Fair Value Measurement

3 Months Ended

9 Months Ended

Dec. 31, 2024

Sep. 30, 2025

NOTE 12 – FAIR VALUE MEASUREMENT

Customer digital currency assets and liabilities represent the Company’s obligation to safeguard customer digital currencies. Accordingly, the Company has valued the assets and liabilities using quoted market prices for the underlying digital currencies which is based on Level 2 inputs.

The Black-Scholes option pricing model is used to estimate fair value of liability-classified stock purchase warrants issued in connection with convertible notes (see Note 9) and the liability-classified pre-funded stock purchase warrants issued in connection with the December 2024 Private Placement (see Note 10). A Monte Carlo simulation model is used to estimate the fair value of liability-classified stock purchase warrants issued in connection with the December 2024 Private Placement (see Note 10). Both models utilize the following assumptions:

●

Risk-free interest rates are derived from the yield on U.S. Treasury debt securities in effect on the date of measurement.

●

Dividend yields are based on our historical dividend payments, which have been zero to date.

●

Volatility is estimated from historical volatility of a peer group over a similar period.

●

The expected term is based on the time to expiration of the warrants from the date of measurement.

The Monte Carlo simulation model also incorporates management’s judgments for the occurrence or non-occurrence of certain events as well as the probability of certain scenarios impactful to the valuation of the liability-classified stock purchase warrants issued in connection with the December 2024 Private Placement.

The assumptions used for the Black-Scholes option pricing model for liability-classified stock purchase warrants are as follows:

June 2024 Warrants	December 31, 2024			November 2024 Modification
Expected term (years)		4.4 years			4.6 years
Risk-free interest rate		4.4	%		4.4	%
Expected volatility		114.2	%		113.8	%
Expected dividend yield		0.0	%		0.0	%

November 2024 Warrants	December 31, 2024			November 2024 Issuance
Expected term (years)		4.9 years			5.0 years
Risk-free interest rate		4.2	%		4.2	%
Expected volatility		114.2	%		113.8	%
Expected dividend yield		0.0	%		0.0	%

Pre-funded Warrants	December 31, 2024			December 2024 Issuance
Expected term (years)		5.0 years			5.0 years
Risk-free interest rate		4.3	%		4.3	%
Expected volatility		114.2	%		113.8	%
Expected dividend yield		0.0	%		0.0	%

The assumptions used for the Monte Carlo simulation model for liability-classified stock purchase warrants and the embedded derivative liability issued in connection with a convertible note are as follows:

December 2024 Warrants	December 31, 2024			December 2024 Issuance
Expected term (years)		5.0 years			5.0 years
Risk-free interest rate		4.3	%		4.3	%
Expected volatility		114.2	%		113.8	%
Expected dividend yield		0.0	%		0.0	%
Probability of a fundamental event		10.0	%		10.0	%

Embedded Derivative Liability	December 31, 2024			December 2024 Issuance
Expected term (years)		0.9 years			1.0 years
Risk-free interest rate		4.2	%		4.3	%
Expected volatility		156.2	%		157.5	%
Expected dividend yield		0.0	%		0.0	%
Conversion discount		10.0	%		10.0	%
Interest rate		10.0	%		10.0	%
Redemption premium	$	50,000		$	50,000

The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2024:

	Quoted Price in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance at December 31,
	(Level 1)		(Level 2)		(Level 3)		2024
Liabilities
June 2024 Warrant		—		—		5,333,794		5,333,794
November 2024 Warrant		—		—		12,467,515		12,467,515
Pre-funded warrant liabilities		—		—		52,682,426		52,682,426
Private Placement Warrants		—		—		94,286,790		94,286,790
Embedded derivative liability		—		—		847,753		847,753
Total liabilities	$	—	$	—	$	165,618,278	$	165,618,278

The Company did not make any transfers into or out of Level 3 of the fair value hierarchy during the three months ended December 31, 2024. The Company had no assets or liabilities measured and recorded at fair value on a recurring basis as of September 30, 2024 and 2023.

