4. Fair Value of Financial Assets and Liabilities – Derivative Instruments

The guidance regarding fair value measurements prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company estimates the fair values of derivative liabilities utilizing Level 3 inputs. No derivative liabilities have been transferred between the classification levels. Estimating the fair values of derivative liabilities requires the use of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.

There were no assets or liabilities that require recurring fair value measurements as of December 31, 2020 or 2019.

The following table sets forth a summary of changes in the fair value of the Company’s derivative liabilities during the year ended December 31, 2019:


	Asset Acquisition
	Derivative Liability
Balance, December 31, 2018	$	1,117,000
Changes in estimated fair value		(1,117,000)
Balance, December 31, 2019	$	—

The Company estimated the fair value of this derivative by forecasting the timing and likelihood of the events occurring and discounting the probability adjusted payments using an appropriate discount based on market interest rates and its own non-performance risk as required by ASC 820 – Fair Value Measurement. There is no longer a potential payment requirement associated with the derivative liability subsequent to the Merger. Accordingly, the fair value of the derivative liability was reduced to zero with the associated change recorded in other income.