NOTE
10 – EMBEDDED DERIVATIVE IN CONVERTIBLE NOTE
Convertible
Note Terms
The
Company has outstanding convertible debt with the following key terms:
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Principal Amount: $1,082,956
(including accrued interest) |
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Conversion Price: $0.069
per share |
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Maturity Date: March 1,
2025 |
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Current Market Price of
Common Stock: $0.0758 |
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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 the market price. |
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 December 31, 2025, valued at $403,353, while principal amount was $1,082,956 (including accrued
interest). On December 31, 2024, the notes principal amount was $948,642 (including accrued interest), the derivative liability was valued
at $186,652. The following key inputs were used in the derivative debt calculation:
SCHEDULE OF FAIR VALUE MEASUREMENT OF EMBEDDED DERIVATIVE
| Parameter | |
December 31, 2025 | | |
December 31, 2024 | | |
Source/Methodology |
| Current Stock Price | |
$ | 0.0758 | | |
$ | 0.0899 | | |
Observable market price |
| Conversion Price | |
$ | 0.0692 | | |
$ | 0.08 | | |
Contractual terms |
| Volatility | |
| 109.45 | % | |
| 129.14 | % | |
Historical volatility of comparable companies |
| Risk-Free Rate | |
| 3.59 | % | |
| 4.37 | % | |
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 year ended December 31, 2025, the derivative liability was valued $403,353 resulting
in an increase of the estimated fair value for the derivative of $216,701. For the year ended December 31, 2024, the derivative liability was valued $186,652.
Sensitivity
and Risks
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Volatility Impact: A 20%
increase in volatility to 131.34% would increase the derivative liability by $63,087. |
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Stock Price Risk: A 20%
increase of the stock price to $0.091 would increase the derivative liability by $176,737. |
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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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