Note 16. Shortfall warrant

In connection with the execution of the Forward Purchase Agreement the Company agreed to issue “Shortfall Warrants” to the Sellers (Meteora) for shares not elected under the Forward Purchase Agreement, representing the difference between the maximum number of shares subject to the FPA and the number of shares ultimately elected by the Forward Counterparty.

The warrants grant the holders the right to purchase a fixed number of shares (2,108,070) at a fixed exercise price/termination price. The Shortfall Warrants are exercisable for shares of common stock and were issued concurrently with the consummation of the Business Combination on October 22, 2025 (the “Initial Exercise Date”) and are exercisable at any time from the Initial Exercise Date until 5:00 p.m. (New York City time) on October 22, 2028 (the “Termination Date”). No shortfall warrants have been exercised as at September 30, 2026.

The Company evaluated the Shortfall Warrants in accordance with ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, including the guidance in ASC 815-40 related to contracts indexed to, and potentially settled in, an entity’s own equity.

In making this assessment, the Company considered, among other factors:

Accordingly, in connection with the reverse recapitalization, the Company recognized the Shortfall Warrants at their initial fair value of $1,009 thousands, which is included within additional paid-in capital in the stockholders’ deficit section of the consolidated balance sheet as of December 31, 2025.

Based on this assessment, the Company concluded that the Shortfall Warrants meet all of the criteria for equity classification under ASC 815-40. Accordingly, the Shortfall Warrants are classified as equity and are not subject to subsequent remeasurement.

On February 3, 2026, the Company entered into an amendment to the Common Stock Purchase Warrant (the “Warrant Amendment”) originally issued on October 22, 2025 in connection with the Business Combination with Meteora Capital Partners, LP, Meteora Select Trading Opportunities Master, LP and Meteora Strategic Capital, LLC (collectively, the “Holder”). Pursuant to the Warrant Amendment, the exercise price of the warrant was reduced from $12.00 to $10.00 per share of the Company’s Class A common stock, subject to customary adjustments as set forth in the warrant agreement. All other terms and conditions of the warrant, including the number of shares issuable upon exercise (2,108,070 shares), remain unchanged and continue in full force and effect. As a result of the reduction in exercise price, the Company recognized a deemed dividend equal to the incremental fair value of the Shortfall Warrants resulting from the Warrant Amendment, measured as of February 3, 2026. The deemed dividend amounting to $84.1 thousand has been recorded as a charge to accumulated deficit with a corresponding credit to additional paid-in capital and, while it does not affect net loss, is deducted from net income (loss) attributable to common stockholders for purposes of computing net loss per share.

On August 2, 2026, the Company entered into a second amendment (the “Second Warrant Amendment”) to the Common Stock Purchase Warrant originally issued on October 22, 2025, in connection with the Business Combination with the Meteora Parties. Pursuant to the Second Warrant Amendment, the exercise price was changed from $10.00 per share to the greater of (a) the Termination Price as defined in the FPA, including the weekly VWAP-based variability provided for thereunder, and (b) $0.85 per share. The number of shares issuable upon exercise remains unchanged at 2,108,070 shares.

The Shortfall Warrants remain equity-classified following the amendment. As the Second Warrant Amendment was a contractual condition precedent to the Company’s convertible note financing completed on the same date (refer to Note 6 Debt), the incremental fair value of $ 494.05 thousand has been recognized as a cost of the financing in accordance with ASC 815-40-35-17(b). The cost has been allocated between the Notes and the Financing Warrants issued with the Notes on the same relative fair value basis as the proceeds: $413.11 thousand (83.6%) has been recorded as a debt discount against the carrying amount of the Notes, and $80.94 thousand (16.4%) has been recorded as a reduction of additional paid-in capital. The net increase in additional paid-in capital on account of the Second Warrant Amendment is therefore $413.11 thousand. The $494.05 thousand credit is presented as “Shortfall warrant amendment”, and the $80.94 thousand reduction is 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.

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