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Note 9 - Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

9. Fair Value Measurements

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their respective fair values due to the short-term nature of such instruments.

Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. The requirement requires judgements to be made. Our Level 3 financial liabilities consist of warrant liabilities prior to their reclassification to equity and a convertible note payable for which there is no current market such that the determination of fair value requires judgement 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. The Company uses the Black-Scholes option valuation model to value the Level 3 warrant liabilities at inception and on subsequent valuation dates. This model incorporates transaction detail such as the Company’s stock price, contractual terms, maturing, risk free rates as well as volatility. The unobservable input for the Level 3 warrant liabilities includes volatility, which is not significant to the fair value measurement of the warrant liabilities.

A reconciliation of the beginning and ending balances for the warrant liabilities which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (in thousands):

		Warrant Liabilities
Balance December 31, 2022		$	(534	)
Fair Value Adjustment - March 31, 2023			(629	)
Balance March 31, 2023			(1,163	)
Fair Value Adjustment - April 18, 2023			(1,522	)
Reclassification to Additional paid in capital			2,685
Balance June 30, 2023		$	—

The Company uses the Lattice Model to value the Level 3 note payable liabilities at inception and for subsequent valuation dates. This model incorporates transaction detail such as the term of the note, the nominal value of the note at inception, the coupon rate of the note, the conversion price of the note, the Company’s stock price, risk-free rate and implied bond yield as well as volatility. The unobservable input for the Level 3 note payable includes volatility and implied bond yield, which are significant to the fair value measurement of the note payable. The Company’s stock is publicly traded and is readily determinable. The risk-free interest rate is based on the U.S. Treasury yield for a period consistent with the expected term of the Note. We determine volatility by using our historical stock volatility. The implied bond yield is based on the required rate of return for mezzanine financing for similar companies.

The following weighted-average input assumptions were used in determining the fair value of the note at inception, as of June 30, 2023, and as of September 30, 2023. Volatility was 49.5% on May 17, 2023, 50.6% on June 30, 2023, and 77.9% on September 30, 2023, and the implied bond yield was 18.9% on May 17, 2023, 19.6% on June 30, 2023, and 30.7% on September 30, 2023

A reconciliation of the beginning and ending balances for the note payable which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (in thousands):

		*Note Payable*				*Credit Risk Change*				*Accrued Interest*				*Total Fair Value*
Balance March 31, 2023		$—				$—				$—				$—
Initial Transaction Fair Value - May 17			15,000				—				—				15,000
Accrued Paid-in-Kind (PIK) Interest as of June 30, 2023			—				—				185				185
Fair Value Adjustment - June 30, 2023			640				—				—				640
Balance June 30, 2023			15,640				—				185				15,825
Accrued Paid-in-Kind (PIK) Interest added to Principal			185				—				(185	)			—
Accrued Paid-in-Kind (PIK) Interest as of September 30, 2023			—				—				383				383
Fair Value Adjustment - September 30, 2023			(3,832	)			(1,208	)			—				(5,040	)
Balance September 30, 2023		$	11,993			$	(1,208	)		$	383			$	11,168

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.

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