Convertible Notes Payable

12 Months Ended

Aug. 31, 2025

Note 8 – Convertible Notes Payable

Schedule of Convertible notes payable	August 31, 2025			August 31, 2024

2021 8.0% Notes (1)	$	—		$	1,550,000
2022 and 2023 7.5% Notes (2)		—			12,308,750
2024 12.0% Notes (2)		—			2,150,000
2024 7.5% Notes (3)		—			3,714,065
2025 12.0% Notes (4)		2,222,222			—
		2,222,222			19,722,815
Less: discount on convertible notes (5)		(139,421	)		(266,136	)
Convertible notes payable	$	2,082,801		$	19,456,679

These notes were convertible into Common Stock at $.225 per $1.00 of converted notes per the note agreement. However, these notes were exchanged for 6,888,889 shares of Series B Convertible Preferred Stock during the year ended August 31, 2025.

These notes were convertible into Common Stock at $1.00 per $1.00 of converted notes per the note agreement. However, these notes, along with their associated warrants, were exchanged for 22,434,000 shares of Series B Convertible Preferred Stock during the year ended August 31, 2025.

These notes were convertible into Common Stock at approximately $.16 per share per the note agreement. However, these notes were exchanged for 24,032,533 shares of Series B Convertible Preferred Stock during the year ended August 31, 2025.

These notes are convertible into Series C Convertible Preferred Stock at $.75 per $1.00 of converted notes. See further discussion in Note 9.

The Company records a debt discount to represent the difference between the face value of the notes and the estimated fair value at the issuance date and amortizes the discount over the term of the related debt agreement. For notes that included warrants, the relative fair value of the warrants was included within the total original issue discount assigned to the notes and that total discount was amortized over the term of the note. The 2025 Note outstanding at August 31, 2025 does not include warrants. The unamortized discount balance as of August 31, 2025 and 2024 is approximately $139,000 and $266,000, respectively.

Accrued interest as of August 31, 2025 and 2024 was approximately $63,000 and $2,224,000, respectively.

As of August 31, 2025, the carrying value of the outstanding convertible notes payable approximates fair value.

As of August, 31, 2024, the fair value of the outstanding convertible notes payable was approximately $4,221,000, which approximates the fair market value of the Series B Convertible Preferred Stock that it was exchanged for in November of 2024 (see further discussion of exchange below).

In October 2024, the Company entered into a note purchase agreement with Arena Investors LP (“Arena”), pursuant to which the Company issued to Arena a convertible promissory note (the “October Note”) with a principal amount of $1,333,333. The October Note was issued with an original issue discount and resulted in gross proceeds to the Company of $1,200,000. In April 2025, the October Note, and the related accrued interest, was converted into 3,903,065 shares of Series B Convertible Preferred Stock.

In November 2024, all convertible notes and warrants that were outstanding at that time were exchanged into Series B Convertible Preferred Stock. The exchange into Series B Convertible Preferred Stock was outside of the conversion specified within the underlying convertible note agreements, which allowed for a conversion into common shares. As such, the exchange of convertible notes payable for Series B Convertible Preferred Stock has been accounted for under debt extinguishment rules. As part of the exchange, accrued interest of approximately $2,554,000 on the convertible notes as of the date of exchange was forgiven by the holders of the convertible notes.

$20,572,398 of the exchanged convertible notes payable, which was exchanged for 48,566,344 shares of Series B Convertible Preferred Stock, was held by significant stockholders of the Company, on an as converted basis. For this debt, under GAAP rules for exchanges with related parties, the difference between the net carrying amount of the debt, inclusive of accrued interest and unamortized debt discount, and the fair value of the Series B Convertible Preferred Stock at the time of the exchange is accounted for within Preferred Stock – Mezzanine Equity in the consolidated balance sheets. $483,750 of the exchanged debt was held by a non-significant stockholder of the Company. For this debt, the difference between the net carrying amount of the debt, inclusive of accrued interest and unamortized debt discount, and the fair value of the Series B Convertible Preferred Stock at the time of the exchange is accounted for as Gain on debt forgiveness of $442,638 within the consolidated statements of operations.

In April 2025, the Company entered into note purchase agreements with Arena, pursuant to which the Company issued to Arena convertible promissory notes (the “April Notes”) with a principal amount of $2,222,222. The April Notes were issued with an original issue discount and resulted in gross proceeds to the Company of $2,000,000. The April Notes are outstanding as of August 31, 2025 and are recorded net of original issue discount in Convertible notes payable on the consolidated balance sheet.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References

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