The following table provides a reconciliation of the warrants measured at fair value using Level 3 inputs:

	Embedded Derivative Liability		June 2024 Warrant		November 2024 Warrant		Pre-funded Warrant		Common Stock Warrant

Balance at October 1, 2024	$	—	$	—	$	—	$	—	$	—
Additions		222,865		283,293		663,408		5,085,682		18,153,362
Change in fair value		624,888		5,050,501		11,804,107		47,596,744		76,133,428
Ending balance, December 31, 2024	$	847,753	$	5,333,794	$	12,467,515	$	52,682,426	$	94,286,790

NOTE 11 – FAIR VALUE MEASUREMENT

The Black-Scholes option pricing model is used to estimate fair value of liability-classified stock purchase warrants issued in connection with convertible notes (see Note 8) and the liability-classified pre-funded stock purchase warrants issued in connection with the December 2024 Private Placement (see Note 9). A Monte Carlo simulation model is used to estimate the fair value of liability-classified stock purchase warrants issued in connection with the December 2024 Private Placement and the September 2025 Private Placement (see Note 9). Both models utilize the following assumptions:

●

Risk-free interest rates are derived from the yield on U.S. Treasury debt securities in effect on the date of measurement.

●

Dividend yields are based on our historical dividend payments, which have been zero to date.

●

Volatility is estimated from historical volatility of a peer group over a similar period.

●

The expected term is based on the time to expiration of the warrants from the date of measurement.

The assumptions used for the Black-Scholes option pricing model for liability-classified stock purchase warrants are as follows:

June 2024 Warrants	September 30, 2025			November 2024 Modification
Expected term (years)		3.7 years			4.6 years
Risk-free interest rate		3.74	%		4.4	%
Expected volatility		110.0	%		113.8	%
Expected dividend yield		0.0	%		0.0	%

November 2024 Warrants	September 30, 2025			November 2024 Issuance
Expected term (years)		4.1 years			5.0 years
Risk-free interest rate		3.74	%		4.2	%
Expected volatility		110.0	%		113.8	%
Expected dividend yield		0.0	%		0.0	%

The assumptions used for the Monte Carlo simulation model for liability-classified stock purchase warrants are as follows:

August 2025 Warrants	September 30, 2025			August 2025 Issuance
Expected term (years)		4.9 years			5.0 years
Risk-free interest rate		3.73	%		3.65	%
Expected volatility		108.3	%		110.1	%
Expected dividend yield		0.0	%		0.0	%
Probability of a fundamental event		10.0	%		10.0	%

September 2025 Private Placement Warrants	September 30, 2025			September 2025 Issuance
Expected term (years)		4.9 years			5.0 years
Risk-free interest rate		3.74	%		3.65	%
Expected volatility		158.4	%		156.9	%
Expected dividend yield		0.0	%		0.0	%
Probability of a fundamental event		10.0	%		10.0	%

The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities measured and recorded at fair value on a recurring basis as of September 30, 2025:

	Quoted Price in Active Markets		Significant Other Observable Inputs		Significant Unobservable Inputs		Balance at September 30,
	(Level 1)		(Level 2)		(Level 3)		2025
Liabilities
June 2024 Warrant		—		—		914,583		914,583
November 2024 Warrant		—		—		2,133,949		2,133,949
August 2025 Warrant		—		—		2,210,729		2,210,729
Private Placement Warrants		—		—		35,480,932		35,480,932
Embedded derivative liability		—		—		—		—
Total liabilities	$	—	$	—	$	40,740,193	$	40,740,193

The Company did not make any transfers into or out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2025.

The following table provides a reconciliation of the warrants measured at fair value using Level 3 inputs:

	Embedded Derivative			June 2024			November 2024			Pre-funded			Common Stock			August 2025		September 2025
	Liability			Warrant			Warrant			Warrant			Warrant			Warrant		Warrant

Balance at January 1, 2025	$	847,753		$	5,333,794		$	12,467,515		$	52,682,426		$	94,286,790		$	-	$	-
Additions		-			-			-			-			-			1,672,686		29,605,956
Subtractions		(259,963	)		-			-			(12,421,864	)		(19,517,415	)		-		-
Change in fair value		(587,790	)		(4,419,211	)		(10,333,566	)		(40,260,562	)		(74,769,375	)		538,043		5,874,976
Ending balance, September 30, 2025	$	-		$	914,583		$	2,133,949		$	-		$	-		$	2,210,729	$	35,480,932

- 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

T3 Defense Inc. S-1