NOTE
9 – CONVERTIBLE NOTE AND EMBEDDED DERIVATIVE
Convertible
Note Terms
The
Company has outstanding convertible debt with the following key terms:
| |
● |
Principal Amount: $1,009,911
(including accrued interest) |
| |
● |
Conversion Price: $0.08
per share |
| |
● |
Maturity Date: March 1,
2025 |
| |
● |
Current Market Price of
Common Stock: $0.10324 |
| |
● |
Price Adjustment Feature:
If the market price at conversion is below 0.08, the conversion price will be reduced by 120% of the difference between the conversion
price and the market price. |
Embedded
Derivative Classification
The
price adjustment feature meets the criteria for bifurcation as an embedded derivative under ASC 815-15-25-1 because:
| |
● |
It is not clearly and closely
related to the host debt instrument. |
| |
● |
The 120% adjustment creates
a non-linear payoff linked to the stock price. |
| |
● |
It is required to be separately
accounted for at fair value with changes recorded in earnings. |
Valuation
Technique
The
company has used a 100-step binomial lattice model for its valuations. The binomial model captures:
| |
● |
Path dependency of the
adjustment feature. |
| |
● |
Optimal conversion behavior
(American-style exercise). |
| |
● |
Probability-weighted payoffs
under risk-neutral valuation. |
Fair
Value Measurement of Embedded Derivative
The
derivative liability was at June 30, 2025, valued at $684,002, while principal amount was $1,009,911 (including accrued interest). On
December 31, 2024, the notes principal amount was $948,642 (including accrued interest), the derivative liability was valued at $186,652.
The following key inputs were used in the derivative debt calculation:
SCHEDULE OF FAIR VALUE MEASUREMENT OF EMBEDDED DERIVATIVE
| Parameter |
|
June
30, 2025 |
|
|
December
31, 2024 |
|
|
Source/Methodology |
| Current
Stock Price |
|
$ |
0.1048 |
|
|
$ |
0.0899 |
|
|
Observable market price |
| Conversion
Price |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
Contractual terms |
| Volatility |
|
|
159.59 |
% |
|
|
129.14 |
% |
|
Historical volatility of comparable companies |
| Risk-Free
Rate |
|
|
4.29 |
% |
|
|
4.37 |
% |
|
1.5-month (6-month)* U.S. Treasury yield |
| Time
to Maturity |
|
|
default |
|
|
|
0.25 years |
|
|
1.5 months (7 months)* |
| Adjustment
Multiplier |
|
|
120 |
% |
|
|
120 |
% |
|
Contractual terms |
| * |
The number of months inside the parenthesis was used
in the December 31, 2024, calculation. |
For
the three months ended June 30, 2025, the estimated change in fair value reduced the derivative liability by ($307,402), while for the
six months ended June 30, 2025, the estimate of the change in fair value increased the derivative liability by $497,350.
Sensitivity
and Risks
| |
● |
Volatility Impact: A 20%
increase in volatility to 149.75% would increase the derivative liability by $66,906. |
| |
● |
Stock Price Risk: A 20%
increase of the stock price to $0.1234 would increase the derivative liability by $204,597. |
| |
● |
Concentration Risk: The
derivative liability represents 42.3% of the debt principal, highlighting a potential equity dilution. |
|