Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2025

3. Fair Value of Financial Instruments

As a basis for determining the fair value of certain of the Company’s financial instruments, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level I – Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level II – Observable inputs, other than Level I prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level III – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.

As of September 30, 2025 and December 31, 2024, the fair values of cash and cash equivalents, accounts payable, and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. Cash equivalents are classified within Level I of the fair value hierarchy. Short-term investments consist of Level I securities which are comprised of highly liquid money market funds. The estimated fair value of the short-term investments is based on quoted market prices. There were no transfers between fair value hierarchy levels during the three months ended September 30, 2025 and 2024.

The fair value of financial instruments measured on a recurring basis is as follows:


		As of September 30, 2025
Description		Total			Level 1				Level 2		Level 3
Assets:
Short-term investments		$	19,178		$	19,178		$	—		$	—
Liabilities:
Convertible promissory notes, related party			8,862,000			—			—			8,862,000
Non-convertible promissory notes, related party			2,410,000			—			—			2,410,000
Warrant liability			46,000			—			—			46,000


		As of December 31, 2024
Description		Total				Level 1			Level 2		Level 3
Assets:
Short-term investments		$	135,143		$	135,143		$	—		$	—
Related party receivable			1,100,000			—			—			1,100,000
Liabilities:
Convertible promissory notes, related party			16,015,400			—			—			16,015,400
Warrant liability			2,098,000			—			—			2,098,000

The following tables summarize the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs for the three and nine months ended September 30, 2025 and 2024:


			Three Months Ended September 30, 2025
			Convertible		Non-Convertible
			Promissory Notes,		Promissory Notes,		Warrant
			Related Party		Related Party		Liability
Balance at June 30, 2025			$	(11,232,000)	$	(2,190,000)	$	(287,000)
Proceeds from issuance of non-convertible promissory notes, related party				—		(3,229,083)		—
Contribution recognized for non-convertible promissory notes, related party issued at premium				—		1,949,083		—
Modification recognized as extinguishment				(2,647,000)		—		—
Change in fair value				5,017,000		1,060,000		241,000
Balance at September 30, 2025			$	(8,862,000)	$	(2,410,000)	$	(46,000)


	Nine Months Ended September 30, 2025
	Related		Convertible		Non-Convertible
	Party		Promissory Notes,		Promissory Notes,		Warrant
	Receivable		Related Party		Related Party		Liability
Balance at December 31, 2024	$	1,100,000	$	(16,015,400)	$	—	$	(2,098,000)
Partial conversions to common stock		—		2,009,079		—		—
Proceeds from issuance of non-convertible promissory notes, related party		—		—		(7,839,083)		—
Repayments of non-convertible promissory notes, related party		—		—		450,000		—
Contribution recognized for non-convertible promissory notes, related party issued at premium		—		—		3,679,083		—
Modifications recognized as extinguishment		—		(2,647,000)		—		(279,000)
Change in fair value		230,000		7,791,321		1,300,000		2,331,000
Proceeds from settlement of related party receivable		(550,000)		—		—		—
Loss on settlement of related party receivable		(780,000)		—		—		—
Balance at September 30, 2025	$	—	$	(8,862,000)	$	(2,410,000)	$	(46,000)


	Three Months Ended September 30, 2024
	Contingent		Related		Convertible		Non-Convertible
	Earn-Out Receivable		Party		Promissory Notes,		Promissory Notes,
	Related Party		Receivable		Related Party		Related Party
Balance at June 30, 2024	$	2,720,000	$	—	$	(1,940,000)	$	(740,000)
(Loss) Gain on partial extinguishment		(1,480,000)		—				750,000
Change in fair value		190,000		140,000		(120,000)		(10,000)
Reclass contingent earn-out receivable, related party to related party receivable		(1,430,000)		1,430,000
Balance at September 30, 2024	$	—	$	1,570,000	$	(2,060,000)	$	—


	Nine Months Ended September 30, 2024
	Contingent		Contingent		Related		Convertible		Non-Convertible
	Consideration Receivable		Earn-Out Receivable		Party		Promissory Notes,		Promissory Notes,
	Related Party		Related Party		Receivable		Related Party		Related Party
Balance at December 31, 2023	$	268,000	$	1,720,000	$	—	$	—	$	—
Issuance of non-convertible promissory note, related party		—		—		—		—		(750,000)
Issuance of convertible promissory note, related party		(268,000)		—		—		(1,985,750)		—
(Loss) Gain on partial extinguishment		—		(1,480,000)		—		170,000		750,000
Change in fair value		—		1,190,000		140,000		(244,250)		—
Reclass contingent earn-out receivable, related party to related party receivable		—		(1,430,000)		1,430,000		—		—
Balance at September 30, 2024	$	—	$	—	$	1,570,000	$	(2,060,000)	$	—

Adjustments associated with changes in fair value are the result of changes to both observable and unobservable inputs used in the measurement of fair value, which are reassessed at each reporting period. The unobservable inputs are reflected in the following tables, which present quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements of financial assets and liabilities classified as Level 3 as of September 30, 2025 and December 31, 2024.


