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FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2026
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

 

6. FAIR VALUE MEASUREMENTS

 

The Company measures certain liabilities at fair value on a recurring basis. These liabilities consist primarily of derivative liabilities associated with convertible notes (See Note 8. Convertible Notes Payable) as well as a Commitment Shares derivative liability (See Note 9. Derivative Liabilities and Note 10. Capital Stock). These instruments are valued using significant unobservable inputs and are classified within Level 3 of the fair value hierarchy. The fair value of these instruments was updated as of June 30, 2026 in accordance with ASC 820, reflecting all relevant market inputs and valuation considerations as of the reporting date.

 

Convertible Notes Derivative Liabilities

 

Valuation Methodology

 

The derivative liabilities relate to embedded features within the Company’s convertible notes, including variable conversion pricing, look-back provisions, contingent conversion price resets, default and delinquency adjustments, DTC trading restrictions, and change-of-control redemption alternatives. Because these features are not considered indexed to the Company’s own stock and may require net-cash settlement, they are accounted for as derivative liabilities under ASC 815.

 

The Company engaged an independent valuation specialist to estimate the fair value of the derivative liabilities using a Monte Carlo simulation model, which incorporates assumptions regarding expected volatility, risk-free interest rates, expected term, and probability-weighted assessments of contingent events.

 

Fair Value Hierarchy

            
    

Level 1

    Level 2    Level 3    Total 
Derivative liability as of June 30, 2026  $–   $–   $1,076,951   $1,076,951 

 

Level 3 Roll-forward

   
   Amount
Balance at January 1, 2026  $– 
Initial recognition of derivative liability   1,913,228 
Change in fair value gain   (836,277)
Settlements / conversions   – 
Balance at June 30, 2026  $1,076,951 

 

Commitment Shares Derivative Liability

 

Valuation Methodology

 

The derivative liability related to the Commitment Shares feature of the Common Stock Purchase Agreement entered into on June 5, 2026 (see Note 10. Capital Stock) includes a contingent settlement provision wherein the shares will be issuable upon the date that the applicable Registration Statement has been declared effective by the Securities and Exchange Commission (the “SEC”). This affects when the shares can be issued and how many shares are issued. The number of shares to be issued is based on a future stock price determined on a future event outside the Company’s control. As such, the number of shares to be issued is variable, the denominator is a future stock price, and the share count is not fixed at inception. The Commitment Shares feature represents a variable-share obligation based on a future stock price which triggers derivative liability accounting requiring a fair value measurement at inception and settlement. A Black-Scholes option-pricing model is an acceptable method for fair-valuing the derivative liability as the payoff depends on a single future price, not a path-dependent minimum. Significant inputs include: current stock price, expected volatility, expected term and risk-free interest rate. Changes in any of these inputs could materially impact the fair value measurement.

 

Fair Value Hierarchy

            
  

 

Level 1

  Level 2  Level 3  Total
Derivative liability as of June 30, 2026  $–   $–   $10,178   $10,178 

 

Level 3 Roll-forward

   
   Amount
Balance at January 1, 2026  $– 
Initial recognition of derivative liability   12,621 
Change in fair value gain   (2,443)
Settlements / conversions   – 
Balance at June 30, 2026  $10,178 

 

Sensitivity Analysis

 

The fair value of the derivative liabilities is sensitive to changes in several unobservable inputs, most notably expected volatility, expected term, and probability-weighted assessments of default, delinquency, and other contingent events. In general, increases in expected volatility, decreases in stock price, or increases in the probability of default or delinquency would result in a higher fair value of the derivative liabilities. Conversely, decreases in volatility or increases in stock price would reduce the fair value. Because of the path-dependent nature of the conversion features in the Convertible Note derivative liabilities, the impact of changes in these inputs may not be linear. See also Note 9. Derivative Liabilities.