NOTE 8 – CONVERTIBLE PROMISSORY NOTES AND DERIVATIVE LIABILITIES

During the period from January 8, 2026 through February 26, 2026, the Company issued a series of convertible promissory notes (the “Notes”) to six investors, with an aggregate principal amount of approximately $895,250. The Company received net proceeds of approximately $806,000   in the aggregate, after deducting original issue discount and related fees. During the three months ended May 31, 2026, the Company further issued one convertible promissory note to one investor, with a principal amount of approximately $51,500. The Company received net proceeds of approximately $41,500 after deducting original issue discount and related fees.

The Notes generally bear interest at a rate of 10% per annum and have contractual maturities ranging from approximately nine to twelve months from issuance. The holders may convert the outstanding principal and accrued interest into shares of the Company’s common stock, subject to the terms of the instrument, which may include a holding period (e.g., 180 days) in certain agreements.

The conversion price is generally equal to 80% of the lowest trading price of the Company’s common stock during a specified look-back period (typically 20 trading days) prior to the conversion date, subject to a 4.99% beneficial ownership limitation. The Notes contain customary default provisions, including increased interest rates upon events of default. As a result of these features, the number of shares issuable upon conversion is not fixed and may vary significantly based on the Company’s stock price and the timing of conversion, which may result in substantial dilution to existing shareholders.

AI ERA CORP. (FORMERLY KNOWN AS AB INTERNATIONAL GROUP CORP.) 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 – CONVERTIBLE PROMISSORY NOTES AND DERIVATIVE LIABILITIES (Continued)

The Company accounts for its convertible promissory notes in accordance with ASC 470 and evaluates embedded features in accordance with ASC 815. The Company determined that the embedded conversion features are not indexed to its own stock within the meaning of ASC 815-40 because the conversion price is based on a variable discount to the Company’s market price, resulting in a variable number of shares to be issued upon conversion. Accordingly, the embedded conversion features are bifurcated from the host instruments and accounted for as derivative liabilities, with the remaining host instruments accounted for as debt. Derivative liabilities are initially recognized at fair value on the issuance date and are subsequently remeasured at fair value at each reporting date, with changes in fair value recognized in earnings.

The fair value of the embedded derivatives is estimated using a Monte Carlo simulation model due to the path-dependent nature of the conversion features, including look-back pricing provisions and assumptions regarding the timing of conversion by the holders. Key inputs used in the valuation include:

• The Company’s stock price at the valuation date
• Expected volatility (approximately 85.0% to 123.1%)
• Risk-free interest rates (approximately 3.48% to 3.79%)
• Expected term based on contractual maturity and estimated conversion behavior
• Zero expected dividend yield

Due to the use of significant unobservable inputs, including assumptions regarding expected volatility and holder behavior, the derivative liabilities are classified as Level 3 within the fair value hierarchy in accordance with ASC 820.

In accordance with ASC 815-15-30-2, the Company allocates the proceeds received from the issuance of convertible promissory notes between the derivative liability and the host debt. The derivative liability is initially measured at its fair value, and the carrying amount of the host debt is determined as the difference between the proceeds received and the fair value of the derivative liability. To the extent that the fair value of the derivative liability exceeds the proceeds received, the excess is recognized immediately in earnings as a loss on issuance, resulting in no initial carrying amount for the host debt.

Interest expense recognized over the term of the Notes includes contractual coupon interest and, where applicable, amortization of any debt discount. Debt issuance costs related to the Notes are capitalized and amortized to interest expense over the term of the Notes using the effective interest method.

For the three and nine months ended May 31, 2026, the Company recognized (i) interest expense of $145,909 and $184,562, respectively, and (ii) a change in fair value of derivative liabilities of $142,598 and $98,998, respectively   in the consolidated statements of operations.

As of May 31, 2026, the Company had outstanding convertible notes with an aggregate principal amount of approximately $946,750, and derivative liabilities with an aggregate fair value of approximately $538,415.

The following table summarizes the Company’s convertible promissory notes and derivative liabilities as of May 31, 2026:

AI ERA CORP. (FORMERLY KNOWN AS AB INTERNATIONAL GROUP CORP.) 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)