DERIVATIVE LIABILITIES

6 Months Ended

Jun. 30, 2026

Derivative Instruments and Hedging Activities Disclosure [Abstract]

9.	DERIVATIVE LIABILITIES

Convertible Notes Derivative Liabilities

Several of the Company’s convertible notes contain embedded features that require bifurcation of the conversion option and derivative liability accounting under ASC 815 (see also Note 8. Convertible Notes Payable). These features include:

	Variable price conversion features:

	·	Variable conversion pricing based on a discount to the lowest trading price over a look-back period.

	·	Six-month conversion price reset wherein the conversion price automatically resets to the lower of the fixed price or the Company’s common stock closing bid price on each reset date.

	·	DTC chill reset where the conversion discount increases and default reset where the conversion discount increases further.

	·	Interest payable in shares at a floating conversion price.

	·	Down-round protection wherein the conversion price adjusts downward to match any future issuance below the current conversion price.

	Variable settlement features:

	·	Make-whole conversion feature where a make-whole amount equal to interest that would have accrued through maturity is added to the conversion amount which increases the number of shares issued upon conversion.

	·	Variable interest-in-shares feature in which interest is payable in shares at a deemed rate and the number of shares varies based on the conversion price in effect at that time.

	·	Interest payable in shares at a floating conversion price.

	·	Variable conversion pricing based on a discount to the lowest trading price over a look-back period.

	Contingent conversion features:

	·	Change-in-control conversion feature where the conversion price becomes the lower of the then-current conversion price or a 25% discount to the acquisition price.

	·	Delinquency reset where the conversion price is reduced during the delinquency period.

	·	Default conversion feature where upon default, the holder may immediately convert the entire outstanding balance with the conversion price still subject to all the variable-price mechanics.

	·	Change-of-control (Sale Event) redemption or conversion alternatives.

	·	Successor-security conversion rights.

	·	Holder early-exercise rights.

Because these features are not considered indexed to the Company’s own stock and could require net-cash settlement, the embedded conversion options do not qualify for equity classification under ASC 815-40 and were bifurcated from the host debt instruments and recorded as derivative liabilities at fair value on the issuance date. The derivative liability is remeasured at fair value each reporting period, with changes recognized in earnings. Issuance costs, including original issue discounts, legal fees, and broker commissions, were allocated between the derivative liabilities and the host debt based on relative fair values. The portion allocated to the derivative liabilities reduced their initial carrying amount.

Key valuation inputs included:

	·	Stock price: $2.10 - $4.075 per share
	·	Expected term: 1 – 5 years
	·	Volatility: 60%
	·	Risk-free rate: 3.68% - 3.83% (continuously compounded)
	·	Discount rate: 15%

Commitment Shares Derivative Liability

In connection with entering into a Common Stock Purchase Agreement on June 5, 2026 (refer to Note 10. Capital Stock for details), the Company is required to issue Commitment Shares equal to $250,000 divided by the closing price of the Company’s common stock on the Effective Date of the registration statement covering the resale of shares under the Purchase Agreement. Because the number of Commitment Shares is based on a future stock price (the Effective Date closing price), the Commitment Shares represent a freestanding derivative liability under ASC 815-40. The Company measured the derivative liability at fair value on the commitment date using a Black-Scholes option-pricing model.

Key valuation inputs included:

	·	Stock price: $1.75
	·	Expected term: 30 days (expected time to registration effectiveness)
	·	Volatility: 63.8% (blended volatility)
	·	Risk-free rate: 3.65% (continuously compounded)
	·	Dividend yield: 0%

The Company recorded an initial derivative liability of $12,621 at inception and a decrease in derivative fair value adjustment of $2,443 at June 30, 2026 upon revaluation of the derivative liability at the reporting date in accordance with ASC 820 using the same valuation techniques and materially consistent inputs as those applied at inception. Changes in fair value are recognized in other income (expense) in the condensed consolidated statements of operations. The derivative liability is classified within Level 3 of the fair value hierarchy due to the use of unobservable inputs. A roll-forward of the derivative liability is presented in Note 6. Fair Value Measurements. Additional information regarding valuation techniques and fair value hierarchy classification is included in Note 6. Fair Value Measurements.