NOTE 3: DERIVATIVE LIABILITY

Equity-classified warrants

The Company evaluates each warrant under ASC 815-40. The common stock purchase warrants issued to Talos Victory Fund, LLC and FirstFire Global Opportunities Fund in September 2022 contained a down-round price-protection feature. Management concluded that the warrants qualified for equity classification under ASC 815-40, including the down-round feature exception in ASC 815-10-15-75A. Accordingly, no derivative liability was recorded for warrants at June 30, 2026 or 2025. The warrants were cancelled in April 2026, and no warrants remained outstanding as of June 30, 2026. See Note 7.

The down-round feature of an equity-classified warrant is evaluated under ASC 260-10-S99-2 when a triggering event occurs. No deemed dividend attributable to the warrants was recognized in the periods presented.

Accounting for Convertible-Note Derivative Liability

The embedded derivative features in certain variable-price convertible notes are measured at fair value at issuance and at each reporting date using a Cox, Ross & Rubinstein Binomial Tree valuation model. The resulting derivative liability is recognized in the Consolidated Balance Sheets, and changes in fair value are recognized in the Consolidated Statements of Operations. The accounting for the convertible-note derivative liability has no direct cash-flow effect.

Derivative liability – convertible notes

The Company had certain convertible notes with variable-price conversion terms. Management concluded that the embedded conversion features in those notes require bifurcation and liability classification under ASC 815. The derivative liabilities related to convertible notes payable were measured at fair value at June 30, 2025 and at each conversion or repayment date during fiscal 2026 using a Cox, Ross & Rubinstein Binomial Tree valuation model. No derivative liability was outstanding at June 30, 2026.

Changes in the fair value of the Company’s other convertible-note derivative liabilities, together with the initial accounting for applicable new convertible notes, resulted in a gain of $271,391 and $33,761 for the years ended June 30, 2026 and 2025, respectively, in the Consolidated Statements of Operations under the caption “Gain on change in fair value of derivative liabilities.” The fiscal 2026 gain consists of $263,586 from the derecognition, upon conversion or repayment of the related notes, of derivative liabilities initially recognized during the year (whose initial fair value was recorded as debt discount and amortized to interest expense) and $7,805 from the remeasurement of the derivative liability outstanding at June 30, 2025. The Company had no derivative liability at June 30, 2026, compared to $7,805 at June 30, 2025, reported on the Consolidated Balance Sheets as “Derivative liabilities.” No warrant derivative liability was recorded in either period.

June 2026 Note Payable – Default-Contingent Conversion Feature

On June 1, 2026, the Company issued a $99,600 promissory note to 1800 Diagonal Lending LLC (see Note 5). The note carries a one-time interest charge of 15% ($14,940), matures on March 15, 2027, is payable in cash in four scheduled installments beginning December 15, 2026, and may be prepaid in full at any time without penalty. The holder has no right to convert the note into common stock unless an Event of Default (as defined in the note) occurs. Only following an Event of Default may the holder convert the outstanding balance, which upon default would include a default amount equal to 150% of the outstanding principal and accrued interest, into common stock at 65% of the lowest trading price of the Company’s common stock during the ten trading days preceding conversion. Because the conversion right is not exercisable unless the Company defaults, the Company accounts for the note as a cash-pay note payable and presents it within Notes Payable rather than Convertible Notes Payable. The Company evaluated the default-contingent conversion feature and the related default provisions under ASC 815-15. At issuance and at June 30, 2026, the note was current, no Event of Default had occurred, no notice of default had been received, the Company had no other indebtedness to the holder that could give rise to a cross-default, and management assessed the likelihood of an Event of Default as remote. Accordingly, management concluded that the default-contingent features had no more than nominal value, and no derivative liability was recognized for the note at issuance or at June 30, 2026. The Company reassesses this conclusion at each reporting date. If an Event of Default occurs or becomes more than remote, the Company will measure the conversion feature at fair value and recognize a derivative liability, with subsequent changes in fair value recognized in earnings.

The note's Events of Default include, among other matters, certain failures to comply with the Company's reporting obligations under the Exchange Act. Following June 30, 2026, the Company filed a Notification of Late Filing on Form 12b-25 on September 29, 2026 with respect to this Annual Report. Because this Annual Report was filed on October 13, 2026, within the extension period provided by Rule 12b-25, it is deemed under Rule 12b-25(b) to have been filed on or before its prescribed due date. Accordingly, management concluded that the late-filing notification did not constitute an Event of Default under the note. As of the date of this Annual Report, the Company had not received any notice of default from the holder. The Company’s other convertible notes are convertible at fixed conversion prices of $121.50 per share, substantially above the market price of the common stock throughout fiscal 2026. Their conversion features are indexed to the Company’s own stock and were not bifurcated as derivative liabilities under ASC 815-15 and ASC 815-40.