Turn Therapeutics Inc. Fair Value Disclosure
| 3. | FAIR VALUE MEASUREMENTS |
The carrying amounts reflected in the consolidated balance sheets for prepaid expenses, accounts payable and accrued expenses and other liabilities are shown at their historical values which approximate their fair values.
The following tables presents the financial instruments carried at fair value on a recurring basis:
| As at December 31, 2025 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Cash equivalents | $ | 4,027,862 | $ | $ | $ | 4,027,862 | ||||||||||
| Liabilities | ||||||||||||||||
| Derivative liability instrument | $ | $ | $ | 3,028,401 | $ | 3,028,401 | ||||||||||
| As at December 31, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Cash equivalents | $ | 498,286 | $ | $ | $ | 498,286 | ||||||||||
| Liabilities | ||||||||||||||||
| Derivative liability instrument | $ | $ | $ | $ | ||||||||||||
As of December 31, 2024, derivative liability instrument includes contingent warrant liability and the contingent put option liability as a single unit of account under the Share Purchase Agreement (Note 7). We measured derivative liability instrument to be immaterial as of December 31, 2024. The warrant liability and forward contract liability were contingent upon a public listing of our common stock on a stock exchange event, and is classified within Level 3 of the value hierarchy because the liability was based upon a valuation model that used inputs and assumptions including potential outcomes, interest rates, probabilities, and timing. We completed Direct Listing of our common stock on NASDAQ and bifurcated the liability instrument into its separate warrant liability and put contract liability components. The fair value of the Warrant liability to be issued upon completion of the public listing was $5.6 million, and this fair value decreased to $2.8 million at December 31, 2025. The fair value of the put contract liability was $0.2 million at December 31, 2025.
The following table summarizes the activity related to Level 3 financial liabilities for the year ended December 31, 2025:
| Derivative Liability Instrument | ||||
| Fair value at December 31, 2024 | $ | |||
| Addition to derivative liability for warrants under Share Purchase Agreement | 5,603,372 | |||
| Increase in fair value of put contract derivative under Share Purchase Agreement | 202,871 | |||
| Decrease in fair value of warrant derivative liability | (2,777,842 | ) | ||
| Fair value at December 31, 2025 | $ | 3,028,401 | ||
Upon public listing and as of December 31, 2025, the warrant liability value for the warrant issued to investor under the Share Purchase Agreement (Note 7) was determined using a Monte Carlo simulation. Inputs used in the Monte Carlo simulation are as below:
| As at October 8, 2025 |
As at December 31, 2025 |
|||||||
| Risk-free interest rate | 3.63 | % | 3.54 | % | ||||
| Dividend yield | ||||||||
| Term (years) | 3.00 | 2.77 | ||||||
| Annual Volatility | 87.1 | % | 94.4 | % | ||||
| Closing stock price | $ | 7.00 | 3.94 | |||||
Put contract derivative liability as of public listing date was not material. As of December 31, 2025, the put contract derivative liability was remeasured using a Black-Scholes option valuation model, followed by a series of contractual adjustments. Inputs used in Black-Scholes model for valuation as of December 31, 2025 were as follows:
|
As at December 31, |
||||
| Risk-free interest rate | 3.61 | % | ||
| Dividend yield | ||||
| Term (years) | 2.77 | |||
| Annual Volatility | 87.70 | % | ||
| Closing stock price | 3.94 | |||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.