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Fair Value of Financial Assets and Liabilities
 9 Months Ended
Sep. 30, 2023
Fair Value Disclosures [Abstract]  
Fair Value of Financial Assets and Liabilities

Note 4 – Fair Value of Financial Assets and Liabilities

 

The Company measures certain assets and liabilities at fair value. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

Financial instruments, including cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.

 

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of September 30, 2023 and December 31, 2022:

   Fair Value Measured at September 30, 2023 
  

Total at

September 30,

2023

   Quoted prices in active markets (Level 1)   Significant other observable inputs (Level 2)   Significant unobservable inputs (Level 3) 
                     
Assets                    
Investments  $100,000   $      -   $          -   $100,000 
Liabilities                    
Warrant Liabilities  $71,250   $-   $-   $71,250 

 

   Fair Value Measured at December 31, 2022 
  

Total at

December 31,

2022

   Quoted prices in active markets (Level 1)   Significant other observable inputs (Level 2)   Significant unobservable inputs (Level 3) 
                     
Assets                    
Investments  $100,000   $      -   $          -   $100,000 
Liabilities                    
Warrant Liabilities  $213,750   $-   $-   $213,750 

 

The Company did not make any transfers between the levels of the fair value hierarchy during the nine months ended September 30, 2023 and 2022.

 

 

Level 3 Valuation Techniques

 

Level 3 financial assets consist of private equity investments for which there is no current public market for these securities such that the determination of fair value requires significant judgment or estimation. As of September 30, 2023 and December 31, 2022, the Company’s Level 3 investments were carried at original cost of the investments, with a value of $100,000. The Company has elected to apply the measurement alternative under ASC 321, Investments—Equity Securities, for these investments.

 

Level 3 financial liabilities consist of the warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.

 

Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the warrant liabilities are recorded in “change in fair value of warrant liabilities” in the Company’s statements of operations.

 

On March 2, 2021, the Company entered into a securities purchase agreement with certain purchasers which closed on March 4, 2021 pursuant to which the Company sold an aggregate of (i) 950,000 shares of Common Stock, and (ii) Common Stock warrants (the “Warrants”) to purchase up to 712,500 shares of Common Stock for gross proceeds of $9.5 million in a private placement offering.

 

The Warrants require, at the option of the holder, a net-cash settlement following certain fundamental transactions (as defined in the Warrants) at the Company. At the time of issuance, the Company maintained control of certain fundamental transactions and as such the Warrants were initially classified in equity. As of December 31, 2022, the Company no longer maintained control of certain fundamental transactions as they did not control a majority of shareholder votes. As such, the Company may be required to cash settle the Warrants if a fundamental transaction occurs which is outside the Company’s control. Accordingly, the Warrants are classified as liabilities. The Warrants have been recorded at their fair value using the Black-Scholes valuation model, and will be recorded at their respective fair value at each subsequent balance sheet date. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk-free rates, as well as volatility.

 

The Warrants require the issuance of registered shares upon exercise, do not expressly preclude an implied right to cash settlement and are therefore accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the balance sheet as a current liability.

 

 

A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy at the date of issuance and, as of September 30, 2023 and December 31, 2022, is as follows:

   September 30, 2023   December 31, 2022 
Risk-free rate of interest   5.03%   3.99%
Expected volatility   108.3%   152.8%
Expected life (in years)   2.43    3.18 
Expected dividend yield   -    - 

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. For the Warrants, the Company estimates expected volatility giving primary consideration to the historical volatility of its Common Stock. The general expected volatility is based on the standard deviation of the Company’s underlying stock price’s daily logarithmic returns. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based on the fact that the Company has not historically paid dividends on its Common Stock and does not expect to pay recurring dividends on its Common Stock in the future.

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial assets and liabilities for the nine months ended September 30, 2023 and 2022, that are measured at fair value on a recurring basis:

   Fair Value of Level 3 Financial Assets 
   September 30, 2023   September 30, 2022 
Beginning balance  $100,000   $- 
Purchases   -    - 
Unrealized appreciation (depreciation)   -    - 
Ending balance  $100,000   $            - 

 

   Fair Value of Level 3 Financial Liabilities 
   September 30, 2023   September 30, 2022 
Beginning balance  $213,750   $1,852,500 
Warrant liabilities classification   -    - 
Fair value adjustment of warrant liabilities   (142,500)   (1,140,000)
Ending balance  $71,250   $712,500