Note 3. Fair Value Measurement

The following tables summarize the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):


	As of September 30, 2025
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds(1)	$	78,007	$	—	$	—	$	78,007
Total financial assets measured at fair value	$	78,007	$	—	$	—	$	78,007

Liabilities:
Tranche liability(2)	$	—	$	—	$	51,651	$	51,651
2021 Public Warrants(3)		94		—		—		94
2021 PIPE Warrants(3)		—		11		—		11
2024 Pre-Funded Warrants(3)		—		515		—		515
2024 PIPE Warrants(3)		—		—		14,189		14,189
2025 Pre-Funded Warrants(3)		—		16,815		—		16,815
2025 PIPE Warrants(3)		—		—		21,920		21,920
Total financial liabilities measured at fair value	$	94	$	17,341	$	87,760	$	105,195


	As of December 31, 2024
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds(1)	$	25,495	$	—	$	—	$	25,495
Total financial assets measured at fair value	$	25,495	$	—	$	—	$	25,495

Liabilities(3):
2021 Public Warrants	$	109	$	—	$	—	$	109
2021 PIPE Warrants		—		17		—		17
2024 Pre-Funded Warrants		—		574		—		574
2024 PIPE Warrants		—		—		55,192		55,192
Total financial liabilities measured at fair value	$	109	$	591	$	55,192	$	55,892

(1)

Included in cash and cash equivalents on the condensed consolidated balance sheets.

(2)

See Note 8.

(3)

See Note 10.

There were no changes to the valuation methods utilized and there were no transfers of financial instruments between Level 1, Level 2, and Level 3 during the three and nine months ended September 30, 2025.

The 2021 Public Warrants (as defined in Note 10 below) are classified as Level 1 due to the use of an observable market quote in an active market. The 2021 PIPE Warrants (as defined in Note 10 below) are classified as Level 2 due to the use of observable market data for identical or similar liabilities. The fair value of each 2021 PIPE Warrant is determined to be consistent with that of a 2021 Public Warrant because the 2021 PIPE Warrants are also subject to the make-whole redemption feature, which allows the Company to redeem both types of warrants on similar terms.

The 2024 Pre-Funded Warrants and 2025 Pre-Funded Warrants (as defined in Note 10 below) are classified as Level 2 due to the use of observable market data for similar instruments. The fair value of all pre-funded warrants is determined to be consistent with the fair value of the Company’s common stock due to the nominal exercise price.

The tranche liability (see Note 8), 2024 PIPE Warrants and 2025 PIPE Warrants (as defined in Note 10 below) are classified as Level 3 because the fair value was measured based on significant inputs that are unobservable in the market. They were initially recorded at fair value and subsequently remeasured at each reporting period using the Black-Scholes option-pricing model with the following assumptions: expected term, expected volatility, risk-free interest rate and dividend yield. The significant unobservable inputs used in the fair value measurement of the tranche liability at inception and September 30, 2025 and the fair value measurement of the 2024 PIPE Warrants at December 31, 2024 also included the timing and probability of achieving the milestones. The expected volatility was based on historical volatility of the Company’s stock price with a risk adjustment. The expected term was estimated based on expiration date or the timing of when the milestone is expected to be achieved. The risk-free interest rate was based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the expected term. The dividend rate is based on the historical rate, which the Company anticipated remaining at zero.

The fair value of the Level 3 liabilities may change significantly as additional data is obtained. In evaluating this information, considerable judgment is required to interpret the data used to develop the assumptions and estimates. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.

The key inputs into the fair value measurement of the Level 3 liabilities at inception and the end of period were as follows:


	Tranche Liability					2025 PIPE Warrants						2024 PIPE Warrants
	September 30,			March 24,		September 30,			March 26,			September 30,			December 31,
	2025			2025		2025			2025			2025			2024
Expected term (in years)	1.0 - 6.1			1.6 - 6.6			4.5			5.0			3.5		0.5 - 4.3
Expected volatility		55	%	55%			55	%		55	%		55	%		100	%
Risk-free interest rate	3.6% - 3.8%			4.1% - 4.3%			3.7	%		4.1	%		3.6	%	4.3% - 4.4%
Dividend yield		—			—		—			—			—			—

Warrant Amendment and Cancellation

As described in Note 10, the 2024 PIPE Warrants included Series A, Series B, Series C and Series D common stock warrants. Due to the discontinuation of clinical development of SZN-043 in the first quarter of 2025, the fair value of the Series C and Series D common stock warrant liabilities became zero as they would not be exercisable. Additionally, in connection with the 2025 PIPE completed in March 2025 as described in Note 8, both the exercise prices of the Company’s outstanding Series A and Series B common stock warrants were reduced to $11.54 per share, except that the exercise prices per warrant for such warrants held by members of management were reduced to $12.45 per share, and the Company’s outstanding Series C and Series D common stock warrants were cancelled. The 2024 PIPE Warrants were revalued using the Black-Scholes option pricing model immediately before and after the modification and cancellation using the following assumptions: (a) fair value of common stock of $12.00 per share, (b) expected volatility of 55%, (c) dividend yield of zero, (d) risk-free interest rate of 4.01%, and (e) expected term of 4.0 years. The increase in the fair value of the 2024 PIPE Warrants resulted from the amendment and cancellation of warrants was recorded as a loss of $2.1 million in the unaudited consolidated statements of operations.

Activity of Level 3 liabilities is summarized in the following table (in thousands):


	Tranche Liability			2025 PIPE Warrants			2024 PIPE Warrants
Balance, December 31, 2024	$	—		$	—		$	55,192
Issuance in the 2025 PIPE		141,084			17,395			—
Settlement of tranche liability		(82,321	)		—			—
Amendment and cancellation of warrants		—			—			2,073
Change in fair value upon remeasurement(1)		(16,340	)		2,465			(44,405	)
Balance, March 31, 2025		42,423			19,860			12,860
Change in fair value upon remeasurement(1)		(31,520	)		(7,228	)		(5,004	)
Balance, June 30, 2025		10,903			12,632			7,856
Change in fair value upon remeasurement(1)		40,748			9,288			6,333
Balance, September 30, 2025	$	51,651		$	21,920		$	14,189

(1) Change in fair value of tranche liability is on the unaudited consolidated statements of operations. Change in fair value of warrant liabilities is included in other (expense) income, net on the unaudited consolidated statements of operations.

- 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

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+ Details

Surrozen, Inc./DE 10-Q