	As of September 30, 2025
	Valuation Methodology		Significant Input		Weighted Average (range, if applicable)
Convertible promissory note, related party		Discounted Cash Flow Analysis		Maturity term		<1 month
(Restated Elusys Convertible Note, Related Party)				Risk free interest rate		3.8%
				Option-adjusted spread⁽¹⁾		2.8%
				Principal amount	$	2.25 million

Non-convertible promissory notes, related party		Estimated Recovery Value Analysis		Recovery rate ^(1,2)		31.7%
(2025 Non-Convertible Promissory Notes, Related Party)				Default probability		100.0%

Convertible promissory note, related party		Estimated Recovery Value Analysis		Recovery rate ^(1,2)		50.0%
(December 2024 Secured Convertible Notes, Related Party)				Default probability		100.0%

Warrant liability		Black-Scholes Option Pricing Model		Risk free interest rate		3.7%
				Volatility of common stock ⁽¹⁾		87.4%
				Expected term		4.18 years


	As of December 31, 2024
	Valuation Methodology		Significant Input		Weighted Average (range, if applicable)
Related party receivable		Discounted Cash Flow Analysis		Timing of expected payment		2028
				Risk free interest rate		4.3%
				Option-adjusted spread⁽¹⁾		18.4%
				Principal amount	$	2.5 million

Convertible promissory note, related party		Discounted Cash Flow Analysis		Maturity term		8 months
(Restated Elusys Convertible Note, Related Party)				Risk free interest rate		4.2%
				Option-adjusted spread⁽¹⁾		18.6%
				Principal amount	$	2.25 million

Convertible promissory note, related party		Monte Carlo Simulation Model		Risk free interest rate		4.3%
(December 2024 Secured Convertible Notes, Related Party)				Credit spread⁽¹⁾		18.6%
				Volatility of common stock ⁽¹⁾		85.0%
				Expected term		2.93 years

Warrant liability		Black-Scholes Option Pricing Model		Risk free interest rate		4.4%
				Volatility of common stock ⁽¹⁾		64.0%
				Expected term		4.93 years

(1)	Represents significant unobservable input

(2)

On September 9, 2025 and in connection with the Notice of Default (defined in Note 7 Debt) received on that date, the Company began using an estimated recovery value analysis in place of a Monte Carlo simulation model as the valuation technique. The recovery rate used was based, in part, on the Moody’s corporate default and recovery rates and adjusted for factors such as the nature of the underlying collateral and seniority of the debt. Prior to September 9, 2025, the valuation technique used Monte Carlo simulation trials through a lattice model incorporating geometric Brownian motion. The simulations were weighted based on projected future stock prices, the volatility of a set of guideline companies, and significant unobservable inputs. Each simulation was based on the range of inputs in a scenario with the mean of the output on each simulation calculated as an average. In addition to the significant unobservable inputs in the preceding table, the Monte Carlo simulations included assumptions related to the timing and probability of i) a fundamental transaction and ii) an eligible subsequent placement, both as defined by the December 2024 Secured Convertible Notes, Related Party.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/exampleRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 55
-Paragraph 107
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482078/820-10-55-107

Reference 2: http://www.xbrl.org/2003/role/exampleRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 55
-Paragraph 100
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482078/820-10-55-100

Reference 3: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2
-Subparagraph (c)(3)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2

Reference 4: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (a)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 5: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2E
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2E

Reference 6: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (h)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 7: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (f)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 8: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (e)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 9: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 6A
-Subparagraph (d)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A

Reference 10: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2
-Subparagraph (h)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2

Reference 11: http://www.xbrl.org/2003/role/disclosureRef
-Topic 820
-SubTopic 10
-Name Accounting Standards Codification
-Section 50
-Paragraph 2
-Subparagraph (g)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147482106/820-10-50-2

Reference 12: http://www.xbrl.org/2003/role/disclosureRef
-Topic 940
-SubTopic 820
-Name Accounting Standards Codification
-Section 50
-Paragraph 1
-Subparagraph (a)
-Publisher FASB
-URI https://asc.fasb.org/1943274/2147478119/940-820-50-1

+ Details

Scorpius Holdings, Inc. 10-Q