Company: SMNR
Filing Date: 2025-05-16
Form Type: 10-Q
Source: 0001213900-25-044889
Chunk: 29

Company: Semnur Pharmaceuticals, Inc.
Filing Date: 2025-05-16
Form: 10-Q
Item: Part I, Item 1
Chunk 29
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. If a component is clearly and closely related to its host instruments, then the Company
has to assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlying,
typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares
upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in
the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked
component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies
for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both
a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.

If the conversion feature within convertible debt
meets the requirements to be treated as a derivative, the Company estimates the fair value of the embedded derivative using the Black
Scholes method upon the date of issuance. If the fair value of the embedded derivative is higher than the face value of the convertible
debt, the excess is immediately recognized as interest expense. The derivative shall be recorded at fair value as liability and the carrying
value assigned to the host contract represents the difference between the previous carrying amount of the hybrid instrument and the fair
value of the derivative; therefore, there is no gain or loss from the initial recognition and measurement of an embedded derivative that
is accounted for separately from its host contract.

 The ASU 2020-06 “Debt with conversion and
other option”, changes the accounting for convertible instruments by reducing the number of accounting models. It requires convertible
debt instruments to be accounted for under one of the following three models: embedded derivative, substantial premium, or no proceeds
allocated (traditional debt) models. It eliminates the cash conversion and beneficial conversion feature models, which will likely result
in more convertible debt instruments being accounted for as a single unit. The Company has adopted this ASU in January 1, 2024, as a result
of these changes, companies are no longer required to separately account for embedded conversion features solely due to a beneficial conversion
or cash settlement provision, unless the feature meets the definition of a derivative under ASC 815 and does not qualify for the equity
scope exception.

 The conversion feature in