Note 4 – Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – This level consists of quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2 – This level consists of directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3 – This level consists of unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

In determining the fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the unobservable inputs to the extent possible, as well as considers counterparty credit risk in its assessments of fair value.

Fair Value of Liabilities – The following tables represent the Company’s financial liabilities according to the fair value hierarchy, measured at fair value (in thousands):

The value of the warrants to purchase the Company’s redeemable convertible preferred stock is dependent on inputs for which there is little or no market data, in particular the value of the Company’s stock. As a result, the valuation of the warrants to purchase the Company’s redeemable convertible preferred stock is categorized as Level 3. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the lowest level of significance of the unobservable inputs to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). The fair values could change significantly based on future market conditions.

The Company estimates volatility based upon analysis of the historical volatility of peer public companies as well as factors specific to the Company, including, but not limited to, size, expected growth and relative risk. The expected life assumption is based on the remaining contractual terms of the warrants. The risk-free rate as of March 31, 2026 and December 31, 2025 is based on the 1.5 year U.S. treasury bond yield. The expected dividend yield used is zero, because the Company has no present intention to pay cash dividends. The fair value of the warrant liability as of March 31, 2026 and December 31, 2025, was $0.9 million and $0.9 million, respectively. The change in fair value of the warrant liabilities was recorded within Other income (expense), net in the condensed statements of operations.

In January and February 2026, the Company issued convertible promissory notes in an aggregate principal amount of $40.0 million (the “Convertible Notes”). The Company elected the fair value option under ASC 825 for the Convertible Notes. At issuance, the fair value of the Convertible Notes was determined based on the transaction price, which the Company concluded represented an orderly transaction between market participants. Subsequent fair value measurements are determined using a scenario-based valuation model that incorporates probability-weighted outcomes across multiple potential scenarios, including an initial public offering, financing, change of control, maturity, and default. The model incorporates discounted cash flow techniques and option-pricing methodologies to reflect the embedded conversion features and is calibrated to the transaction price at issuance and updated at each reporting date. Significant unobservable inputs used in the valuation include discount rate (including a company-specific credit spread), equity volatility, and the probability and timing of potential liquidity events. The Convertible Notes are recurring Level 3 liabilities measured under the ASC 825 fair value option.

As of issuance, key assumptions included a discount rate of approximately 21.2%, equity volatility of approximately 85%, and expected term of 1.0 – 2.0 years. As of March 31, 2026, key assumptions included a discount rate of approximately 21.5%, equity volatility of approximately 80% and expected timing of liquidity events of 0.8 – 1.5 years. For each measurement date, the estimated probability of an initial public offering was 40% and a change of control was 20%.

As of March 31, 2026, the aggregate principal amount of the Convertible Notes outstanding was $40.0 million and the estimated fair value of the Convertible Notes was $40.7 million.