Senior Secured Notes

3 Months Ended

Mar. 31, 2025

Note 7 Senior Secured Notes

On February 17, 2021, the Company entered into a securities purchase agreement with funds affiliated with Arena Investors, LP (the “Investors”) pursuant to which it issued two convertible notes having an aggregate principal amount of $16,500,000 for an aggregate purchase price of $15,000,000 (collectively, the “Notes”). The Notes are secured by a blanket lien on all of the Company’s assets and the shares of the Company’s Common Stock and Preferred Stock (the “Pledged Assets”).

In connection with the issuance of the Notes, the Company also issued 192,073,016 number of common share purchase warrants (the "Warrants") and 1,000 Preferred Series F Shares to the investors (Note 10).

The Notes would mature on February 17, 2024, unless earlier converted, and accrue interest at a rate of 11% per annum, subject to increase to 20% per annum upon the occurrence of an event of default. Interest is payable in cash on a quarterly basis, commencing on March 31, 2021.

Conversion Feature

The Notes contain conversion features that allow the Investors to convert the Notes and unpaid interests into shares of the Company’s common stock. The conversion price is subject to the following:

The conversion price on any conversion date will be the lower of (1) $50,000,000 divided by the total number of outstanding shares of preferred stock, common stock, and common stock equivalents (assuming full conversion or exercise of all securities convertible into or exercisable for equity), or (2) $1.00.

Upon an event of default, the conversion price will be the lower of (1) 75% of the average VWAP of the Company’s common stock over the five (5) trading days immediately preceding the conversion date, or (2) $0.015 per share.

On September 24, 2021, the Notes were amended to change the conversion price to $0.02.

Warrants

The Warrants entitle the Investors to purchase shares of the Company’s common stock. At the inception of the agreement, the exercise price of the Warrants was calculated as 125% of the base price, where the base price was determined by dividing $50,000,000 by the total number of outstanding shares of preferred stock, common stock, and common stock equivalents (assuming the full conversion or exercise of all outstanding securities that are convertible into or exercisable for equity securities of the Company). The exercise price is subject to adjustment as provided in the Warrant agreement and may be paid on a cashless basis. On September 24, 2021, the exercise price of the Warrants was amended to $0.025.

The Company evaluated the conversion feature and warrants in accordance with Accounting Standards Codification (ASC) 815, Derivatives and Hedging. Initially, the conversion features and warrants were determined to be derivative liabilities. However, as the Company’s common stock is quoted on the OTC Expert Market, which lacks sufficient trading volume and transparency, management determined that reliable market inputs necessary to support a fair value measurement were not available. As a result, the fair value of the embedded conversion features was assessed to be nil. The fair values of the warrants of $3,464,529 were separated from the note and accounted for as a reduction of the carrying amount of the note with a recognition of derivative liabilities).

On September 24, 2021, upon the amendment of the exercise price of the warrants to a fixed price, the Company re-evaluated the amended terms in accordance with ASC 815-40 Contracts In Entity’s Own Equity, derecognized the derivative liabilities related to those warrants, and recognized the Warrants in equity (“End of derivative warrants treatment”).

The issuance of the Notes resulted in an original issuance discount of $1,500,000. Additionally, the fair value of the Preferred Series F Shares issued in connection with the Notes issuance and the derivative liabilities recognized were $32,229 and $3,464,529 respectively. These amounts totalling $4,996,758 was recorded as a discount to the face value of the Notes. The discount is being amortized to consolidated statements of operations over the term of the notes using the effective interest method.

On February 1, 2023, pursuant to an agreement with the lender of the Company’s senior secured notes, Sovryn was sold to the lender. The net assets of Sovryn at the time of disposition totalled $9,159,907, which was used to partially settle the principal balance of the senior secured notes, which totalled $16,500,000. The transaction was accounted for as a non-cash settlement.

Schedule of senior secured notes issued


	Total
		$
Face value of senior secured notes issued		16,500,000
Debt discount		(4,996,758	)
Day 1 value of senior secured notes issued		11,503,242

Amortization expenses		1,262,697
Balance at December 31, 2021		12,765,939

Amortization expenses		1,631,127
Balance at December 31, 2022		14,397,066

Partial settlement of principal		(9,159,907	)
Amortization expenses		1,987,011
Balance at December 31, 2023		7,224,170

Amortization expenses		115,923
Balance at December 31, 2024		7,340,093

The Company recorded interest expenses of $361,977 and $365,999 for the three months ended March 31, 2025 and 2024, respectively.

The Company recorded discount amortization expenses of $Nil and $115,923, respectively for the three months ended March 31, 2025 and 2024.

The interest payable on senior secured notes as on March 31, 2025 and December 31, 2024 amounts to $6,760,871 and $6,398,894 respectively.

Madison Technologies Inc. 10-Q