NOTE 6 – DERIVATIVE LIABILITIES

The variable-rate conversion features embedded in each of the three promissory notes described in Note 6 were determined not to be clearly and closely related to the debt host instruments under ASC 815-15-25. Each conversion price is reset at the time of each future conversion based on a lookback formula applied to then-current market prices, causing the conversion price to vary with changes in the Company’s stock price. As a result, the embedded conversion features do not satisfy the fixed-for-fixed criterion of ASC 815-40-15 and were bifurcated from the host debt instruments and recorded as derivative liabilities at fair value at inception, with subsequent changes in fair value recognized in the statements of operations.

The derivative liabilities are classified within Level 3 of the fair value hierarchy because their valuation requires unobservable inputs, principally the variable future conversion price (which is path-dependent on future stock prices) and management’s estimate of historical volatility.

The conversion right under the Boot Capital and Vanquish notes is contingent on the occurrence of an Event of Default. Accordingly, the probability that the conversion feature will ever be exercised depends, in part, on the probability that an Event of Default will occur. The fair value of these embedded derivatives was estimated using a Black-Scholes option pricing model adjusted by management’s estimate of the probability of default (“PD”). At inception (March 12, 2026), management estimated the PD at 40%, reflecting the Company’s then-current liquidity position, history of going concern disclosures, and clinical-stage operating profile. Subsequent to the closing of an offering on March 30, 2026, the PD was revised to 7.5%, reflecting the substantially improved liquidity position. The conversion right under the Labrys Fund II note is available to the Holder as a routine contractual right beginning on Day 181 (September 16, 2026), regardless of whether any Event of Default has occurred. No probability-of-default adjustment was applied to the Labrys Fund II derivative; the full Black-Scholes value was used.

The fair value of each embedded derivative liability was estimated using the Black-Scholes option pricing model. This model was selected as a practical and widely-accepted approach for valuing variable-rate convertible features on short-term promissory notes. Management acknowledges the following simplifications inherent in this approach:

The Company utilized the Black-Scholes model to value the derivative liabilities. During the three months ended March 31, 2026, the Company utilized the following assumptions:

At inception of the Labrys Fund II note (March 20, 2026), the fair value of the bifurcated embedded derivative of $756 exceeded the total proceeds received $300. Under ASC 815-15-30-6, this excess is recognized immediately as a loss in the statement of operations on the date of inception. The Company recognized a day-one loss on derivative bifurcation of $456 as of March 31, 2026.

The following represents the movement of the value of the March 2026 notes during the three months ended March 31, 2026: