the condensed consolidated interim statements of stockholders’ deficit and in the supplemental non-cash disclosures in the condensed consolidated interim statements of cash flows.

All discounts and issuance costs are amortized over the term of the Notes using the effective interest method at an effective interest rate of 410.3%. The effective interest rate does not represent the contractual coupon or stated interest rate for the notes, but rather reflects the accounting amortization of the original issue discount, warrant allocation, and debt issuance costs over the Notes’ relatively short contractual term. The Company recognized interest expense on the Notes of $294 thousand during the three months ended September 30, 2026. During the three months ended September 30, 2026, $224 thousand of principal was repaid through the mandatory prepayment from early-termination proceeds under the Forward Purchase Agreement (refer to Note 15 Forward Purchase Agreement). The net carrying amount of the Notes as of September 30, 2026 was $ 1,245 thousand.  

Related Party loan payable

For a full description of the terms, conversion features, and amendment history of each convertible note, refer to Note 10 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025.

Impact of Reverse Recapitalization on Convertible Notes

In the prior fiscal year, on October 22, 2025, the Company consummated a Business Combination (accounted for as a reverse recapitalization). In connection with that transaction, each Legacy Fusemachines convertible note that was issued and outstanding immediately prior to closing — including both related-party and non-related-party convertible notes (comprising the 2019 and 2021 Convertible Notes, the January 2024 Convertible Notes, and the April 2024, June 2024, September 2024, and February 2025 Convertible Notes) — were converted into an aggregate of 8,048,770 shares of Legacy Fusemachines common stock in accordance with the respective convertible note agreements.

Fusemachines Inc. and Subsidiaries Notes to the Condensed Consolidated Interim Financial Statements

In accordance with ASC 470-20, Debt with Conversion and Other Options, convertible notes exchanged for equity pursuant to their original contractual terms are accounted for by reclassifying the carrying amount of the convertible debt to equity, with no gain or loss recognized in earnings.

Immediately following such conversions, all shares of Legacy Fusemachines common stock issued upon conversion were exchanged for shares of Fusemachines Inc. common stock based on the exchange ratio specified in the Business Combination Agreement.

As a result, no convertible notes or related-party notes payable remained outstanding as of September 30, 2026, other than the related party loan payable to Dolma of $300 thousand, which was not converted in connection with the Business Combination and continues to remain outstanding as of the date of this filing.

Warrant Issuance Upon Conversion at Reverse Recapitalization

Upon conversion of the April 2024, June 2024, and September 2024 Convertible Notes in connection with the Business Combination on October 22, 2025, warrants to purchase 7,500 shares of Fusemachines Inc. common stock at an exercise price of $11.50 per share were issued to each respective noteholder. These warrants are classified as equity warrants under ASC 480 and ASC 815, were measured at fair value on the issuance date (October 22, 2025) and are not subject to subsequent remeasurement through earnings. These warrants carry the same terms and provisions as the Company’s Public Warrants (refer to Note 17 – Public and Private Warrants).

Common Stock Warrant Liability

In connection with the 2023 Notes Agreement, the Company issued common stock warrants (the “Common Stock Warrants”) to purchase up to 92,211 shares of the Company’s common stock at an exercise price of $0.70 per share, with a contractual term of 10 years. These warrants are liability-classified under ASC 480-10 and continue to be remeasured at fair value each reporting period.

As of September 30, 2026 and December 31, 2025, the fair value and carrying amount of the Common Stock Warrant Liability was $ 29.6 thousand and $ 121.0 thousand, respectively (refer to Note 3 – Fair Value Measurements).

Related Party Loan Payable

The $300 thousand related party loan payable as of September 30, 2026 and December 31, 2025 represents the outstanding balance under the promissory note with Dolma, which was not converted or settled in connection with the Business Combination and remains outstanding as of the date of this report.

In connection with the Business Combination on October 22, 2025, the Company separately settled the outstanding principal and accrued interest under the 2024 Related Party Promissory Notes with Mr. Sameer Maskey, CEO, in cash; accordingly, no balance remains outstanding under those notes as of September 30, 2026 and December 31, 2025.