v3.26.3
Convertible Notes Payable
 9 Months Ended
Sep. 30, 2026
Convertible Notes Payable [Abstract]  
CONVERTIBLE NOTES PAYABLE

NOTE 5 – CONVERTIBLE NOTES PAYABLE

 

Convertible Notes Issued

 

During the nine months ended September 30, 2026, the Company issued convertible promissory notes (collectively, the “Convertible Notes”) to Keystone Capital Partners, LLC (“Keystone”) and SRX as follows:

 

Note   Original Holder   Issue Date   Purchase Price     Principal   Maturity
February 2026 Note   Keystone   February 9, 2026   $ 750,000     $ 937,500   July 9, 2027
March 2026 Note   Keystone   March 6, 2026     750,000       937,500   August 6, 2027
April 2026 Note   Keystone   April 8, 2026     350,000       437,500   April 8, 2027
Second April Note   Keystone   April 27, 2026     400,000       500,000   April 27, 2027
May 2026 Note   SRX   May 28, 2026     750,000       937,500   May 28, 2027
June 2026 advance   SRX   June 23, 2026     663,600       829,500   May 28, 2027
July 2026 advance   SRX   July 14, 2026     671,600       839,500   May 28, 2027
August 2026 advance   SRX   August 11, 2026     150,000       187,500   May 28, 2027
Total           $ 4,485,200     $ 5,606,500    

 

Each Convertible Note was issued at a purchase price equal to 80% of its principal amount, resulting in an aggregate original issue discount of $1,121,300. The notes bear interest at 10% per annum. Each Keystone note permitted borrowings of up to $1,000,000.

 

On June 23, July 14 and August 11, 2026, the Company and SRX amended and restated the May 2026 Note to increase the maximum loan amount to $1,413,600, $2,085,200 and $2,235,200, respectively, and SRX funded the additional advances shown above. All other terms were unchanged. The Company accounted for each advance as a new borrowing. The Company evaluated each amendment under ASC 470-50, Debt – Modifications and Extinguishments, and concluded that each was a modification, with no gain or loss recognized.

 

At any time, each holder could convert all or part of its outstanding principal and accrued but unpaid interest into common stock. The conversion price was the lesser of (i) $0.05 per share and (ii) 80% of the average of the five lowest intraday trading prices during the 20 trading days before the conversion request. The conversion price was subject to certain adjustments and to a 4.99% beneficial ownership limitation.

 

Embedded Conversion Feature Derivative Liabilities

 

The conversion price of each Convertible Note varied with the market price of the Company’s common stock, so the embedded conversion feature is not indexed to the Company’s own stock under ASC 815-40-15. In addition, from May 2026 the Company had insufficient authorized shares to settle it (see Note 2). The Company concluded that the conversion feature was not clearly and closely related to the debt host, that the Convertible Notes were not measured at fair value through earnings, and that the feature would meet the definition of a derivative on a standalone basis. The Company further concluded that the feature did not qualify for the scope exception in ASC 815-10-15-74(a). The Company therefore bifurcated it and accounted for it as a derivative liability under ASC 815-15, Derivatives and Hedging – Embedded Derivatives.

 

At issuance, the aggregate fair value of the conversion feature derivatives was $8,108,424. Of this amount, $4,485,200 was recorded as a debt discount, limited to the net proceeds of the notes. The remaining $3,623,224 was charged to operations as initial derivative expense. The debt discount and the original issue discount were amortized to interest expense over the terms of the notes.

