NOTE
9 – CONVERTIBLE NOTE AND EMBEDDED DERIVATIVE
Convertible
Note Terms
The
Company has outstanding convertible debt with the following key terms:
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Principal
Amount: $1,154,811 (including accrued interest) |
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Lower
of Conversion Price, $0.08,
& Reset price, $0.0421 per share of Common Stock |
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Maturity
Date: March 1, 2025 |
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Lower
of VWAP, $0.0274,
& Market closing, $0.026 per share of Common Stock |
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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 VWAP, price adjusted for fluctuation in reset- and market closing price
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Embedded
Derivative Classification
The
price adjustment feature meets the criteria for bifurcation as an embedded derivative under ASC 815-15-25-1 because:
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It
is not clearly and closely related to the host debt instrument. |
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The
120% adjustment creates a non-linear payoff linked to the stock price. |
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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:
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Path
dependency of the adjustment feature. |
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Optimal
conversion behavior (American-style exercise). |
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Probability-weighted
payoffs under risk-neutral valuation. |
Fair
Value Measurement of Embedded Derivative
The
fair value measurement of the derivative is classified within Level 3 of the fair value hierarchy established by ASC 820-10-35-37 through
ASC 820-10-35-54A, as the valuation inputs include unobservable inputs (expected volatility) that are significant to the overall measurement.
The
derivative liability on the note was at June 30, 2026, valued at $369,730, while principal amount was $1,154,811 (including accrued interest).
On December 31, 2025, the notes principal amount was $1,082,956 (including accrued interest), the derivative liability was valued at
$403,353. The following key inputs were used in the derivative debt calculation:
SCHEDULE OF FAIR VALUE MEASUREMENT OF EMBEDDED DERIVATIVE
| Parameter | |
June 30, 2026 | | |
December 31, 2025 | | |
Source/Methodology |
| Current Stock Price | |
$ | 0.0260 | | |
$ | 0.0758 | | |
Observable market price |
| Conversion Price | |
$ | 0.0249 | | |
$ | 0.0692 | | |
Contractual terms |
| Volatility | |
| 103.50 | % | |
| 109.45 | % | |
Historical volatility of comparable companies |
| Risk-Free Rate | |
| 4.01 | % | |
| 3.59 | % | |
1.5-month (6-month)* U.S. Treasury yield |
| Time to Maturity | |
| default | | |
| default | | |
6 months* |
| Adjustment Multiplier | |
| 120 | % | |
| 120 | % | |
Contractual terms |
| * |
The
number of months used in the calculation to estimate the value of the derivative debt. |
For
the three months ended June 30, 2026, the estimated change in fair value reduced the derivative liability by $(106,759), while for the
six months ended June 30, 2026, the estimate of the change in fair value reduced the derivative liability by $(33,623).
Sensitivity
and Risks
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Volatility
Impact: A 20% increase in volatility to 124.19% would increase the derivative liability by $64,343. |
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Stock
Price Risk: A 20% increase of the stock price to $0.0329 would reduce the derivative liability by $46,423. |
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Concentration
Risk: The value of the derivative liability is significantly higher that the instrument itself, which highlights a potential equity
dilution. |
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