6. Fair Value of Financial Instruments

Fair Value of Financial Liabilities

The following tables summarize the Company’s convertible debt instruments as of June 30, 2026 and December 31, 2025, respectively (in thousands):

 Schedule of Fair Value of Financial Liabilities 

The following tables summarize the Company’s derivative liabilities as of June 30, 2026 and December 31, 2025 as discussed in Note 8 – Convertible and Redeemable Preferred Stock and Stockholders’ Deficit (in thousands):

 Schedule of Fair Value of Derivative Liabilities 

Change in Fair Value of Level 3 Financial Liabilities

The following table summarizes the changes in Level 3 financial liabilities related to Baker Notes, Exchanged SSNs, and Aditxt Notes measured at fair value on a recurring basis for the three and six months ended June 30, 2026 (in thousands):

 Schedule of Change in Fair Value of Level 3 Financial Liabilities 

The following table summarizes the changes in Level 3 financial liabilities related to Baker Notes, Exchanged SSNs, and Aditxt Notes measured at fair value on a recurring basis for the three and six months ended June 30, 2025 (in thousands):

The following table summarizes the changes in Level 3 financial liabilities related to derivative liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2026 (in thousands):

The following table summarizes the changes in Level 3 financial liabilities related to derivative liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2025 (in thousands):

Valuation Methodology

Baker Notes

The fair value of the Baker Notes is determined using a Monte Carlo simulation-based model and is subject to uncertainty due to the assumptions used in the model. The fair value of the Baker Notes is sensitive to these estimated inputs made by management that are used in the calculation. The Monte Carlo simulation takes into account several embedded features, factors and management inputs, including the exercise of the repurchase rights, the Company’s future revenues, meeting certain debt covenants, the maturity term of the note and dissolution. For the dissolution scenario, the cost approach, an adjusted net asset value method was used to determine the net recoverable value of the Company, including an estimate of the fair value of the Company’s intellectual property. The estimated fair value of the Company’s intellectual property was valued using a relief from royalty method which required management to make significant estimates and assumptions related to forecasts of future revenue, and the selection of the royalty (5.0%) and discount (13.9%) rates. The key unobservable inputs used in the valuation include a risk-free rate of 4.14%, a discount rate of 13.9%, a revenue weighted-average cost of capital of 17.4%, a revenue volatility of 140% on an annual basis, and an event probability of 29% for the Baker Notes to be repurchased by September 2026.

Exchanged SSNs and Aditxt Notes

The fair value of the Exchanged SSNs and Aditxt Notes issued, as described in Note 4 – Debt, were determined by estimating the fair value of the Market Value of Invested Capital (MVIC) of the Company on a going-concern basis. This was estimated using a form of the market approach where comparable market revenue multiples were selected and applied to the Company’s forward revenue forecast to ultimately derive a MVIC indication. In addition, the Company considered a transaction in which certain of its investors sold a portion of their notes to HUB, as described in Note 4 – Debt. Because the referenced transaction was with a related party and not conducted at arm’s length, the Company did not rely on the full transaction value as a direct indicator of fair value; rather, the implied value from the transaction was weighted and used as a corroborating market price indicator in support of the MVIC and related inputs described below. An option pricing model (OPM) was then applied to value the Exchanged SSNs by allocating the estimated MVIC through the Company’s capital structure including the more senior notes payoff in a hypothetical exit event. Under the OPM, each debt or equity class is modeled as a call option with a distinct claim on the total value of the Company. The option’s exercise price is based on the Company’s total value available for each participating security holder. By constructing a series of options in which the exercise price is set at incremental levels of value, which correspond to the value necessary for each level of debt or equity to participate, the Company determined the incremental option value of each series. When multiplied by the percentage of ownership of each class participating, the result is the incremental value allocated to each class under that series. The key unobservable inputs used in the valuation include the revenue based multiple ranging from 3.00x to 3.25x, a risk-free rate of 3.91%, an equity volatility of 74%, a time to expiration of 382 days, a discount for lack of marketability of 32.0% for certain instruments, and the implied value from the transaction weighted at 15% due to its non-arm’s-length nature.