 

The derivative liabilities were remeasured to fair value at each reporting date and on August 27, 2026, with changes recognized in earnings. Fair value was estimated using a binomial valuation model, a Level 3 measurement, with the following assumptions:

 

    Nine months ended
September 30,
2026		  
Expected dividend rate     –  
Expected term (years)     0.8 to 1.4  
Volatility     271.4% to 293.8 % 
Risk-free interest rate     3.48% to 4.04 % 

 

Activity in the derivative liabilities for the nine months ended September 30, 2026 was as follows:

 

    Amount  
Balance, December 31, 2025   $ –  
Initial fair value of conversion features allocated to debt discount     4,485,200  
Initial fair value of conversion features allocated to initial derivative expense     3,623,224  
Gain on revaluation of derivative liabilities     (227,340 )
Derecognized upon extinguishment of debt included in gain on debt extinguishment     (7,881,084 )
Balance, September 30, 2026   $ –  

 

For the three and nine months ended September 30, 2026, the Company recognized a net gain (loss) on derivative liabilities of $604,371 and $(3,395,884), respectively. The nine-month amount consists of initial derivative expense of $(3,623,224) and a gain on the change in fair value of $227,340. For the three months: initial derivative expense of $(1,062,245) and a gain on change in fair value of $1,666,616.

 

Extinguishment of Convertible Notes

 

On August 27, 2026, the Company completed a secured financing with SRX and issued the non-convertible Consolidated Senior Secured Promissory Note (the “Consolidated Note”) described in Note 6. Before the transaction, Keystone sold its Convertible Notes to SRX. Because this was a transfer between creditors, it had no accounting effect for the Company.

 

The Consolidated Note replaced all outstanding Convertible Notes (the “Previous Notes”). Its principal amount of $5,666,109 consists of (i) $2,794,000 of principal under the Previous Notes originally held by SRX and (ii) $2,812,500 of principal and $59,609 of accrued and unpaid interest under the Previous Notes originally held by Keystone.

 

The Company first evaluated the exchange under ASC 470-60, Troubled Debt Restructurings by Debtors. It concluded that the exchange was not a troubled debt restructuring because the creditor granted no concession: the Consolidated Note’s principal equals the principal and accrued interest of the Previous Notes, and the effective borrowing rate did not decrease. The Company then evaluated the exchange under ASC 470-50. Because the exchange eliminated a substantive conversion option, the terms of the Consolidated Note are substantially different under ASC 470-50-40-10. The exchange was therefore accounted for as an extinguishment of the Previous Notes.

 

Immediately before the extinguishment, the Company remeasured the embedded conversion feature derivatives to their fair value of $7,881,084. Because the bifurcated derivatives were extinguished together with the debt host, their fair value was included in the carrying amount of the extinguished debt. The Consolidated Note was recorded at its fair value of $5,666,109. The Company recognized a gain on extinguishment of debt as follows:

 

    Amount  
Principal of Previous Notes   $ 5,606,500  
Less: unamortized debt discount     (4,079,671 )
Accrued interest     59,609  
Fair value of embedded conversion feature derivatives     7,881,084  
Net carrying amount of extinguished debt     9,467,522  
Less: fair value of Consolidated Note (reacquisition price)     (5,666,109 )
Gain on extinguishment of debt   $ 3,801,413  

 

The gain is included in “Gain on extinguishment of debt” in other income (expense) in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2026. Following the extinguishment, the Company had no convertible debt outstanding. As a result, it reassessed the classification of its convertible preferred stock (see Note 2, “Preferred Stock Liabilities”).

 

Interest Expense

 

For the three months ended September 30, 2026 and 2025, amortization of debt discounts related to the Convertible Notes was $780,182 and $0, respectively. For the nine months ended September 30, 2026 and 2025, amortization of debt discounts related to the Convertible Notes was $1,526,829 and $0, respectively. These amounts are included in interest expense on the accompanying condensed consolidated statement of operations. The unamortized debt discount of $4,079,671 at August 27, 2026 was included in the carrying amount of the extinguished debt, was not charged to interest expense and was included in gain on debt extinguishment on the accompanying condensed consolidated statement of operations. The weighted average stated interest rate of the Convertible Notes was 10.0% for the nine months ended September 30, 2026.

 

As of September 30, 2026 and December 31, 2025, the Company had no convertible notes or related derivative liabilities outstanding.