EMBEDDED DERIVATIVE IN CONVERTIBLE NOTE

3 Months Ended

Mar. 31, 2026

Embedded Derivative In Convertible Note

NOTE 9 – EMBEDDED DERIVATIVE IN CONVERTIBLE NOTE

Convertible Note Terms

The Company has outstanding convertible debt with the following key terms:

	●	Principal Amount: $1,118,685 (including accrued interest)
	●	Conversion Price: $0.0379 per share
	●	Maturity Date: March 1, 2025
	●	Current Market Price of Common Stock: $0.0499
	●	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:

	●	It is not clearly and closely related to the host debt instrument.
	●	The 120% adjustment creates a non-linear payoff linked to the stock price.
	●	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:

	●	Path dependency of the adjustment feature.
	●	Optimal conversion behavior (American-style exercise).
	●	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 March 31, 2026, valued at $476,489, while principal amount was $1,118,685 (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:

Parameter	March 31, 2026			December 31, 2025			Source/Methodology
Current Stock Price	$	0.0499		$	0.0758		Observable market price
Conversion Price	$	0.0379		$	0.0692		Contractual terms
Volatility		105.26	%		109.45	%	Historical volatility of comparable companies
Risk-Free Rate		3.72	%		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 quarter ended March 31, 2026, the increase of the estimated fair value for was derivative of $73,136.

Sensitivity and Risks

	●	Volatility Impact: A 20% increase in volatility to 126.31% would increase the derivative liability by $64,171.
	●	Stock Price Risk: A 20% increase of the stock price to $0.0539 would increase the derivative liability by $63,190.
	●	Concentration Risk: The value of the derivative liability is significantly higher that the instrument itself, which highlights a potential equity dilution.