Note 4 — Fair Value Measurements

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company follows ASC 820, Fair Value Measurement, for financial assets and liabilities measured at fair value on a recurring basis. The Company uses the fair value hierarchy to categorize the financial instruments measured at fair value based on the available inputs to the valuation and the degree to which they are observable or not observable in the market.

The three levels of the fair value hierarchy are as follows:

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.

The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated financial statements approximate fair value due to their short-term maturities.

The Company determined that during the years ended December 31, 2025 and 2024, certain instruments qualified as derivative liabilities and were recorded at fair value on the date of issuance and re-measured at fair value each reporting period with the change reported in earnings. The fair value of these instruments was computed using the Black Scholes model, incorporating transaction details such as the assumed price of the Company’s Common Stock at an initial public offering, contractual terms, maturity and risk-free rates, as well as assumptions about future financings, volatility, and holder behavior.

There were no derivative liabilities recorded as of December 31, 2025. See Note 9 –Warrants for more information.

Securities Purchase Agreement

On February 4, 2025, the Company entered into an SPA with an investor (“2025 Investor”) for a Senior Secured Convertible Note (“Convertible Note”) with a face value of $5,500,000 and 16 Incremental Warrants exercisable for a face amount of $2,500,000 each. See Note 8 – Borrowings for further discussion.

The purchase price paid by the Investor under the SPA for the Convertible Note and Incremental Warrants was $4,963,750 in gross proceeds of which $354,450 was paid to satisfy, in full, the remaining balance of the standard merchant cash advance agreements with Cedar Advance, LLC, $340,421 was paid to satisfy, in full, the remaining balance of the standard merchant cash advance agreement with Arin Funding, LLC and $910,250 was paid to satisfy, in full, the remaining balance of the senior secured promissory notes with an accredited investor, leaving net proceeds remaining of $3,408,585. It was determined that the note and warrants within this transaction met the requirements for the Fair Value Option under ASC 825, which the Company elected. Using the fair value option, the Convertible Note is required to be recorded at initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the notes are recognized as gain/loss on fair value adjustment within other income (expenses) in the Company’s consolidated statements of operations. 

As a result of applying the fair value option, direct costs and fees related to the Convertible Note were expensed as incurred and were not deferred.

On June 18, 2025, with the prior approval by the Company’s Board of Directors, the Company and the 2025 Investor entered into, and closed the transactions contemplated by, that certain Amendment and Exchange Agreement (the “Exchange Agreement”) pursuant to which (among other things) the Investor surrendered and exchanged all of its Incremental Warrants in exchange for (the “Exchange”) 6,000 shares of the Company’s Series B Convertible Preferred Stock, par value $0.0001 per share (“Series B Preferred Stock”). The Convertible Note remained outstanding post-Exchange.

Pursuant to the terms of the Exchange Agreement, conversion of the Series B Preferred Stock into shares of common stock of the Company, par value $0.0001 per share (the “Common Stock”) in excess of 19.99% of the Company’s outstanding shares of Common Stock is conditional upon obtaining the approval of the Company’s shareholders in accordance with the rules and regulations of the Nasdaq Capital Market (“Shareholder Approval”). The Company agreed to convene a meeting of stockholders to obtain Shareholder Approval within 120 days after the date of the Exchange Agreement. The Company obtained the Shareholder Approval effective as of August 11, 2025.

The Company determined the Exchange met the criteria for liability derecognition of the Incremental Warrants as the Exchange represented settlement of the liability through delivery of other financial assets. As the warrant was an equity contract classified as a liability at issuance, upon settlement, the equity contract was required to be marked to market. The Company recognized a change in fair value of $10,240,000 measured as the difference between the fair value of the Incremental Warrants at February 4, 2025, and their fair value of $90,560,000 immediately prior to the Exchange. The Series B Preferred Stock issued to the Investor in satisfaction of the Incremental Warrants in the Exchange had an issuance date fair value of $8,261,000 based on the following assumptions:

At the closing of the Exchange, the Company recognized a gain on settlement of the Incremental Warrants of $82,299,000, measured as the difference between the adjusted fair value of the Incremental Warrants immediately prior to the Exchange and the fair value of the Series B Preferred Stock at issuance, net of par value. The Company evaluated the classification of its Series B Preferred Stock and concluded that it is more akin to equity than debt and accounted for as permanent equity. Accordingly, the Series B Preferred Stock is presented within permanent equity in the accompanying consolidated financial statements. The shares were issued at their par value (rounded to $1) with the remaining fair value of the Series B Preferred Stock in excess of par value, $8,260,999 being recorded to additional paid-in capital.

The following tables provide the fair value and contractual principal balance outstanding on the Convertible Note and the Incremental Warrants accounted for under the fair value option as of December 31, 2025, June 18, 2025, June 26, 2025 and February 4, 2025:

The fair value of the Convertible Note was calculated using a fair value analysis considering the following factors and assumptions:

The fair value of the Incremental Warrants were calculated using the Monte Carlo simulation with the following factors, assumptions and methodologies from February 4, 2025 when the Company entered into the agreement and right before the exchange on June 18, 2025:

A summary of the Company’s liabilities measured at fair value on a recurring basis is as follows:

At December 31, 2024, the estimated fair value of the derivative liability tied to the three vested warrants held by an institutional investor and remeasured on a recurring basis amounted to $1,607,544.

As of December 31, 2025, warrants held by an institutional investor were eliminated through exercising and a redemption and cancellation agreement for $379,083. The Company recorded a derivative liability related to the Incremental Warrants issued in connection with the SPA dated February 4, 2025. The Incremental Warrants’ fair value at date of issuance was $100,800,000 and were settled by June 30, 2025, with a gain recorded of $82,299,000. The initial analysis assumes immediate conversion upon issuance and does not incorporate ownership limitations or conversion blockers that could otherwise restrict full exercise or conversion. On June 26, 2025, the Company determined that modifications of the existing Senior Secured Convertible Note during the year qualified as an extinguishment. 

The following tables provide a summary of changes in fair value associated with the Level 3 liabilities for the years ended December 31, 2025 and 2024:

Derivative liabilities

Convertible Note

The fair value of the derivative liability related to the three eliminated Warrants, was computed using the Black-Scholes model both when issued and on the balance sheet date. To determine the fair value, the Company incorporated transaction details such as the price of the Company’s common stock, contractual terms, maturity, and risk-free rates, as well as assumptions about future financings, volatility, probability of contingencies, and holder behavior. The fair value of the derivative liability on the issuance date and the balance sheet date and the assumptions used in the Black-Scholes model are set forth in the table below.