Derivative Liability |
6 Months Ended | ||||||||||||||||||||
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Jun. 30, 2026 | |||||||||||||||||||||
| Derivative Liability [Abstract] | |||||||||||||||||||||
| Derivative Liability | 8. Derivative Liability
The Company evaluated the conversion feature of the Convertible Promissory Notes under applicable accounting guidance and concluded that the feature is not indexed to the Company’s own stock and does not meet the criteria for equity classification. Accordingly, the conversion feature is accounted for as an embedded derivative liability.
The fair value of the derivative liability at issuance date was $563 as determined using a Monte Carlo simulation model with expected terms of 0.5 and 0.75 years and expected daily volatility of 4.93% and 15,000 simulation paths. The model also incorporates assumptions regarding the optimal behavior of both the holder as it relates to the timing of conversion and the Company as it relates to the exercise of the extension option. The Company used a Monte Carlo simulation due to the presence of path-dependent features, including the use of a multi-day VWAP in determining the conversion price and the Company’s option to extend the maturity date.
Due to the use of significant unobservable inputs, the derivative liability is classified as a Level 3 fair value measurement. The derivative was initially recorded at fair value, with a corresponding discount recorded to the carrying value of the Convertible Promissory Notes. The debt discount is being amortized to interest expense over the term of the Convertible Promissory Notes using the effective interest method.
Subsequent to initial recognition, the derivative liability is remeasured at fair value at each reporting date in accordance with ASC 820, with changes in fair value recognized in earnings within other income (expense) in the condensed statements of operations and comprehensive loss. For the three and six months ended June 30, 2026, the gain on the change in fair value of the derivative liability was $133 and $88, respectively.
The following is a reconciliation of the changes in the fair value of the derivative liability for the six months ended June 30, 2026:
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