9. FAIR VALUE MEASUREMENTS
The Company follows the authoritative guidance for fair value measurements relating to financial and non-financial assets and liabilities, including presentation of required disclosures herein. This guidance establishes a fair value framework requiring the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Recurring Fair Value Measurements
The Company marks-to-market its derivatives at each reporting date, or more frequently as deemed necessary, with the changes in fair value recognized in the Company’s consolidated statements of operations. See Note 8: Derivatives for further information.
Embedded Derivative within the 2024 Debt Repayment
The embedded derivative relating to the 2024 Debt Repayment is valued using a discounted cash flow model. The most significant input used in the fair value measurement was the discount yield, which was 6.05% and 7.58% at December 31, 2025 and 2024, respectively. As the discount yield used in the valuation process decreases, the fair value of the embedded derivative increases. Similarly, as the length of time between the reporting date and the start date of the interest payments decreases, the present value of the projected interest savings increases, resulting in a higher derivative asset value. The significant unobservable input that drives the cash flows used in the fair value measurement includes the estimated achievement of project milestones. As the probability of reaching the relevant milestones increases, the fair value of the embedded derivative would also increase.
Rollforward of Recurring Level 3 Assets and Liabilities
The following table presents a rollforward for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2025 | | 2024 |
| Balance at beginning of period | $ | 108,799 | | | $ | 1,295 | |
Issuance of embedded derivative within the 2024 Debt Repayment | 2,480 | | | 109,601 | |
| Settlement of a portion of the derivative asset for project milestone achieved | (11,337) | | | — | |
| Unrealized gain (loss), included in derivative and other | 14,519 | | | (2,097) | |
| Balance at end of period | $ | 114,461 | | | $ | 108,799 | |
Nonrecurring Fair Value Measurements
The Company follows the authoritative guidance regarding non-financial assets and liabilities that are remeasured at fair value on a nonrecurring basis.
2023 Funding Agreement
The Company's August 2025 draw on the 2023 Funding Agreement had a fair value of $28.6 million and was calculated using projected future cash flows discounted using the prevailing market rate of interest for a similar transaction. The discount yield used for this calculation was 5.98%. Due to the significant unobservable inputs utilized in the valuation of the August 2025 draw, the fair value of the draw was classified as a Level 3 fair value measurement.