11. FAIR VALUE MEASUREMENTS

The Company measures certain liabilities at fair value on a recurring basis, including derivative liabilities arising from bifurcated conversion features on convertible debt instruments accounted for under ASC 815, and a deferred compensation conversion liability classified under ASC 718. Both are considered Level 3 measurements within the fair value hierarchy established by ASC 820.

Derivative Liabilities — ASC 815

The convertible notes payable derivative liabilities are considered Level 3 measurements due to the significant unobservable inputs in the valuation, which are based on a forecast of the Company's future stock performance and, as the note payable is contingently convertible upon an event of default, management's estimate of the likelihood and timing of conversion.

Management utilized a pricing model simulation based on the terms of the bifurcated conversion features, which projects potential future stock prices using the Company’s historical volatility. The model estimates a variable conversion price as of an assumed future conversion date, based on management’s best estimate of the timing and probability of conversion.

The key inputs to the valuation model that was utilized to estimate the fair value of the bifurcated conversion option included:

Deferred Compensation Conversion Liability — ASC 718

The deferred compensation conversion liability represents the fair value of the conversion feature embedded in the CEO's deferred compensation arrangement, which is classified as a liability under ASC 718 because settlement into common stock is at the employee's election. The fair value is estimated using the Black-Scholes option pricing model at each reporting date.

While several inputs to the Black-Scholes model are observable — including the Company's stock price, historical volatility, and the risk-free rate — the expected term represents a significant unobservable input, as it requires management's estimate of when the employee will elect to convert. The significance of the expected term assumption is further heightened by the fact that as of June 30, 2026, the conversion feature is out-of-the-money, with the Company's stock price of $0.24 below the $0.25 conversion price. As a result, the fair value of the feature is driven primarily by time value rather than intrinsic value, making the expected term the most significant input to the measurement. Accordingly, the liability is classified as Level 3 within the fair value hierarchy.

The key inputs as of June 30, 2026 were as follows: expected term of approximately 1.3 years, stock price of $0.24, conversion price of $0.25, volatility of 171.9%, risk-free interest rate of 4.0%, and no expected dividends. The resulting estimated fair value was approximately $326 thousand as of June 30, 2026.

The following table presents the fair value of liabilities measured at fair value on a recurring basis as of June 30, 2026 (in thousands):

The following table presents the fair value of liabilities measured at fair value on a recurring basis as of December 31, 2025 (in thousands):

Derivative financial instruments and changes thereto recorded in the six months ended June 30, 2026 and 2025 include the following (in thousands):

The following table presents activity in the deferred compensation conversion liability for the six months ended June 30, 2026 and 2025 (in thousands):