Note 4 – Derivative and Warrant liabilities

Fair Value Assumptions Used in Accounting for Derivative Liabilities

Convertible notes

ASC 815 requires us to assess the fair market value of derivative liabilities at the end of each reporting period and recognize any change in the fair market value as other income or expense. The Company determined the embedded conversion feature to be a derivative liability to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of December 31, 2025 and March 31, 2026.

The Black-Scholes model, which requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The current stock price is based on the Company’s stock price. Expected volatility is based on the historical stock price volatility of comparable companies and our common stock. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods.

During the three months ended March 31, 2026 and year ended December 31, 2025, in connection with the convertible notes payable and a conversion feature which converts into common shares at the time of an uplist to a senior exchange such as the NYSE American or NASDAQ, the Company determined our derivative liability feature from the noteholder’s conversion for the convertible notes is not clearly and closely related to the host and accounted for it as a bifurcated derivative liability. As a result, the Company calculated the derivative liability based on the conditional liquidity event, the IPO or the Maturity. As of March 31, 2026, the pricing of the IPO was assumed to be between $7.00 and $9.00 per share after the expected reverse stock split occurs (1 for 200 shares) and probabilities were assigned not only for the IPO, but at different price points within the range from $7.00 to $9.00 per Unit. As of March 31, 2026, and the issue date of this interim report, the reverse split has not occurred.

As of March 31, 2026, for the convertible notes, the estimated fair values of the liabilities measured on a recurring basis were based on the following Black Scholes inputs:

The following table summarizes the changes in the derivative liabilities during the three months ended March 31, 2026 (no derivative liability during the three months ended March 31, 2025):

Warrant Liability

The Alumni Warrant does not qualify for equity classification under ASC 815-40 and is recorded as a liability and recognized as a Level 3 fair value with changes in fair value recorded in the income statement at each reporting date (Note 3). The Company determined the embedded feature, allowing Alumni to require the Company to repurchase the Alumni Warrant for cash, in the event of a change of control, to be a liability, and used the Monte Carlo pricing model to calculate the fair value as of issuance date (February 5, 2026) and March 31, 2026.

At the issuance date, the Alumni Warrant was recorded at its estimated fair value of $126,000 and recorded as a debt discount.. At March 31, 2026, the fair value was remeasured to $151,000, resulting in a loss on derivative liability of $25,000 recognized during the three months ended March 31, 2026.

As of initial date and March 31, 2026, for the warrant, the estimated fair values of the liability measured on a recurring basis were based on the following Monte Carlo inputs:

The following table summarizes the changes in the warrant liability during the three months ended March 31, 2026 (no derivative liability during the three months ended March 31, 2025):