Purchase Rights

The Purchase Rights are recorded as derivative liabilities in the condensed consolidated balance sheets. The Purchase Rights are valued using an OPM, such as a Black-Scholes option pricing model, with changes in the fair value being recorded in the condensed consolidated statements of operations. In addition, the Company considered a transaction in which certain of its investors sold a portion of their Purchase Rights to HUB, as described in Note 8 – Convertible and Redeemable Preferred Stock and Stockholders’ Deficit. The Company applied a similar method in consideration of the implied value from the transaction used for Exchanged SSNs and Aditxt Notes. The assumptions used in the OPM are considered level 3 assumptions and include, but are not limited to, the MVIC, the cumulative equity value of the Company as a proxy for the exercise price and the expected term the Purchase Rights will be held prior to exercise and a risk-free interest rate. The key unobservable inputs used in the valuation of the Purchase Rights were the same as those used for the Exchanged SSNs and Aditxt Notes as described herein.

Warrants

Warrants are classified as equity and the Company re-evaluates the classification of its warrants at the close of each reporting period to determine their proper balance sheet classification. The warrants are valued using an OPM based on the applicable assumptions, which include the exercise price of the warrants, time to expiration, expected volatility of our peer group, risk-free interest rate, and expected dividends. The assumptions used in the OPM are considered level 3 assumptions and include, but are not limited to, the MVIC, the cumulative equity value of the Company as a proxy for the exercise price, the expected term the warrants will be held prior to exercise, a risk-free interest rate, and probability of change of control event. Additionally, because the warrants are re-priced under certain provisions in the agreements, at each re-pricing event the Company must value the warrants using a Black-Scholes option pricing model immediately prior to and immediately following the re-pricing event. The incremental fair value is recorded as an increase to accumulated deficit and additional paid-in capital, in accordance with ASC 470. The key unobservable inputs used in the valuation of warrants were the same as those used the Exchanged SSNs and Aditxt Notes as described aforementioned.

SOLOSEC Asset Acquisition Intangible Asset and Contingent Liabilities

The total consideration for the SOLOSEC asset acquisition included an up-front payment (paid at closing), sales-based payments to be paid over 15 years (the Earnout Term) in each year in which SOLOSEC adjusted net revenue is over a specified threshold, a $10.0 million one-time payment once the cumulative SOLOSEC adjusted net revenues reach $100 million, and assumption of quarterly royalty payments based on SOLOSEC net revenue. As discussed in Note 7 – Commitments and Contingencies, the fair value of the consideration is attributed to the SOLOSEC product line and was therefore recorded as an intangible asset.

The fair value of the total consideration, including cash paid and future sales-based payments, is determined using a Monte Carlo simulation model, which assumes the Company’s revenue follows a geometric Brownian motion. Using specific revenue factors, including expected growth, risk adjustments, and revenue volatility, future revenues were simulated through the Earnout Term to assess whether sales-based payments would be triggered in each relevant period, as stipulated by the SOLOSEC Asset Purchase Agreement. The average output of the Monte Carlo simulations for each period provides the expected payment value, which is then discounted to its present value to derive the fair value of future sales-based payments and recorded as contingent liabilities. The discount rate is a market index rate based on the Company’s credit risk.

The fair value of the SOLOSEC contingent liabilities is subject to uncertainty due to the assumptions made by management that are used in the Monte Carlo simulation-based model. These factors include the estimated future SOLOSEC net revenue, the risk-neutral revenue calculation and simulation assumptions, payment timing, and the discount rate. The key unobservable inputs used in the valuation include a risk-free rate of 4.6%, and a revenue volatility of 162%.

The fair value of the SOLOSEC contingent liabilities will be updated at each reporting period using the methodology described above. Any changes to the fair value will be recorded as an adjustment to the carrying value of both the contingent liabilities and the SOLOSEC IP intangible asset as per ASC 323, Investments – Equity Method and Joint Ventures (ASC 323). Periodic intangible amortization will also be prospectively updated based on the new fair value of the SOLOSEC IP.